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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 2001.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________.
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
(Address of principal executive offices) (Zip Code)
(203) 753-2921
(Registrant's telephone number, including area code)
Not Applicable
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock, $.01 par value
(Securities registered pursuant to Section 12(g) of the Act, Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Based upon the closing price of the registrant's common stock as of February 28,
2002, the aggregate market value of the voting common stock held by
non-affiliates of the registrant is $1,648,130,877. Solely for purposes of this
calculation, the shares held by directors and executive officers of the
registrant have been excluded because such persons may be deemed to be
affiliates. This reference to affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date is:
Common Stock (par value $ .01) 48,882,265 Shares
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Class Issued and Outstanding at February 28, 2002
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2002.
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WEBSTER FINANCIAL CORPORATION
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Page
Item 1. Business 3
General 3
Business Combinations 3
Lending Activities 5
Insurance Activities 12
Trust and Investment Services 12
Financial Advisory Services 13
Investment Activities 13
Sources of Funds 13
Bank Subsidiaries 15
Employees 16
Market Area and Competition 16
Regulation 16
Taxation 17
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 41
PART III
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42
Exhibit Index 42
Signatures 47
Index to Consolidated Financial Statements and Notes F-1
2
PART I
ITEM 1. BUSINESS
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GENERAL
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Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank (the "Bank"), Damman Associates, Inc., which has been
renamed Webster Insurance, Inc. ("Webster Insurance"), and Webster D&P Holdings,
Inc. ("Duff & Phelps"), delivers financial services to individuals, families and
businesses primarily in Connecticut and equipment financing and financial
advisory services to public and private companies throughout the United States.
Webster provides business and consumer banking, mortgage lending, trust and
investment services and insurance services through 105 banking and other
offices, over 210 ATM's and its Internet website (www.websterbank.com). Webster
Bank was founded in 1935 and converted from a federal mutual to a federal stock
institution in 1986.
Webster, on a consolidated basis, at December 31, 2001 and 2000 had total assets
of $11.9 billion and $11.2 billion, total securities of $4.0 billion and $3.4
billion and net loans receivable of $6.9 billion and $6.8 billion, respectively.
At December 31, 2001 and 2000, total deposits were $7.1 billion and $7.0
billion, respectively. At December 31, 2001 and 2000, shareholders' equity was
$1.0 billion and $890.4 million, respectively.
At December 31, 2001, the assets of Webster's, Parent Company only, on an
unconsolidated basis, consisted primarily of its investments in the Bank,
Webster Insurance and Duff & Phelps of $1.2 billion, investment securities of
$83.2 million, cash and interest-bearing deposits of $17.1 million, other direct
investments of $16.7 million and loans receivable of $3.2 million. Primary
sources of income to Webster, on an unconsolidated basis, are dividend payments
received from the Bank, interest from and gains on sale of investment securities
and income from interest-bearing deposits. Primary expenses are interest expense
on borrowings and capital securities and allocated operating expenses. See Notes
18 and 21 of Notes to Consolidated Financial Statements included elsewhere in
this report for additional information.
Deposits in the Bank are federally insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and at December 31, 2001; approximately 80% of the Bank's deposits
were subject to BIF assessment rates and 20% were subject to Savings Association
Insurance Fund ("SAIF") assessment rates. See the "Regulation" section under
this Item for additional information.
Webster, as a bank holding company, and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision (the
"OTS"), as its primary federal regulator. The Bank is also subject to
regulation, examination and supervision by the FDIC as to certain matters.
Webster's executive offices are located at Webster Plaza, Waterbury, Connecticut
06702. The telephone number is (203) 753-2921.
The Company's principal business lines, including their operating results, are
fully discussed in Note 17 of Notes to Consolidated Financial Statements
included elsewhere in this report.
BUSINESS COMBINATIONS
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PURCHASE TRANSACTIONS
The following acquisitions, completed during 2001 and 2000, were accounted for
as purchase transactions, and as such, results of operations are included in the
Consolidated Financial Statements subsequent to the date of acquisition.
WOLFF ZACKIN & ASSOCIATES AND BENEFIT PLANS DESIGN & ADMINISTRATION
In April 2001, through Webster Insurance, Webster completed its acquisition of
Wolff Zackin & Associates Inc. ("Wolff Zackin") and its sister company, Benefits
Plans Design & Administration Inc. ("Benefit Plans"). Wolff Zackin is a multiple
lines insurance business specializing in personal and corporate life insurance,
personal and commercial property and casualty insurance and deferred
compensation plans. Benefit Plans provides businesses with pension, profit
sharing, individual retirement account ("IRA") and 401(k) investment plans.
Benefit Plans also provides group life, disability income, and medical and
dental care plans for businesses. The addition of Wolff Zackin provides
Webster's customers expanded insurance products and services and the ability to
negotiate the best coverage in the marketplace.
3
CENTER CAPITAL CORPORATION
In March 2001, Webster acquired Center Capital Corporation ("Center Capital"), a
privately owned Farmington, Connecticut-based equipment financing company with
assets of $260 million. Center Capital finances commercial and industrial
equipment including trucks, tractors, trailers, machine tools and other heavy
equipment through leasing programs to customers throughout the United States.
This acquisition broadened commercial bank product offerings by adding expertise
in equipment financing.
MUSANTE REIHL ASSOCIATES
In January 2001, through Webster Insurance, Webster acquired Musante Reihl
Associates ("Musante"), a privately owned Cheshire, Connecticut-based insurance
agency. Musante specializes in group benefits, long-term care and life insurance
products. This acquisition further increased Webster's ability to offer quality
insurance products in the Connecticut marketplace.
DUFF & PHELPS ACQUISITION, LLC
In November 2000, Webster, through its newly formed company, Duff & Phelps,
acquired a 65% interest in Duff & Phelps, LLC, a privately owned company with
offices in Chicago, New York, Los Angeles, and Seattle. Duff & Phelps provides
expertise in middle-market mergers and acquisitions, private placements,
fairness opinions, valuations, ESOP and ERISA advisory services, and special
financial advisory services. Through Duff & Phelps, Webster has added another
fee-based revenue source, which further accelerates progress toward the
strategic objective of broadening commercial bank product offerings and
increasing revenue from fee-based services.
FLEETBOSTON BRANCH ACQUISITION
In August 2000, Webster purchased four Connecticut branches from FleetBoston
Financial Corporation that were divested as the result of the Fleet-BankBoston
merger. The branches had approximately $138 million in deposit balances at the
time of closing and were located in Brookfield, Guilford, Meriden and Thomaston.
The transaction included the assumption of deposits and purchase of loans to
individual and small business customers associated with these branches. This
transaction strengthened and extended the Bank's retail franchise.
MECH FINANCIAL, INC.
In June 2000, Webster acquired MECH Financial, Inc. ("Mechanics"), the holding
company for Mechanics Savings Bank, in a non-taxable, stock-for-stock exchange.
Mechanics Savings Bank was a state-chartered, Hartford-based savings bank with
$1.1 billion in assets and 16 branch offices in Connecticut's capitol region.
Based on the terms of the agreement, Mechanics shareholders received 1.52 shares
of Webster common stock for each share of Mechanics common stock. The
acquisition strengthened Webster's deposit market share in Hartford County,
where Webster already ranked second in deposit market share.
CHASE MANHATTAN BRANCH
In May 2000, Webster purchased six Connecticut branches from The Chase Manhattan
Bank, located in Cheshire, Middlebury, North Haven, Waterbury (2) and Watertown
with approximately $135 million in deposit balances at time of closing. The
transaction included the assumption of consumer and small business deposits and
the purchase of loans, and brokerage and custody accounts associated with these
branches. This transaction strengthened and extended the Bank's retail
franchise.
LOUIS LEVINE AGENCY, INC. AND FOLLIS, WYLIE, INC.
During 2000, Webster expanded its insurance operation, by purchasing the Louis
Levine Agency, Inc. ("Levine") and Follis Wylie & Lane, Inc. ("Follis"). Webster
entered the insurance agency business in 1998. In April 2000, Webster, through
its wholly-owned insurance subsidiary Webster Insurance, acquired Follis, a
privately owned Hamden, Connecticut-based insurance agency. Follis offers a full
range of insurance services, including property and casualty, life and health.
In February 2000, through Webster Insurance, Webster acquired Levine, a
privately owned Waterford and Norwich, Connecticut-based insurance agency.
Founded in 1928, Levine includes three entities: Louis Levine Agency, Inc.,
Levine Financial Services, Inc. and Retirement Planning Associates, Inc.
4
LENDING ACTIVITIES
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GENERAL
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total gross loans receivable were
$7.0 billion and $6.9 billion at December 31, 2001 and 2000, respectively. The
Bank offers commercial and residential permanent and construction mortgage
loans, commercial and industrial loans, lease financing and various types of
consumer loans including home equity lines of credit, home equity loans and
other types of small business and consumer loans. At December 31, 2001 and 2000,
residential loans represented 51% and 61% of Webster's loan portfolio net of
fees and costs, respectively.
RESIDENTIAL MORTGAGE LOANS AND MORTGAGE BANKING ACTIVITY
Webster is dedicated to providing a full array of residential mortgage loan
products that meet the financial needs of its customers. While its primary
lending markets are Connecticut and the Northeastern United States, Webster's
lending markets now include all states except Alaska and Hawaii. Webster offers
its customers a full range of products including conventional conforming and
jumbo fixed rate loans, conforming and jumbo adjustable rate loans, Federal
Housing Authority ("FHA"), Veterans Administration ("VA") and state agency
mortgage loans through Connecticut Housing Finance Authority ("CHFA"). Various
programs are offered to support Webster's Community Reinvestment Act goals at
the state level. Types of properties consist of one-to-four family residences,
owner and non-owner occupied, second homes, construction permanent and improved
single family building lots. Additionally, Webster provides certain customers
with an option to modify their existing loan in order to enhance portfolio
retention strategies. Webster's distribution channels for these loans include
its network of branches referrals, loan officers, call center, as well as third
party licensed mortgage brokers in targeted areas of the United States. In 2001,
Webster originated $1.3 billion in total residential mortgages compared to $589
million in 2000.
The Bank originates both fixed rate and adjustable rate residential mortgage
loans. At December 31, 2001, approximately $1.7 billion or 49% of Webster's
total residential mortgage loans were adjustable rate loans. Webster offers
adjustable rate mortgage loans at initial interest rates discounted from the
fully-indexed rate. Adjustable rate loans originated during 2001 and 2000, when
fully-indexed, will be 2.75% above the constant maturity one-year U.S. Treasury
yield index. At December 31, 2001, approximately $1.8 billion or 51% of
Webster's total residential mortgage loans had a fixed rate. Webster sells
residential mortgage loans in the secondary market in a manner consistent with
its asset/liability management objectives. At December 31, 2001, Webster had
$143.9 million of residential mortgage loans held for sale.
The volume of residential mortgage loans varies with interest rate fluctuations
and customer preferences. Residential mortgage volume increased in 2001 compared
to 2000 due to the declining interest rate environment creating an increase in
refinance activity. Webster's current strategy is to sell most newly originated
conforming (loans with balances less than or equal to established Fannie Mae and
Freddie Mac limits) fixed and adjustable rate residential mortgage loans and to
retain most jumbo loans for its own portfolio. At December 31, 2001,
approximately 93% of the residential mortgage portfolio was secured by
properties located in Connecticut. During 2001, the demand for fixed rate
mortgages exceeded the demand for adjustable rate mortgage ("ARM") loans,
including loans with a fixed rate for three or five years. Predominately all of
these loans were or will be sold in the secondary market.
At December 31, 2001, Webster had $6.6 million of mortgage servicing rights,
included in other assets, which had a market value of approximately $11.4
million. These servicing rights, comprised of individual pools of loans, are
carried at the lower of cost or market determined on an individual pool basis.
The pools are tested for impairment quarterly with any adjustment included in
noninterest income. Webster services approximately $1.2 billion of residential
mortgage loans for others.
5
Wholesale Lending
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Webster continued its focus on its wholesale lending throughout 2001, generating
$518 million in residential one-to-four family loan originations. The majority
of these loans were originated throughout the Northeast with approved licensed
mortgage brokers. The loans were underwritten, closed and funded by the Bank,
and the majority were subsequently sold into the secondary market as
mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac. Due to the
competitive product and pricing needs of the wholesale lending program, Webster
Bank also became an approved Ginnie Mae issuer of mortgage-backed securities
whereby the collateral is HUD-approved FHA/VA loans.
As part of its expansion program, Webster has recruited a proven management
team, with significant prior experience in national wholesale lending and
operations. The Bank opened three regional wholesale offices in Atlanta, Phoenix
and Chicago in January 2002. These additional offices are intended to enable the
Bank to continue the efficient expansion of its wholesale product platform, and
in addition to first mortgages, these new offices will also offer consumer
lending products and, potentially, insurance products outside of its current
market. Also, the wholesale lending unit has the ability to originate adjustable
rate residential loans to augment portfolio balances and provide geographic
diversification. In January 2002, wholesale lending began offering home equity
loans through its broker network and regional offices.
The increased residential loan activity from the wholesale initiative enabled
Webster to negotiate more favorable pricing terms from its investors, which
enhanced Webster's retail pricing in its core market. With this expansion,
management anticipates wholesale lending and mortgage banking volume to increase
during 2002, provided the interest rate environment remains favorable. This
activity allows Webster to generate fee income without balance sheet expansion.
COMMERCIAL LOANS
Middle Market
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The Middle Market division provides financial services to a diversified group of
companies with revenues in the $10 million to $250 million range, primarily
privately held and located within the State of Connecticut. Due to the
recessionary environment in 2001, loans outstanding at December 31, 2001
declined to $492 million from $563 million at the prior year end. Despite this
decline, we experienced another year of growth in our customer base as total
borrowing relationships rose to 320 from 300 the prior year. Typical loan
facilities include lines of credit for working capital, term loans to finance
purchases of equipment and commercial real estate loans for owner occupied
buildings. Unit and relationship managers within the Middle Market Division are
among the most experienced in the region, averaging over 20 years in the
Connecticut market.
In an effort to offer the broadest range of resources to our customer base,
value is added by facilitating access to other specialists within the Bank.
These include Webster Financial Advisors, Center Capital, Webster Insurance and
a team of cash management professionals offering customized solutions and
competitive products. Investment banking services are provided in close
collaboration with Duff & Phelps, a subsidiary of Webster.
Specialized Lending
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The Bank, as part of its strategy to expand its commercial loan portfolio,
supports a specialized lending unit which invests primarily in syndicated
credits. This lending unit's objective is to obtain geographic and industry
diversification within the overall commercial loan portfolio by participating in
the syndicated lending market. In addition to internal oversight, loans
administered by the specialized lending unit are primarily reviewed by the
Shared National Credit Program ("SNCP"). The SNCP is designed to provide
consistent review and classification by bank regulatory agencies of any loan or
loan commitment that totals $20 million or more and is shared by three or more
supervised institutions. These bank regulatory agencies include the Board of
Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation.
At December 31, 2001 and 2000, the specialized lending unit administered $410.3
million and $439.9 million of funded loans against commitments of $620.1 million
and $637.9 million, respectively. The funded loans represented approximately
5.9% and 6.4% of gross loans at December 31, 2001 and 2000, respectively.
6
A summary of loans, by industry, administered by the specialized lending unit
follows:
(In thousands)
Principal Balances Outstanding at December 31,
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INDUSTRY 2001 2000
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Manufacturing $ 105,171 128,704
Cable 58,364 56,163
Wireless Communications 58,246 71,706
Advertising and Publishing 46,171 33,067
Other Telecom(a) 35,858 23,831
Radio and TV broadcasting 21,161 33,146
Competitive local exchange carrier 16,275 10,475
All other 22,669 37,372
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Direct loans 363,915 394,464
Collateralized debt obligations 46,380 45,480
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Total $ 410,295 439,944
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(a) Includes towers and integrated communication providers.
Syndicated credits by nature of their leveraged or highly leveraged structures
tend to be more susceptible to default in periods of economic downturn. In
underwriting these credits, the Bank carefully evaluates the various risks
inherent in this form of lending. Webster Bank has a highly qualified team of
lenders averaging twenty years of syndicated lending experience in the banking
and insurance investment industries administering these credits. This level of
experience allows the Bank to identify and control risks associated with lending
in this market. The unit's well-defined underwriting standards have resulted in
the credit quality of the portfolio significantly outperforming the loans
monitored by the Shared National Credit Program. At December 31, 2001,
approximately 92% of the portfolio carried a credit rating or shadow rating of B
or better from one of the leading rating agencies. The remaining 8% is comprised
of six loans totaling $31.5 million of which: two loans totaling $7.5 million
that are pass rated under the loan classification system and accruing; two loans
totaling $15.1 million that are substandard and accruing and two loans totaling
$8.9 million are classified substandard or doubtful and are nonaccruing. At
December 31, 2001, these two loans in nonperforming status totaled $8.9 million,
compared with one loan totaling $5.2 million a year earlier.
In addition to the loans administered by the specialized lending unit, the Bank
had $148.2 million of loans that are also monitored by the SNCP against
commitments of $214.0 million at December 31, 2001. These loans are located
primarily in the Northeast region and are funded through the Bank's Middle
Market and CRE divisions. These SNCP loans are distinguished from the
specialized lending unit SNCP loans by being relatively smaller transactions
exhibiting lower leverage profiles where the Bank in most cases, has a direct
relationship with the borrower.
Small Business Banking
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Small Business Banking ("SBB") is dedicated to providing a full array of loan
and deposit products that meet the core financial needs of Connecticut-based
small businesses and their owners. Webster's SBB target market is businesses
with annual revenues of up to $10 million and borrowing needs of up to $2
million. This market represents a significant percentage of commercial
businesses in Connecticut and Webster currently has a 12-15% market share. SBB
uses the Bank's branch network as well as geographically focused business
development officers to fully service its existing customer base and call on
potential new customers. In addition to personal customer contact, SBB continues
to use a variety of direct mail and telemarketing programs to increase market
penetration. SBB also plays a major role in supporting the Bank's Community
Reinvestment Act goals by providing credit facilities to numerous local
not-for-profit organizations. By utilizing the Fair Isaac credit-scoring model
to assist in loan approvals up to $250,000 and offering a $50,000 same-day line
of credit approval program, SBB has been able to remain competitive with other
local financial institutions. SBB also serves as an excellent referral source
for other Bank products including cash management, insurance, international
products and investments.
7
As Webster is a Small Business Administration ("SBA") preferred lender, Webster
is authorized to offer all SBA loan guaranty products and is also active in
several loan programs provided through the Connecticut Development Authority.
The SBB administered a portfolio of approximately $333 million at December 31,
2001, a 4% decrease from the prior year end. Included in SBB's portfolio are
$144.6 million of commercial loans and $188.4 million of commercial real estate
loans. Webster is the leading bank in Connecticut for providing loans of $1
million and under to small businesses in the state.
An objective of the SBB's strategic plan is to also focus on deposit growth as
part of the overall customer relationship. For the year ending December 31,
2001, total small business deposit balances increased 10% to $729 million from
$662 million at December 31 of the prior year.
Lease Financing
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Center Capital, a lease financing subsidiary of the Bank that was acquired in
March 2001, transacts business with end-users of equipment, either by soliciting
this business on a direct basis or through referrals from various equipment
manufacturers, dealers and distributors with whom they have relationships.
Center Capital has grown its portfolio since March 2001 from $243.7 million to
$320.7 million at December 31, 2001, an increase of 32%.
Center Capital markets its products nationally through a network of dedicated
leasing sales executives who are grouped by customer type (e.g.; Environmental
Equipment Financing Division) or collateral-specific business initiatives (e.g.;
Machine Tool Equipment Financing Division). During 2001, financing initiatives
encompassed three distinct industry/equipment niches, each operating as a
division within Center Capital; Machine Tool Equipment Financing; Construction
and Transportation Equipment Financing and Environmental Equipment Financing. A
fourth division, Professional Practices Lending, was added during the first
quarter of 2002.
Within each Division, Center Capital seeks to finance equipment which retains
good value throughout the term of the underlying lease or loan. In many
instances, financing terms cover only half of the financed equipment's useful
life. As such, and in the exceptional instances where Center Capital is forced
to repossess its collateral, the equipment is likely to have value equal to or
in excess of the specific transaction's remaining balance. At December 31, 2001,
it had nonperforming loans to numerous borrowers totaling $7.3 million.
International Loans
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The primary purpose of the International Banking line of business is to assist
our domestic clients involved in international trade by providing a full range
of international banking services, including commercial letters of credit,
stand-by letters of credit, international payments in both domestic and foreign
currency, foreign exchange, international collections and international check
clearing. Some of these services carry credit risk and any exposure under the
above services must be approved in compliance with domestic underwriting
standards. Additionally the Bank, through its international department,
participates in programs offered by the U.S. Export-Import Bank, a government
agency that provides loan guarantees to banks, which finance eligible U.S.
export sales or exporters.
COMMERCIAL REAL ESTATE LOANS
The Bank's Commercial Real Estate ("CRE") group provides variable rate and fixed
rate financing alternatives for borrowers whose purpose is that of acquiring,
developing, constructing, improving or refinancing commercial real estate where
the property is the primary collateral securing the loan or the primary
repayment source is from income produced by the property and its tenants. The
loans meet the Bank's underwriting requirements and are diversified by property
type and geographic location. The CRE group consists of a small team of
professionals with a high level of expertise and experience. The majority have
more that 15 years of national lending experience with major banks or insurance
companies. They have significant experience with both permanent and construction
lending.
8
In recent years, the Bank has cultivated construction financing relationships
with quality regional and national developers, both directly and through loan
participations with selected banks outside its primary market, as it looks to
diversify its portfolio by geographic location. The Bank controls risk by
utilizing personnel familiar with the demographics of the area during its credit
review process. As a result, the Bank is able to obtain its desired geographical
diversification, while maintaining a knowledge of the specific areas when making
its credit decisions. At December 31, 2001, outstanding commercial real estate
loans, totaled $975.0 million compared to $857.0 million as of December 31,
2000.
The CRE group also makes construction loans, including loans to residential
developers. These loans provide financing for the purpose of acquiring,
developing and constructing properties. Included in the total CRE loans were
commercial construction loans of $82.8 million and $72.2 million at December 31,
2001 and 2000, respectively.
Typically, the Bank lends against Class A or B, investment quality real estate;
including office, retail, industrial and apartments. Webster provides
construction, construction mini-perm and permanent loans from $2 million to $15
million. Loan to value and loan to cost are generally 75% and 80%, respectively.
A breakdown of the CRE loan portfolio by property type is as follows:
At December 31, 2001
-----------------------------------------------------
PROPERTY TYPE Amount Percent
- --------------------------------------------------------------------------------
Office $ 197,920 20.3%
Industrial 194,020 19.9
Retail 92,624 9.5
Multi-family 80,923 8.3
Mixed-use 68,248 7.0
Healthcare 61,423 6.3
Residential Development 50,699 5.2
Other 229,119 23.5
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Total $ 974,976 100.0%
- --------------------------------------------------------------------------------
CONSUMER LOANS
Webster Bank is dedicated to providing a convenient and competitive selection of
consumer loan products to its customers. The Bank concentrates on providing its
customers a range of products including home equity loans and equity lines of
credit as well as second mortgages and direct installment lending programs. The
Bank does not have credit card loans in its consumer loan portfolio. The
distribution channels consist of its network of branches, loan officers, call
center, as well as third party licensed mortgage brokers operating in contiguous
states. In January 2002, Webster's wholesale lending program began offering home
equity loans, through its broker network in regional offices located in Phoenix,
Atlanta and Chicago. Additionally, Webster periodically offers consumer products
through direct mail programs. The Bank also provides the convenience of the
Internet for equity loan applications that are available in most states. Credit
exposure to any single borrower is limited by utilizing the Fair Isaac scoring
model, an industry-accepted credit scoring system, to assess risk.
9
Consumer loan volume increased significantly in 2001 and, at December 31, loans
totaled $1.1 billion and represented 15.9 % of the loan portfolio, compared to
$699 million or 10.3%, a year earlier. This growth is attributable to the
popularity of the Bank's home equity programs and the expansion of lending into
contiguous states through a network of brokers.
The Bank's consumer loan products consist of:
o Home Equity Lines of Credit
o Home Equity Loans
o Second Mortgage Loans
o Installment Loans
o Automobiles Loans
o Loans Secured by Deposit Accounts
The following table sets forth the contractual maturity and interest-rate
sensitivity of residential and commercial construction mortgage loans and
commercial loans at December 31, 2001.
CONTRACTUAL MATURITY
-------------------------------------------------------------------
One Year More than One More Than
(In thousands) or Less to Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------
Contractual Maturity
Construction loans:
Residential mortgage $ 217,783 -- -- 217,783
Commercial mortgage 23,176 44,295 16,051 83,522
Commercial loans 198,367 677,124 491,265 1,366,756
- ---------------------------------------------------------------------------------------------------
Total $ 439,326 721,419 507,316 1,668,061
- ---------------------------------------------------------------------------------------------------
Interest-Rate Sensitivity
Fixed rate $ 235,657 271,092 168,878 675,627
Variable rate 203,669 450,327 338,438 992,434
- ---------------------------------------------------------------------------------------------------
Total $ 439,326 721,419 507,316 1,668,061
- ---------------------------------------------------------------------------------------------------
10
The following table sets forth the composition of the Bank's loan portfolio in
amounts and percentages at the dates shown.
At December 31,
2001 2000 1999
-------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,058,662 44.52% $ 3,760,792 55.15% $ 3,537,038 58.73%
Loans held for sale 143,918 2.10 17,730 0.26 7,022 0.12
Construction 223,583 3.26 302,776 4.44 302,310 5.02
Multi-family units 104,038 1.51 65,482 0.96 52,573 0.87
- ---------------------------------------------------------------------------------------------------------------------
Total 3,530,201 51.39 4,146,780 60.81 3,898,943 64.74
- ---------------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,046,874 15.24 1,207,398 17.70 915,035 15.19
Lease financing 320,704 4.67 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total 1,367,578 19.91 1,207,398 17.70 915,035 15.19
- ---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 892,145 12.99 784,817 11.51 695,520 11.55
Commercial construction 82,831 1.20 72,216 1.06 45,648 0.76
- ---------------------------------------------------------------------------------------------------------------------
Total 974,976 14.19 857,033 12.57 741,168 12.31
- ---------------------------------------------------------------------------------------------------------------------
Consumer loans:
Home equity credit loans 1,038,350 15.11 609,293 8.94 492,684 8.18
Other consumer 56,113 .82 89,514 1.31 47,064 0.79
- ---------------------------------------------------------------------------------------------------------------------
Total 1,094,463 15.93 698,807 10.25 539,748 8.97
- ---------------------------------------------------------------------------------------------------------------------
Loans receivable (a) 6,967,218 101.42 6,910,018 101.33 6,094,894 101.21
Less: allowance for loan losses (97,307) (1.42) (90,809) (1.33) (72,658) (1.21)
- ---------------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 6,869,911 100.00% $ 6,819,209 100.00% $ 6,022,236 100.00%
- ---------------------------------------------------------------------------------------------------------------------
At December 31,
1998 1997
----------------------------------------------------------
(Dollars in thousands) Amount % Amount %
- ------------------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,669,804 66.64% $ 3,896,709 70.53%
Loans held for sale 9,409 0.17 3,515 0.07
Construction 200,417 3.64 117,619 2.13
Multi-family units 689 0.01 16,736 0.30
- ------------------------------------------------------------------------------------------
Total 3,880,319 70.46 4,034,579 73.03
- ------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 548,734 9.96 369,658 6.69
Lease financing -- -- -- --
- ------------------------------------------------------------------------------------------
Total 548,734 9.96 369,658 6.69
- ------------------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 548,487 9.96 530,080 9.59
Commercial construction 67,717 1.23 58,888 1.07
- ------------------------------------------------------------------------------------------
Total 616,204 11.19 588,968 10.66
- ------------------------------------------------------------------------------------------
Consumer loans:
Home equity credit loans 458,981 8.33 494,537 8.95
Other consumer 68,081 1.24 108,775 1.97
- ------------------------------------------------------------------------------------------
Total 527,062 9.57 603,312 10.92
- ------------------------------------------------------------------------------------------
Loans receivable (a) 5,572,319 101.18 5,596,517 101.30
Less: allowance for loan losses (65,201) (1.18) (71,599) (1.30)
- ------------------------------------------------------------------------------------------
Loans receivable, net $ 5,507,118 100.00% $ 5,524,918 100.00%
- ------------------------------------------------------------------------------------------
(a) Net of deferred costs and discounts.
11
INSURANCE SERVICES
- ------------------
Webster Bank, through its wholly-owned subsidiary, Webster Insurance, offers a
full range of insurance plans to both individuals and businesses. Webster
Insurance is a regional insurance brokerage agency with three operating
divisions: individual and family insurance, financial services, and business and
professional insurance. Insurance products and services include: commercial and
personal property and casualty insurance; life, health, disability and long-term
care insurance for individuals and businesses; annuities and investment
products; risk management services and pension and 401(k) plan administration.
Webster Insurance is the largest independent insurance agency based in
Connecticut generating $21.8 million of insurance commissions in 2001. Webster
Insurance is headquartered in Wallingford and has offices in several Connecticut
communities, including Wesport, Waterford and Vernon. Revenues for the year 2001
were $22.0 million, an increase of $7.4 million, or 51.5%, over the prior year.
The increase was largely due to purchase transactions in 2000 and 2001.
TRUST AND INVESTMENT SERVICES
- -----------------------------
The Bank offers trust and investment services through its wholly-owned
subsidiaries Webster Trust Company, N.A. ("Webster Trust") and Webster
Investment Services, Inc. ("WIS"). For the year ended 2001, revenue from both
subsidiaries was $18.3 million, compared to $18.2 million in 2000.
Webster Trust provides asset management and a comprehensive range of trust,
custody, estate and administrative services to high-net-worth individuals, small
to medium size companies and not-for-profit organizations (endowments and
foundations). At December 31, 2001 and 2000, there were approximately $1.1
billion and $1.0 billion of trust assets held and $796.3 million and $706.0
million of assets under management, respectively. These assets are not included
in the Consolidated Financial Statements, since the Bank does not own them.
During 2000, Webster Financial Advisors ("WFA") was established to provide
consumers with a team of professionals who offer a full range of financial
services for high-net-worth individuals and institutions. WFA offers clients a
comprehensive package of products to meet all their financial needs. Services
include investment management, trust and estate planning, retirement wealth
management, tax planning and sophisticated credit and banking solutions. WFA
also offers institutional services to Connecticut businesses and not-for-profit
organizations.
WFA delivers custom tailored and highly sophisticated services through
professionals who live and work in Connecticut and who are readily available for
in-person consultations. In addition, WFA has the expertise that business
clients and not-for-profit organizations require for addressing their retirement
plans, foundation and endowment needs. WFA is based in Waterbury and has offices
in several Connecticut communities, including Hartford, New Haven and Westport.
Revenues for Webster Trust and WFA for the year 2001 were $6.0 million, an
increase of $1.3 million, or 30.1%, over the prior year.
Through WIS, the Bank offers securities services including brokerage and
investment advice and is a registered investment advisor ("RIA"). WIS has over
100 registered representatives offering customers an expansive array of
investment products including stocks and bonds, mutual funds, managed accounts
and annuities. In 2001, $310 million of such products were sold.
Prior to June 24, 1999, WIS offered brokerage services through an independent
third party. On June 24, 1999, WIS registered with the Securities and Exchange
Commission as a broker-dealer and became a member of the National Association of
Securities Dealers, Inc. WIS's customer transactions are cleared through a third
party broker-dealer on a fully disclosed basis. Accordingly, WIS does not carry
customer accounts and is exempt from SEC Rule 15c3-3 pursuant to provision
k(2)(ii) of such rule.
In June 2000, Webster Financial Corporation acquired MECH Financial, Inc.
("MECH") and it's wholly-owned subsidiary, Mechanics Savings Bank ("Mechanics")
in a transaction that was accounted for as a purchase business combination.
Mechanics Investment Services, Inc. ("MIS"), a subsidiary of Mechanics that was
registered as a broker-dealer and a RIA, was merged into WIS on June 23, 2000,
the effective date of the acquisition of MECH. Investment services revenue for
the year 2001 were $12.3 million compared to $13.5 million the prior year. The
decrease reflects the general decline in retail investor activity marketwide.
12
FINANCIAL ADVISORY SERVICES
- ---------------------------
In November 2000, Webster, through it's newly formed subsidiary Webster D&P
Holdings, Inc., acquired a 65% interest in Duff & Phelps, LLC, a privately owned
company which now has offices in Chicago, New York, Los Angeles, and Seattle.
Duff & Phelps provides expertise in middle-market mergers and acquisitions,
private placements, fairness opinions, valuations, ESOP and ERISA advisory
services and special financial advisory services to public and private companies
located primarily throughout the United States. The acquisition further
accelerates Webster's progress toward the strategic objective of broadening its
product offerings and increasing revenue from fee-based services. Total revenues
for the year 2001 were $15.6 million. Total revenues for 2000 were $1.3 million,
reflecting the November 2000 purchase.
INVESTMENT ACTIVITIES
- ---------------------
Webster Bank may acquire, hold and transact various types of investment
securities in accordance with applicable federal regulations, state statutes and
within the guidelines of its internal investment policy. The type of investments
that the Bank may invest in include: interest-bearing deposits of federally
insured banks, federal funds, U.S. government treasuries and agencies including
agency mortgage-backed securities ("MBS") and collateralized mortgage
obligations ("CMOs"), private issue MBS and CMOs, municipal securities,
corporate debt, commercial paper, banker's acceptances, structured notes, trust
preferred securities, mutual funds and equity securities subject to restrictions
applicable to federally chartered institutions. Webster's asset/liability
management objectives also influence investment activities at both the Parent
Company and Bank. The Bank is required to maintain liquid assets at regulatory
minimum levels, which vary from time to time. The Bank uses various investments
as permitted by regulation for meeting its liquidity requirements.
Webster, directly or through the Bank, maintains an investment portfolio that is
primarily structured to provide a source of liquidity for operating demands,
generate interest income and to provide a means to balance interest-rate
sensitivity. The investment portfolio is classified into three major categories
consisting of: available for sale, held to maturity and trading securities. On
January 1, 2001, as permitted by the provisions of SFAS No. 133, Webster
reclassified all held to maturity securities to available for sale securities.
At December 31, 2001, the combined investment portfolios of Webster and the Bank
totaled $4.0 billion, with $3.9 billion and $83.2 million held by the Bank and
Parent Company, respectively. At December 31, 2001 and 2000, the Bank's
portfolio consisted primarily of mortgage-backed securities. At December 31,
2000, the combined investment portfolios of the Bank and Parent Company totaled
$3.4 billion, with $3.3 billion and $95.0 million held by the Bank and Parent
Company, respectively. At December 31, 2001 and 2000, the Parent Company's
portfolio was classified as available for sale and consisted primarily of
equity, mutual funds and corporate trust preferred securities. See Note 3 of
Notes to Consolidated Financial Statements contained elsewhere within this
report for security maturity data, as well as other additional information.
The Bank has the ability to use interest-rate financial instruments within
internal policy guidelines to hedge and manage interest-rate risk as part of its
asset/liability strategy. See Note 10 of Notes to Consolidated Financial
Statements contained elsewhere within this report.
The securities portfolios of Webster and the Bank are managed by the Bank's
Treasury Group in accordance with regulatory guidelines and established internal
corporate investment policies. These policies and guidelines include limitations
on aspects such as investment grade/ratings, concentrations and investment type
to help manage risk associated with investing in securities.
SOURCES OF FUNDS
- ----------------
Deposits, loan and mortgage-backed security repayments, securities sales
proceeds and maturities, borrowings and earnings are the primary sources of the
Bank's funds available for use in its lending and investment activities and in
meeting its operational needs. While scheduled loan repayments and securities
payments are a relatively stable source of funds, deposit flows and loan and
investment security prepayments are influenced by prevailing interest rates and
local economic conditions. The Bank's borrowings primarily include Federal Home
Loan Bank ("FHLB") advances and repurchase agreement borrowings. See Notes 8 and
9 of Notes to Consolidated Financial Statements contained elsewhere within this
report.
13
The Bank attempts to control the flow of funds in its deposit accounts according
to its need for funds and the cost of alternative sources of funds. A Retail
Pricing Committee meets regularly to determine pricing and marketing initiative.
Webster influences the flow of funds primarily by the pricing of deposits, which
is affected to a large extent by competitive factors in its market area and
asset/liability management strategies.
The main sources of liquidity at the Parent Company level are dividends from the
Bank, interest and dividends on securities and net proceeds from borrowings and
capital offerings. The main outflows of funds are dividend payments to common
shareholders and interest expense on capital securities, senior notes and other
borrowings.
DEPOSIT ACTIVITIES
The Bank has developed a variety of innovative deposit programs designed to meet
depositors needs and attract both short-term and long-term deposits from the
general public. The Bank's checking account programs offer a full line of
accounts with varying features that include noninterest-bearing and
interest-bearing account types. The Bank's savings account programs include
statement and passbook accounts, money market savings accounts, club accounts
and certificate of deposit accounts that offer short and long-term maturity
options. The Bank offers IRA savings and certificate of deposit accounts that
earn its deposit customers interest on a tax-deferred basis. The Bank also
offers special rollover IRA accounts for individuals who have received lump-sum
distributions. The Bank's checking and savings deposit accounts have several
features that include: ATM Card and Check Card use, direct deposit, combined
statements, 24-hour automated telephone banking services, bank by mail services
and overdraft protection. Deposit customers can access their accounts in a
variety of ways including ATMs, Web banking, telephone banking or by visiting a
nearby branch.
The Bank receives retail and commercial deposits through its main office and 104
other full-service banking offices in Connecticut. The Bank relies primarily on
competitive pricing policies and effective advertising to attract and retain
deposits while emphasizing the objectives of quality customer service and
customer convenience. The WebsterOne account is a banking relationship that
affords customers the opportunity to minimize fees, receive free checks, earn
premium rates on savings and simplify their bookkeeping with one combined
account statement that links account balances. The Bank's Check Card can be used
at over eighteen million Visa merchants worldwide to pay for purchases with
money in a linked checking account. The Check Card also serves as an ATM Card
for receiving cash, for processing deposits and transfers and obtaining account
balances 24 hours a day.
Customer services also include over 210 ATM facilities that use state-of-the-art
technology with membership in NYCE and PLUS networks and provide 24-hour access
to linked accounts. The Internet banking service allows, among other things,
customers the ability to transfer money between accounts, review statements,
check balances and pay bills through the use of a personal computer. The
telephone banking service provides automated customer access to account
information 24 hours per day, seven days per week, and to service
representatives at certain established hours. Customers can transfer account
balances, process stop payments and address changes, place check reorders, open
deposit accounts, inquire about account transactions and request general
information about the Bank's products and services. The Bank's services provide
for automatic loan payment features from its accounts as well as for direct
deposit of Social Security, payroll, and other retirement benefits. See Note 7
of Notes to Consolidated Financial Statements contained elsewhere within this
report for additional deposit information.
BORROWINGS
The Federal Home Loan Bank ("FHLB") system functions in a reserve credit
capacity for regulated, federally insured depository institutions and certain
other home financing institutions. Members of the FHLB system are required to
own capital stock in the FHLB. Members are authorized to apply for advances on
the security of their FHLB stock and certain home mortgages and other assets
(principally securities, which are obligations of, or guaranteed by, the United
States Government) provided certain creditworthiness standards have been met.
Under its current credit policies, the FHLB limits advances based on a member's
assets, total borrowings and net worth. The Bank uses long-term and short-term
FHLB advances as a source of funding to meet liquidity and planning needs when
the cost of these funds are favorable as compared to alternate funding sources.
At December 31, 2001 and 2000, FHLB advances totaled $2.5 billion and $2.4
billion and represented 72% and 79%, respectively, of total outstanding borrowed
funds.
14
Additional funding sources are available to the Bank through securities sold
under agreement to repurchase, purchased federal funds and lines of credit with
correspondent banks. Total other borrowings were $1.0 billion and $650.2 million
at December 31, 2001 and 2000 and represented 28% and 21%, respectively, of
borrowed funds. Outstanding borrowings through securities sold under agreement
to repurchase totaled $571.7 million and $489.4 million at December 31, 2001 and
2000, respectively. See Notes 8 and 9 of Notes to Consolidated Financial
Statements contained elsewhere within this report for borrowing information.
In November 2000, Webster completed a registered offering of $126.0 million of
8.72% Senior Notes due 2007 (the "Senior Notes"). The net proceeds from the note
placement were used for general corporate purposes. The Senior Notes are not
redeemable prior to the maturity date of November 30, 2007. On June 30, 2000,
$40.0 million of Senior Notes that were originated in 1993 matured.
BANK SUBSIDIARIES
- -----------------
The Bank's investment in its service corporation subsidiary, WIS, totaled $2.1
million and $4.4 million at December 31, 2001 and 2000, respectively. The
activities of this broker-dealer subsidiary consist of offering broker dealer
and registered investment advisory services to its customers. WIS also offers a
broad range of products including stocks and bonds, mutual funds, annuities,
investment management services, college savings plans and an extensive range of
retirement and 401(k) products.
The Bank's investment in its trust subsidiary corporation, Webster Trust,
totaled $7.2 million and $8.2 million at December 31, 2001 and 2000,
respectively. Webster Trust had approximately $1.1 billion and $1.0 billion of
trust assets held and $796.3 million and $706.0 million in assets under
management at December 31, 2001 and 2000, respectively.
The Bank's investment in its operating subsidiary corporation, FCB Properties,
Inc., totaled $477,000 and $157,000 at December 31, 2001 and 2000, respectively.
The primary function of this operating subsidiary is the disposal of foreclosed
properties.
The Bank's investment in its real estate investment trust ("REIT") operating
subsidiary corporation, Webster Preferred Capital Corporation, totaled $918.8
million and $917.8 million at December 31, 2001 and 2000, respectively. The
primary function of the REIT is to provide a cost-effective means of raising
funds, including capital, on a consolidated basis for the Bank. The REIT's
strategy is to acquire, hold and manage real estate mortgage assets.
The Bank's investment in its Internet lending subsidiary, Access National
Mortgage, Inc., totaled $4.1 million and $4.5 million at December 31, 2001 and
2000, respectively. The function of this subsidiary is the origination of
residential mortgage loans through an efficient national network via the
Internet.
The Bank's investment in its passive investment subsidiary, Webster Mortgage
Investment Corporation, totaled $2.5 billion for both December 31, 2001 and
2000. The primary function of this subsidiary is to provide servicing on passive
investments, which include loans secured by real estate. This passive investment
company derives additional state income tax benefits.
The Bank's investment in its leasing subsidiary, Center Capital Corporation,
totaled $19.3 million at December 31, 2001. The primary function of this
subsidiary is to provide lease financing for commercial and industrial equipment
through installment sales and leasing programs to customers in all states except
Alaska and Hawaii. Center Capital was acquired in March 2001.
MyWebster, Inc., a subsidiary of the Bank, is a service corporation that is
presently inactive.
15
EMPLOYEES
- ---------
At December 31, 2001, Webster had 2,271 employees (including 306 part-time
employees), none of whom were represented by a collective bargaining group.
Webster maintains a comprehensive employee benefit program providing, among
other benefits, group medical and dental insurance, life insurance, disability
insurance, a pension plan, an employee 401(k) investment plan, an employee stock
purchase plan and an employee stock ownership plan. Management considers
Webster's relations with its employees to be good.
MARKET AREA AND COMPETITION
- ---------------------------
The Bank is headquartered in Waterbury, Connecticut (New Haven County) and
conducts business from its home office in downtown Waterbury and 104 branch
offices that are located in the state of Connecticut. The branches are in
Waterbury, Ansonia, Bethany, Branford, Cheshire, Derby, East Haven, Guilford,
Hamden, Madison, Meriden, Middlebury, Milford, Naugatuck, New Haven, North
Haven, Orange, Oxford, Prospect, Seymour, Southbury, Wallingford and West Haven
(New Haven County); New Milford, Thomaston, Torrington, Watertown and Winsted
(Litchfield County); Brookfield, Fairfield, Ridgefield, Shelton, Stratford,
Trumbull, Westport and Wilton (Fairfield County); Avon, Berlin, Bloomfield,
Bristol, Canton, East Hartford, East Windsor, Enfield, Farmington, Forestville,
Glastonbury, Hartford, Kensington, Manchester, New Britain, Newington,
Plainville, Poquonock, Rocky Hill, Simsbury, Southington, South Windsor,
Suffield, Terryville, West Hartford, Wethersfield and Windsor (Hartford County);
Cromwell, Essex, Middletown and Old Saybrook (Middlesex County); Old Lyme (New
London County); Somers and Vernon (Tolland County). Waterbury is approximately
30 miles southwest of Hartford and is located at the intersection of Route 84
and Route 8 midway between Torrington and the New Haven and Bridgeport
metropolitan areas. Most of the Bank's depositors live, and most of the
properties securing its mortgage loans are located, in the same area or the
adjoining counties. The Bank's market area has a diversified economy with the
workforce employed primarily in manufacturing, financial services, healthcare,
industrial and technology companies.
The Bank faces substantial competition for deposits and loans throughout its
market areas. The primary factors stressed by the Bank in competing for deposits
are interest rates, personalized services, the quality and range of financial
services, convenience of office locations, automated services and office hours.
Competition for deposits comes primarily from other savings institutions,
commercial banks, credit unions, mutual funds and other investment alternatives.
The primary factors in competing for loans are interest rates, loan origination
fees, the quality and range of lending services and personalized service.
Competition for origination of first mortgage loans comes primarily from other
savings institutions, mortgage banking firms, mortgage brokers, commercial banks
and insurance companies. The Bank faces competition for deposits and loans
throughout its market area not only from local institutions but also from
out-of-state financial institutions which have opened loan production offices or
which solicit deposits in its market area.
Webster Trust has offices located in Hartford, New Haven, Waterbury, and
Westport, Connecticut. Webster Investment Service's administrative, operations
and compliance departments are headquartered in Bristol, Connecticut with sales
offices located throughout Webster's branch network. Webster Insurance is
headquartered in Wallingford, Connecticut with offices in Vernon, Westport and
Waterford, Connecticut. Duff & Phelps is headquartered in Chicago with offices
in Los Angeles, New York and Seattle. Center Capital Corporation is
headquartered in Farmington, Connecticut with offices in Blue Bell,
Pennsylvania, Schaumburg, Illinois, Westboro, Massachusetts, and Brookfield,
Connecticut.
REGULATION
- ----------
Webster, as a savings and loan holding company, and Webster Bank, as a federally
chartered savings bank, are subject to extensive regulation, supervision, and
examination by the OTS as their primary federal regulator. Webster Bank also is
subject to regulation, supervision, and examination by the FDIC and as to
certain matters by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Webster Trust, as a national bank engaged in trust
activities, is subject to extensive regulation, supervision, and examination by
the Office of the Comptroller of the Currency ("OCC"). Webster Trust also is
subject to regulation, supervision, and examination by the FDIC and as to
certain matters by the Federal Reserve Board. WIS is registered as a
broker-dealer and investment advisor and is subject to extensive regulation,
supervision, and examination by the Securities and Exchange Commission. WIS also
is a member of the National Association of Securities Dealers, Inc., and is
subject to its regulation. WIS and Webster Bank also are authorized to engage as
brokers, dealers and underwriters of municipal securities, and as such are
subject to regulation by the Municipal Securities Rulemaking Board. Webster
Insurance is a licensed insurance agency with offices in the state of
Connecticut and is subject to registration and supervision by the Connecticut
Insurance Department.
16
Webster Bank and Webster Trust are subject to substantial regulatory
restrictions on their ability to pay dividends. Under OTS capital distribution
regulations applicable to Webster Bank, the Bank may pay dividends to Webster
Parent Company without prior regulatory approval so long as it meets its
applicable regulatory capital requirements before and after payment of the
dividends and its total dividends do not exceed its net income to date over the
calendar year plus retained net income over the preceding two years. The OTS has
discretion to prohibit any otherwise permissible capital distributions by
Webster Bank on general safety and soundness grounds, and must be given 30 days
advance notice of all capital distributions, during which time it may object to
any proposed distribution. At December 31, 2001, the Bank had the ability to pay
dividends to the Parent Company of $159.6 million without the prior approval of
the OTS.
Effective July 1, 2001, as a consequence of the passage of the
Gramm-Leach-Bliley Act in 1999, all financial institutions, including Webster,
Webster Bank, Webster Trust, and their subsidiaries, were required to develop
privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request and establish procedures and
practices to protect customer data from unauthorized access. Webster has
developed such policies and believes it is in compliance with all such privacy
provision of the Gramm-Leach-Bliley Act.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, adopted as Title III of the USA PATRIOT Act and signed into law on
October 26, 2001, all financial institutions, including Webster, Webster Bank,
and Webster Trust, are subject to additional requirements to collect customer
information, monitor customer transactions and report information to U.S. law
enforcement agencies concerning customers and their transactions. In many cases,
the specific requirements of the law will not be established until the Secretary
of the Treasury adopts implementing regulations as directed or authorized by
Congress. In general, accounts maintained by or on behalf of "non-United States
persons," broadly defined, are subject to particular scrutiny. Correspondent
accounts for or on behalf of foreign banks with profiles that raise money
laundering concerns are subject to even greater scrutiny, and correspondent
accounts for or on behalf of "shell banks," defined as a foreign bank with no
physical presence in any country, are barred altogether. Financial institutions
must take "reasonable steps," subject to definition by the Secretary of the
Treasury, to ensure that any correspondent accounts with permissible foreign
banks are not used for the benefit of shell banks. The Secretary of the Treasury
also is authorized to require financial institutions to take "special measures,"
including new customer identification requirements, recordkeeping and reporting
and transaction restrictions, if the financial institutions are involved with
jurisdictions, financial institutions, or transactions of "primary money
laundering concern" as determined by the Secretary. Additional
information-sharing among financial institutions, regulators, and law
enforcement authorities is encouraged by creating an exemption from the privacy
provisions of the Gramm-Leach-Bliley Act for financial institutions that comply
with this provision and authorizing the Secretary of the Treasury to adopt rules
to further encourage cooperation and information-sharing. Upon request by an
appropriate federal banking agency, a financial institution must provide or make
available information about an account within 120 hours. All financial
institutions also are required to establish internal anti-money laundering
programs. The effectiveness of a financial institution in combating money
laundering activities is a factor to be considered in any application submitted
by the financial institution after December 31, 2001, under the Federal Deposit
Insurance Act, which applies to Webster Bank and Webster Trust, or the Bank
Holding Company Act, which applies to Webster.
TAXATION
- --------
FEDERAL INCOME TAXES
Except for the Bank's REIT subsidiary and Duff & Phelps, LLC (which file
"stand-alone" tax returns), Webster files a calendar year consolidated federal
income tax return on behalf of itself and its subsidiaries. Webster reports its
income and deductions using the accrual method of accounting.
Certain legislation enacted during August 1996: 1) eliminated the "thrift bad
debt" method of calculating bad debt deductions after 1995; 2) required the
recapture (into taxable income) of certain post-1987 bad debt reserves; and 3)
provided for more limited circumstances in which certain pre-1988 bad debt
reserves would be recaptured. Webster had previously recorded a deferred tax
liability for the post-1987 reserves, and its total tax expense for financial
reporting purposes was not affected by the legislation. Webster's pre-1988
reserves at both December 31, 2001 and 2000 were approximately $50.0 million,
and it does not expect such reserves to be recaptured into taxable income.
17
Webster would be subject to an alternative minimum tax ("AMT") if such tax were
larger than the otherwise payable, regular federal income tax. Historically,
Webster has not been subject to the AMT.
Webster's federal income tax returns have been examined by the Internal Revenue
Service ("IRS"), and/or the statute of limitations periods have expired, for all
tax years through 1998. During February 2002, the IRS completed its examination
of Webster's 1997 and 1998 tax returns, resulting in no significant adjustments.
Additionally, during October 2001, the IRS completed its examination of the
Bank's REIT subsidiary's 1997 and 1998 tax returns, resulting in no adjustments.
STATE INCOME TAXES
During May 1998, the State of Connecticut enacted tax legislation (effective in
1999) allowing for the formation of a Passive Investment Company ("PIC") by a
financial service company ("FSC"). The legislation exempts a PIC from
Connecticut taxation and also exempts dividends paid from a PIC to a related,
qualified FSC from Connecticut tax. Webster Bank, a qualified FSC under the
legislation, organized a PIC that began operation during the first quarter of
1999. The PIC reduced Webster's Connecticut tax expense beginning with tax year
1999.
For 2001, the Bank's REIT and PIC subsidiaries were not subject to Connecticut
corporation business tax. In 2002 and future years, due to the maturity of the
REIT's Series A preferred stock, the Bank's dividend income from its REIT
subsidiary is expected to be subject to Connecticut tax. However, due to the
continued operation of the PIC, and the availability of carryover net operating
loss deductions, Webster expects to pay only nominal Connecticut corporation
business taxes for the foreseeable future. See Note 12 of Notes to Consolidated
Financial Statements contained elsewhere in this report for additional
information.
Historically, as a result of Webster's limited banking activities in other
states, Webster has been subject to nominal taxation in such other states. In
2001, because of the Bank's acquisition of Center Capital Corporation, and the
continued expansion of its Wholesale Lending activities into additional states,
Webster and/or its subsidiaries are expected to file tax returns in all states
except Alaska and Hawaii. Duff & Phelps is subject to taxation in certain other
states due to its investment in Duff & Phelps, LLC. Overall, however, Webster's
state tax expense is expected to be minimal for the foreseeable future.
ITEM 2. PROPERTIES
- -------------------
At December 31, 2001, Webster had 105 offices, which includes 34 banking
offices, including its main office, in New Haven County, 46 banking offices in
Hartford County, 9 banking offices in Fairfield County, 9 banking offices in
Litchfield County, 4 banking offices in Middlesex County, 2 banking offices in
Tolland County, and 1 banking office in New London County. Of these, 53 offices
are owned and 52 offices are leased. Lease expiration dates range from 1 to 86
years with renewal options of 3 to 35 years. Additionally, the Bank maintains
four trust offices: one in Fairfield County, one in Hartford County and two in
New Haven County.
The total net book value of properties and furniture and fixtures owned and used
for banking and trust offices at December 31, 2001 was $82.8 million. The
following table provides detail for the total net book value amount.
(In thousands) At December 31, 2001
- --------------------------------------------------------------------------------
Land & improvements, net $ 11,818
Buildings & improvements, net 36,280
Leasehold improvements, net 5,058
Furniture & equipment, net 29,652
- --------------------------------------------------------------------------------
Total $ 82,808
- --------------------------------------------------------------------------------
18
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which Webster or any of its
subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The common stock of Webster is traded on the Nasdaq National Market System under
the symbol "WBST."
The following table shows dividends declared and the market price per share by
quarter for 2001 and 2000. On March 11, 2002, the closing market price of
Webster common stock was $36.16. Webster increased its quarterly dividend in the
second quarter of 2001 to $.17 per share.
- --------------------------------------------------------------------------------
COMMON STOCK (PER SHARE)
Cash
Dividends Market Price End of
2001 Declared Low High Period
- --------------------------------------------------------------------------------
Fourth $ .17 29.23 34.08 31.53
Third .17 28.16 37.06 32.96
Second .17 27.75 33.74 32.78
First .16 26.44 30.31 29.31
Cash
Dividends Market Price End of
2000 Declared Low High Period
- --------------------------------------------------------------------------------
Fourth $ .16 21.88 29.63 28.31
Third .16 21.19 27.06 26.94
Second .16 20.19 25.19 22.19
First .14 20.13 24.19 23.00
Webster had approximately 12,202 shareholders of common stock at February 28,
2002. The number of shareholders of record was determined by Webster's stock
transfer agent, American Stock Transfer and Trust Company.
Payment of dividends from the Bank to Webster is subject to certain regulatory
and other restrictions. Payment of dividends by Webster on its stock is subject
to various restrictions, none of which is expected to limit any dividend policy
that the Board of Directors may in the future decide to adopt. Under Delaware
law, Webster may pay dividends out of its surplus or, in the event there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If the capital of the corporation has
diminished by depreciation in the value of its property or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, no dividends may be paid out of net
profits until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets has been repaired.
OTHER EVENTS
- ------------
The annual meeting of shareholders of Webster will be held on April 25, 2002.
19
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------
December 31,
----------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
Total assets $ 11,857,382 11,249,508 9,931,744 9,836,029 9,902,775
Loans receivable, net 6,869,911 6,819,209 6,022,236 5,507,118 5,524,918
Securities 3,999,133 3,405,080 3,066,901 3,662,829 3,770,670
Intangible assets 320,051 326,142 138,829 83,227 83,731
Deposits 7,066,471 6,981,128 6,232,696 6,347,644 6,444,546
FHLB advances and other borrowings 3,533,364 3,030,225 2,788,445 2,575,608 2,588,178
Shareholders' equity 1,006,467 890,374 635,667 626,454 585,603
OPERATING INCOME
Net interest income $ 367,479 326,516 303,513 282,611 285,758
Provision for loan losses 14,400 11,800 9,000 8,103 26,449
Noninterest income 162,098 128,821 92,630 82,638 47,723
Noninterest expenses:
Acquisition-related expenses -- -- 9,500 20,993 31,989
Branch reconfiguration 3,703 -- -- -- --
Other noninterest expenses 305,229 267,130 234,961 208,440 197,544
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 308,932 267,130 244,461 229,433 229,533
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
method 206,245 176,407 142,682 127,713 77,499
Income taxes 69,430 58,116 47,332 49,694 29,887
- -------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 136,815 118,291 95,350 78,019 47,612
Extraordinary item - early extinguishment of
debt (net of taxes) (1,209) -- -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (2,418) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 133,188 118,291 95,350 78,019 47,612
- -------------------------------------------------------------------------------------------------------------------------
SIGNIFICANT STATISTICAL INFORMATION
Interest-rate spread 3.38% 3.17 3.19 2.83 3.18
Net interest margin 3.48 3.29 3.32 2.97 3.35
Return on average shareholders' equity 13.88 16.72 15.33 12.82 8.61
Return on average assets 1.15 1.11 0.98 0.77 0.53
Allowance for loan losses/gross loans (a) 1.40 1.31 1.19 1.17 1.28
Net income per common share:
Basic $ 2.71 2.58 2.14 1.72 1.06
Diluted 2.68 2.55 2.10 1.69 1.04
Dividends declared per common share 0.67 0.62 0.47 0.44 0.40
Dividend payout ratio 25.00% 24.31 22.38 26.04 38.46
Fee income as a percentage of total revenue 28.76 25.95 22.55 18.84 13.40
Noninterest expenses to average assets 2.73 2.51 2.51 2.28 2.57
Noninterest expenses to average assets,
adjusted (b) 2.25 2.11 2.07 1.78 2.04
Diluted weighted-average shares 49,743 46,428 45,393 46,118 45,966
Book value per common share $ 20.48 18.19 14.09 14.02 13.15
Tangible book value per common share 13.97 11.53 11.02 12.16 11.27
Average shareholders' equity to average assets 8.32% 6.65 6.38 6.04 6.18
(a) Excludes loans in process.
(b) Excludes nonrecurring items, intangible amortization, capital securities,
preferred dividend and foreclosed property expenses.
20
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------------------
Selected quarterly data for 2001 and 2000 follows:
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
2001:
Interest income $ 196,612 194,457 188,628 177,538
Interest expense 108,901 104,013 95,012 81,830
- --------------------------------------------------------------------------------------------------------------------
Net interest income 87,711 90,444 93,616 95,708
Provision for loan losses 3,200 3,200 4,000 4,000
Gains on sale of investment securities, net 4,249 1,794 2,566 2,012
Other noninterest income 35,237 40,309 37,925 38,006
Noninterest expenses 78,220 76,304 77,266 77,142
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting method 45,777 53,043 52,841 54,584
Income taxes 15,167 18,539 17,810 17,914
Extraordinary item - early extinguishment of debt
(net of taxes) (1,209) -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (2,418) -- -- --
- --------------------------------------------------------------------------------------------------------------------
Net income $ 26,983 34,504 35,031 36,670
- --------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ .55 .70 .71 .75
- --------------------------------------------------------------------------------------------------------------------
Diluted $ .54 .69 .70 .74
- --------------------------------------------------------------------------------------------------------------------
2000:
Interest income $ 169,643 174,946 197,600 196,722
Interest expense 93,371 95,915 111,790 111,319
- --------------------------------------------------------------------------------------------------------------------
Net interest income 76,272 79,031 85,810 85,403
Provision for loan losses 2,200 3,200 3,200 3,200
Gain on sale of investment securities, net 3,050 2,908 1,871 616
Gain on sale of deposits -- -- -- 4,859
Other noninterest income 24,535 27,755 31,298 31,929
Noninterest expenses 61,549 64,604 68,601 72,376
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 40,108 41,890 47,178 47,231
Income taxes 13,297 13,783 15,595 15,441
- --------------------------------------------------------------------------------------------------------------------
Net income $ 26,811 28,107 31,583 31,790
- --------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ 0.61 0.66 0.65 0.65
- --------------------------------------------------------------------------------------------------------------------
Diluted $ 0.61 0.66 0.64 0.64
- --------------------------------------------------------------------------------------------------------------------
The first quarter ended March 31, 2001 included in noninterest expense a
nonrecurring charge of $3.7 million for branch reconfiguration expenses.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
For the year 2001, net income was $133.2 million, or $2.68 per diluted common
share, an increase of $14.9 million or 12.6% compared to net income of $118.3
million for the previous year. The improvement was the result of increased net
interest income and noninterest income that more than offset an increase in
noninterest expenses. Net interest income rose to $367.5 million for 2001, an
increase of $41.0 million or 12.5%. The net interest margin rose to 3.48% during
2001 from 3.29% during the prior year. Noninterest income reached $162.1
million, an increase $33.3 million or 25.8% when compared to $128.8 million the
previous period. Noninterest expenses compared to the previous year increased
$41.8 million or 15.6%. The increases in noninterest income and noninterest
expenses reflect the purchase acquisitions of Mechanics in June 2000, Duff and
Phelps in November 2000, Center Capital in March 2001 and three insurance
agencies between the period of January 2001 and April 2001.
Included in the net income for the current year are a $2.4 million (net of
taxes) expense related to the cumulative effect of a change in the method of
accounting (SFAS No. 133 implementation) and an extraordinary expense of $1.2
million (net of taxes) that represents costs incurred for early extinguishment
of debt related to the prepayment of borrowings from the Federal Home Loan Bank.
COMPARISON OF 2001 AND 2000 YEARS
- ---------------------------------
NET INTEREST INCOME
Net interest income totaled $367.5 million for the year ended December 31, 2001,
an increase of $41.0 million or 12.5%. The factors causing this change were an
increase in the net interest margin (on a fully taxable-equivalent basis) to
3.48% for 2001 from 3.29% during the prior year and an increase in average
outstanding earning assets during the year. See the rate/volume table that is
contained elsewhere in this report.
The decline in interest rates during 2001, combined with a steepening of the
yield curve, resulted in a favorable environment for Webster. As rates dropped
and mortgage and other callable assets prepaid at increasing levels, yields
dropped as the assets were replaced with ones earning lower yields. However,
maturing and repricing liabilities were replaced at even lower costs due to the
steepness of the yield curve. As can be seen from the rate/volume table that
follows, 59% of the increase in net interest income is due to changes in
interest rates, with liability costs dropping much faster than asset yields.
The growth of $796.8 million in average outstanding earning assets during 2001
outpaced the growth in average outstanding rate-bearing liabilities of $671.1
million. Due to earning assets growing faster than rate-bearing liabilities,
changes in volume represented 41% of the increase in net interest income.
INTEREST INCOME
Total interest income increased $18.3 million, or 2.5%, to $757.2 million for
the year 2001 as compared to $738.9 million during the previous year. As
discussed above, the increase was due entirely to increased volume of earning
assets during 2001 as compared to the previous year. Although loans and other
callable assets prepaid at increased volumes during 2001 due to the declining
interest rate environment, Webster was able to increase assets through the
acquisition of Mechanics in 2000 and Center Capital in 2001 as well as through
the increase in consumer loans. The increased consumer loans were primarily home
equity lines of credit, the majority of which were originated within the Bank's
primary market area.
The yield earned on earning assets declined during 2001 to 7.15% from 7.44%
during the year earlier. The decline was entirely within the loan category as
the yield on loans declined 46 basis points, while the yield on securities and
interest-bearing deposits increased by 5 basis points. In addition to the larger
volume of mortgage and other fixed rate loan prepayments during the current
year, as discussed above, declines in interest rates impacted the returns on
adjustable rate loans, which accounted for approximately 52% of gross loans at
December 31, 2001.
22
INTEREST EXPENSE
Interest expense declined $22.6 million, or 5.5%, to $389.8 million for fiscal
year 2001 as compared to $412.4 million the previous year. The decline in
expense was entirely due to the decrease in cost of funds. Due to the short
maturity structure of the wholesale borrowing portfolio, Webster was able to
take advantage of falling rates throughout 2001. Two-thirds of the benefit of
declining costs was realized in the wholesale borrowing area. The deposit area
accounted for one-third of the rate decline benefit. Savings, checking and
certificate of deposit offering rates were decreased as general market interest
rates declined throughout the year.
The average balance of interest-bearing liabilities increased $671.1 million for
2001 compared to 2000. The Mechanics acquisition accounted for a portion of the
volume increase as the balances were outstanding for all of 2001, as opposed to
only half a year in 2000. Approximately half of the increase occurred in
repurchase agreements and other borrowings due to their relative lower cost. The
remainder of the increase occurred in money market and checking accounts.
Net interest income also can be understood in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have impacted interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume) and (iii) the net change. The
change attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Years ended December 31, Years ended December 31,
2001 V. 2000 2000 V. 1999
- -----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) due to Increase (Decrease) due to
(In thousands) Rate Volume Total Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans, net $ (31,130) 32,731 1,601 25,335 57,648 82,983
Securities and interest bearing deposit 1,203 16,259 17,462 17,858 (7,607) 10,251
- -----------------------------------------------------------------------------------------------------------------------
Total (29,927) 48,990 19,063 43,193 50,041 93,234
- -----------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (17,580) 9,621 (7,959) 6,891 13,598 20,489
FHLB advances and other
borrowings (36,656) 21,976 (14,680) 25,962 23,665 49,627
- -----------------------------------------------------------------------------------------------------------------------
Total (54,236) 31,597 (22,639) 32,853 37,263 70,116
- -----------------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $ 24,309 17,393 41,702 10,340 12,778 23,118
- -----------------------------------------------------------------------------------------------------------------------
23
The following table shows the major categories of average assets and average
liabilities together with their respective fully taxable-equivalent interest
income or expense and the average yield or cost, for the three years ended
December 31, 2001.
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
2001 2000
Average Average Average Average
(Dollars in thousands) Balance Interest Yields Balance Interest Yields
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net (a) $ 6,969,481 519,930(b) 7.46% $ 6,541,659 518,329(b) 7.92%
Securities and interest-bearing deposits 3,667,917 238,423 6.56(c) 3,298,959 220,961 6.51(c)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,637,398 758,353 7.15(c) 9,840,618 739,290 7.44(c)
Other assets 896,052 799,597
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,533,450 $ 10,640,215
- ----------------------------------------------------------------------------------------------------------------------------
Savings and escrow $ 1,505,110 26,699 1.77% $ 1,509,414 31,036 2.06%
Money market savings, NOW and DDA 2,217,320 29,861 1.35 1,821,948 19,894 1.09
Time deposits 3,207,112 159,775 4.98 3,308,228 173,364 5.24
FHLB advances 2,011,440 112,784 5.61 2,047,743 128,447 6.27
Repurchase agreements and other borrowings 1,258,247 49,475 3.93 935,629 56,744 6.06
Senior notes 126,000 11,162 8.86 31,142 2,910 9.34
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 10,325,229 389,756 3.77 9,654,104 412,395 4.27
Other liabilities 87,530 78,870
Capital securities and minority interest 161,221 199,577
Shareholders' equity 959,470 707,664
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,533,450 $ 10,640,215
- ----------------------------------------------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (1,118) (379)
------- -------
Net interest income 367,479 326,516
Interest rate spread 3.38%(c) 3.17%(c)
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.48%(c) 3.29%(c)
- ----------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- --------------------------------------------------------------------------------------
1999
Average Average
(Dollars in thousands) Balance Interest Yields
- --------------------------------------------------------------------------------------
Loans, net (a) $ 5,802,453 435,346(b) 7.50%
Securities and interest-bearing deposits 3,317,708 210,710 6.30(c)
- --------------------------------------------------------------------------------------
Total interest-earning assets 9,120,161 646,056 7.07(c)
Other assets 624,963
- --------------------------------------------------------------------------------------
Total assets $ 9,745,124
- --------------------------------------------------------------------------------------
Savings and escrow $ 1,477,856 34,058 2.30%
Money market savings, NOW and DDA 1,519,929 15,185 1.00
Time deposits 3,228,480 154,562 4.79
FHLB advances 1,585,458 84,498 5.33
Repurchase agreements and other borrowings 978,581 50,316 5.14
Senior notes 40,000 3,660 9.15
- --------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,830,304 342,279 3.88
Other liabilities 93,252
Capital securities and minority interest 199,577
Shareholders' equity 621,991
- --------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,745,124
- --------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (264)
-------
Net interest income 303,513
Interest rate spread 3.19%(c)
- --------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.32%(c)
- --------------------------------------------------------------------------------------
(a) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(b) Includes amortization of net deferred loan costs (net of fees) and premiums
(net of discounts) of: $1.7 million, $1.5 million, and $496,000 million in
2001, 2000 and 1999, respectively.
(c) Unrealized gains (losses) are excluded from the average yield calculations.
Unrealized gains (losses) averaged $33.9 million, ($96.5 million) and ($24.5
million) for 2001, 2000 and 1999, respectively.
24
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $14.4 million for the year ended
December 31, 2001 from $11.8 million the year earlier, an increase of $2.6
million or 22.0%. Management performs a quarterly review of the loan portfolio
to determine the adequacy of the allowance for loan losses. See the "Allowance
for Loan Losses Methodology" section later in this Management's Discussion and
Analysis for further details.
Based upon these reviews, it was determined that the provision for loan losses
should be increased over the second half of 2001. Several factors that
influenced this increase included the following:
o The Bank's strategic plan is to change the mix of the loan portfolio
and increase the proportion of commercial and consumer loans and
decrease residential mortgage loans. Commercial and consumer lending
carry inherently more risk than residential lending.
o Net charge-offs increased to $9.7 million during 2001 from $4.6 million
the previous year, an increase of $5.1 million or 110.7%. The 2001 net
charge-offs were concentrated in the commercial lending area, which
accounted for $7.7 million, or 79.1%, of the total.
o Nonaccrual loans increased to $57.4 million, or 0.82% of gross loans,
at December 31, 2001, from $41.0 million, or 0.58%, a year earlier.
o The general economic slowdown has raised concerns about employment
stability and economic health in Connecticut and the country.
At December 31, 2001, the allowance for loan losses totaled $97.3 million or
1.40% of gross loans. A year earlier, the allowance totaled $90.8 million or
1.31% of gross loans.
NONINTEREST INCOME
The following table presents the principal categories of noninterest income for
the years ended December 31, 2001 and 2000.
- ------------------------------------------------------------------------------------------------------------
Increase (decrease)
(Dollars in thousands) 2001 2000 Amount %
- ------------------------------------------------------------------------------------------------------------
Fees and service charges $ 72,323 60,059 12,264 20.4%
Insurance commissions 21,751 14,360 7,391 51.5
Trust and investment services 18,346 18,184 162 0.9
Financial advisory services 15,525 1,290 14,235 1103.5
Gains on sale of loans and loan servicing, net 2,771 3,956 (1,185) (30.0)
Increase in CSV of life insurance 9,164 8,555 609 7.1
Gain on sale of securities, net 10,621 8,445 2,176 25.8
Gain on sale of deposits -- 4,859 (4,859) (100.0)
Other income 11,597 9,113 2,484 27.3
- ------------------------------------------------------------------------------------------------------------
Total noninterest income $ 162,098 128,821 33,277 25.8%
- ------------------------------------------------------------------------------------------------------------
The most significant factor in the increase in noninterest income was the
acquisitions completed during 2000 and 2001. The June 2000 Mechanics
acquisition, as well as the purchase of branches from FleetBoston and Chase
Manhattan during the year, added to deposit fees. The Center Capital acquisition
added to loan fee income. The continued expansion of Webster Insurance, with the
purchase of Levine in 2000 and Wolff Zackin, Benefit Plans and Musante in 2001,
added to insurance commission income. Duff & Phelps was acquired in November
2000 and added income from financial advisory services. Webster's plan has been
to expand its sources of noninterest income through the acquisition of fee-based
businesses and become less reliant on net interest income.
Nonrecurring items recognized during 2001 were $3.1 million of proceeds of Bank
Owned Life Insurance ("BOLI") policies. During 2000, $1.1 million in BOLI
proceeds were received, as well as a $4.9 million net gain realized on the sale
of two New Hampshire branches in December 2000.
25
NONINTEREST EXPENSES
The following table presents the principal categories of noninterest expenses
for the years ended December 31, 2001 and 2000.
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease)
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 Amount %
- ------------------------------------------------------------------------------------------------------------------
Compensation and benefits $ 142,899 122,257 20,642 16.9%
Occupancy 25,643 24,774 869 3.5
Furniture and equipment 27,878 26,302 1,576 6.0
Intangible amortization 31,227 22,400 8,827 39.4
Marketing 8,728 9,118 (390) (4.3)
Professional services 8,516 7,399 1,117 15.1
Capital securities 14,462 14,323 139 1.0
Dividends on preferred stock of subsidiary corporation 985 4,151 (3,166) (76.3)
Branch reconfiguration 3,703 -- 3,703 --
Other expenses 44,891 36,406 8,485 23.3
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expenses $ 308,932 267,130 41,802 15.6%
- ------------------------------------------------------------------------------------------------------------------
Noninterest expenses increased $41.8 million or 15.6%. Again, acquisitions in
2000 and 2001 played the most significant role in the increase. Adjusting both
years for the effect of purchase acquisitions, noninterest expenses would have
increased less than 2%. Included in noninterest expense for 2001 was a $3.7
million nonrecurring expense for branch reconfiguration, which represented the
cost of the closing of 10 branches during the first quarter of 2001.
INCOME TAXES
Total income tax expense for 2001 increased to $67.6 million from $58.1 million
in 2000. The increase in income tax expense is due primarily to the increase in
income before taxes for the reasons discussed above. The tax expense for 2001
included tax benefits totaling $1.8 million for the tax effect of the
extraordinary item and the cumulative effect of change in the method of
accounting. The effective tax rates for the years ended December 31, 2001 and
2000 were approximately 34% and 33%, respectively.
COMPARISON OF 2000 AND 1999 YEARS
- ---------------------------------
GENERAL
For the year 2000, Webster reported net income of $118.3 million, or $2.55 per
diluted common share which was an increase of $22.9 million or 24%, over net
income of $95.4 million for 1999. The improvement for 2000 was the result of
increased net interest income combined with higher noninterest income that more
than offset the increase in noninterest expenses. The increase in net interest
income primarily reflects an increase of $720.5 million in average
interest-earning assets and higher realized yields for 2000. Interest-rate
spread was 3.16% and interest margin was 3.29% for 2000. Noninterest income
reached $128.8 million, an increase of $36.2 million or 39% when compared to
$92.6 million for 1999. The rise in noninterest income was primarily due to
higher income from fees, service charges, commissions and financial advisory
services that were $27.0 million over 1999. Noninterest expenses compared to
1999, excluding $9.5 million of acquisition-related costs, increased $32.2
million. The increase in noninterest expenses for 2000 is primarily the result
of purchase acquisitions that were completed during the year and had the effect
of increasing compensation and benefits, occupancy, furniture and equipment and
intangible amortization expenses.
NET INTEREST INCOME
Net interest income increased $23.0 million in 2000 to $326.5 million from
$303.5 million in 1999. The increase is due primarily to a higher level of
average interest-earning assets and increased yields on earnings assets that
more than offset the effect of higher volume of interest-bearing liabilities and
higher rates paid for such liabilities. See "Interest Income" and "Interest
Expense" discussions that follow. Interest-rate spread for 2000 was 3.17% as
compared to 3.19% for 1999. The decrease in interest-rate spread was primarily
due to higher interest costs incurred on time deposits and borrowed funds.
26
INTEREST INCOME
Total interest income for 2000 amounted to $738.9 million, an increase of $93.1
million or 14.4% when compared to $645.8 million in 1999. The higher interest
income for 2000 was due primarily to an increase in the average volume of loans
and higher yields realized on loans and securities. The average balance on loans
increased $739.2 million in 2000 and the rate earned on loans increased 42 basis
points when compared to 1999. The increase in the average balance for loans
comes primarily from higher balances for commercial loans of $458.2 million and
residential mortgages of $188.3 million. The average balance on investment
securities decreased $18.7 million in 2000, however the rate earned on the
securities increased 21 basis points when compared to 1999.
INTEREST EXPENSE
Interest expense for 2000 totaled $412.4 million, an increase of $70.1 million
when compared to $342.3 million in 1999. The increased interest expense was due
primarily to higher interest costs on borrowings that increased 92 basis points
for 2000. Average outstanding borrowings increased during the year by $410.5
million primarily due to FHLB advances that increased $462.3 million and were
offset partially by lower repurchase agreement borrowings of $43.0 million.
Higher rates paid on interest-bearing deposits, particularly time deposits,
combined with an average increase in outstanding deposits of $261.8 million were
also contributing factors to increased interest expense in 2000 compared to
1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 2000 was $11.8 million compared to $9.0
million in 1999. The increase is primarily attributable to the increase in gross
loans of $815.1 million and a shift within the loan portfolio to a higher
concentration of commercial loans. The allowance for losses on loans totaled
$90.8 million and represented 221% of nonaccrual loans at December 31, 2000
versus $72.7 million or 189% of nonaccrual loans at December 31, 1999. The
allowance for loan losses to gross loans increased to 1.31% at December 31, 2000
from 1.19% at December 1999, reflecting the changing loan mix.
NONINTEREST INCOME
Noninterest income for 2000 totaled $128.8 million and increased $36.2 million,
or 39.1%, compared to $92.6 million for 1999. Fees and service charge income
rose to $60.1 million, an increase of 21.3%, and insurance commissions doubled
to $14.4 million for the current year as compared to 1999. The increase in fees
and service charge income was primarily due to a growing deposit and loan
customer base and the acquisitions of Mechanics in 2000 and NECB in the latter
part of 1999. Noninterest income from trust and investment services increased
$7.9 million, or 77.5%, during 2000 as compared to 1999. The increase for trust
and investment income during 2000 reflects the expansion of customer services
within the trust and investment areas. The acquisition of Duff & Phelps in
November 2000 accounted for $1.2 million of financial advisory fee income for
2000. Net gains on the sale of securities increased $4.2 million to $8.4 million
while net gains on the sale of loans and loan servicing remained consistent when
2000 and 1999 are compared. Noninterest income for 2000 included a net gain on
the sale of deposits of $4.9 million that resulted from the sale of two New
Hampshire branches in December 2000. The 2000 period also included life
insurance benefit proceeds of $1.1 million under the BOLI program.
NONINTEREST EXPENSES
Noninterest expenses for 2000 were $267.1 million compared to $244.5 million in
1999. The 1999 results include acquisition-related expenses totaling $9.5
million related to the NECB acquisition that occurred in December 1999.
Excluding acquisition-related expenses, noninterest expenses for 2000 increased
$32.2 million or 13.7% compared to 1999. The increase for 2000 is due primarily
to purchase acquisitions that were completed during 2000 that increased
compensation and benefits, occupancy and furniture and equipment expense and
intangible amortization expense. Included in noninterest expenses for 2000 was
$1.7 million of nonrecurring expenses for branch closures. Intangible
amortization expense increased $8.6 million to $22.4 million in 2000 due to
purchase acquisition activity.
INCOME TAXES
Income tax expense for 2000 increased to $58.1 million from $47.3 million in
1999. The increase in income tax expense is due primarily to a $33.7 million
increase in income before taxes for the reasons discussed above. The effective
tax rates for the years ended December 31, 2000 and 1999 were approximately 33%.
27
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity management allows Webster to meet cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable, cost effective funding to support the balance
sheet. Liquidity comes from a variety of sources such as the cash flow from
operating activities including principal and interest payments on loans and
investments, unpledged securities which can be sold or utilized to secure
funding and by the ability to attract new deposits. Webster's goal is to
maintain a strong, increasing base of core deposits to support its growing
balance sheet.
The Bank's main sources of liquidity are payments of principal and interest from
its loan and securities portfolio and the ability to use its loan and securities
portfolios as collateral for secured borrowings. The Bank is a member of the
Federal Home Loan Bank ("FHLB") system. At December 31, 2001, outstanding FHLB
advances totaled $2.5 billion and the Bank had additional borrowing capacity
from the FHLB of $112.8 million. Investment securities were not pledged as
collateral for FHLB advances at December 31, 2001. Had securities been used for
collateral, additional capacity would be approximately $2.4 billion. The Bank
also has the ability to borrow funds through repurchase agreements, using the
securities portfolio as collateral. At December 31, 2001, outstanding repurchase
agreements totaled $571.7 million. FHLB advances, repurchase agreements and
other borrowings increased $503.1 million from the prior year end, primarily to
fund security purchases.
Factors that affect the Bank's liquidity position include loan origination
volumes, loan prepayment rates, maturity structure of existing loans, core
deposit growth levels, CD maturity structure and retention, credit ratings,
investment portfolio cash flows, the composition, characteristics and
diversification of wholesale funding sources, and the market value of investment
securities that can be used to collateralize FHLB advances and repurchase
agreements. The Bank's liquidity position is influenced by general interest rate
levels, economic conditions and competition. For example, as interest rates
rise, payments of principal from the loan and mortgage-backed securities
portfolio slow, as borrowers are less willing to prepay. Additionally, the
market value of the securities portfolio generally declines as rates rise,
thereby reducing the amount of collateral available for funding purposes.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Liquidity policy ratios are designed to measure the Bank's liquidity
from several different perspectives: maturity concentration, diversification,
and liquidity reserve. Actual ratios are measured against policy limits. In
addition to funding under normal market conditions, the Bank has a contingency
funding plan which is designed for dealing with liquidity under a crisis so that
measures can be implemented in an orderly and timely manner.
Webster's main sources of liquidity at the parent company level are dividends
from the Bank, investment income and net proceeds from borrowings and capital
offerings. The main uses of liquidity are purchases of available for sale
securities, the payment of dividends to common stockholders, repurchases of
Webster's common stock, and the payment of interest to holders of Senior Notes
and capital securities. In November 2000, Webster issued $126.0 million of
Senior Notes with a fixed rate of 8.72%. See Note 9 of Notes to Consolidated
Financial Statements contained elsewhere within this report for further
information on the Senior Notes. There are certain restrictions on the payment
of dividends by the Bank to Webster. See Note 13 of Notes to the Consolidated
Financial Statements contained elsewhere within this report for further
information on dividend restrictions. Webster also maintains $100.0 million in
revolving lines of credit with correspondent banks as a source of additional
liquidity.
During 2001, Webster repurchased a total of 374,756 shares of its common stock.
The majority of the repurchased shares was the result of an announcement during
the 2001 third quarter of a Stock Repurchase Program to acquire 2.5 million
shares of its common stock. See Note 13 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further information
concerning stock repurchases.
The Bank is required by regulations adopted by the Office of Thrift Supervision
("OTS") to maintain minimum levels of liquidity sufficient to ensure safe and
sound operations. Adequate liquidity, as assessed by the OTS, may vary from
institution to institution depending on such factors as the institution's
overall asset/liability structure, market conditions, competition and the nature
of the institution's deposit and loan customers. Management believes it exceeds
all regulatory and operational liquidity requirements at December 31, 2001.
28
Applicable OTS regulations require the Bank, as a federal savings bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement and risk-based capital requirements. As an OTS regulated savings
institution, the Bank is also subject to a minimum tangible capital requirement.
At December 31, 2001, the Bank was in full compliance with all applicable
capital requirements and met the FDIC requirements for a "well capitalized"
institution. See Note 13 of Notes to Consolidated Financial Statements contained
elsewhere within this report for further information concerning capital.
The following tables summarize Webster's contractual obligations and commercial
commitments as of December 31, 2001 (dollars in thousands).
Payments Due by Period
---------------------------------------------------------------------------------
Contractual Obligations: Less than
Total one year 1-3 years 3-5 years After 5 years
- -----------------------------------------------------------------------------------------------------------------------------------
FHLB advances $ 2,531,976 883,000 943,760 155,360 549,856
Other borrowed funds 1,002,185 670,755 96,570 108,860 126,000
Operating leases 70,164 12,200 20,471 12,218 25,275
- -----------------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 3,604,325 1,565,955 1,060,801 276,438 701,131
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of Commitment Expirations Per Period
---------------------------------------------------------------------------------
Commercial Commitments: Total amounts Less than
committed one year 1-3 years 3-5 years After 5 years
- -----------------------------------------------------------------------------------------------------------------------------------
Lines of credit $ 600,264 204,752 199,786 131,096 64,630
Standby letters of credit 61,294 51,463 8,443 138 1,250
Other commercial commitment 138,693 138,693 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 800,251 394,908 208,229 131,234 65,880
- -----------------------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk consists of interest rate risk, foreign currency risk, commodity
price risk and equity price risk. Webster's primary market risk is interest rate
risk.
Interest rate risk can be defined as (1) the sensitivity of the economic value
of Webster's assets less the economic value of its liabilities and off-balance
sheet contracts ("equity at risk") and (2) the sensitivity of Webster's earnings
to changes in interest rates ("earnings at risk"). Both types of risk measure a
change in value for given changes in interest rates. Equity at risk analyzes
sensitivity in the present value of cash flows over the expected life of the
Bank's existing assets, liabilities and off-balance sheet contracts. It is a
measure of the long-term interest rate risk to future earnings streams embedded
in the Bank's current balance sheet. Key assumptions relate to the behavior of
interest rates and spreads, asset prepayment speeds and decay rates on deposits.
Earnings at risk analyzes sensitivity in net income after tax over a
twelve-month horizon. It uses the same assumptions as equity at risk on the
existing balance sheet, but also includes balance sheet growth assumptions over
the next twelve months. It is a measure of short-term interest rate risk to
reported earnings of the Bank. Webster believes that an effective
asset/liability management process must balance the risks and rewards from both
long and short-term interest rate risk in determining management strategy and
action. To facilitate and manage this process, Webster has an Asset/Liability
Committee ("ALCO").
The primary goal of ALCO is to manage interest rate risk to maximize net
economic value and net income over time in changing interest rate environments
subject to Board of Director approved limits. The Board approves limits for both
equity and earnings at risk for parallel shocks in interest rates of plus and
minus 100 and 200 basis points. Webster also regularly analyzes rate shocks of
300 basis points as well as ad hoc scenarios for specific economic scenarios.
Equity and earnings at risk are quantified using simulation software from one of
the leading firms in the field of Asset/Liability modeling. From such
simulations, interest rate risk is quantified and appropriate strategies are
formulated and implemented.
29
The 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 and derives forward rates for future months.
Using interest rate swap option volatilities as inputs, the model creates
multiple rate paths for this scenario with the forward rates as the mean. In the
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.
Cash flows for all instruments are created for each scenario and each interest
rate path using product specific prepayment models and account specific system
data for properties such as maturity date, amortization type, coupon rate and
repricing date. The Asset/Liability simulation software is enhanced with a
mortgage prepayment model and a Collateralized Mortgage Obligation database
provided by two other leading financial software companies. Instruments with
explicit options (i.e., caps, floors, puts and calls) and implicit options
(i.e., prepayment and early withdrawal ability) require such a rate and cashflow
modeling approach to more accurately quantify value and risk. On the asset side,
Webster's risk is impacted the most by a large amount of residential mortgage
loans and mortgage-backed securities, which can typically prepay at any time
without penalty and may have embedded caps and floors. On the liability side,
there is a large concentration of customers with indeterminate maturity deposits
who have the option to add or withdraw funds from their accounts at any time.
The Bank also has the option to change the interest rate paid on these deposits
at any time.
Webster has three main tools for managing interest rate risk: (1) the size and
duration of the investment portfolio, (2) the size and duration of the wholesale
funding portfolio and (3) the pricing and structure of its 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 Bank's risk position and other factors. ALCO delegates pricing
and product design responsibilities to individuals and sub-committees, but
monitors and influences their actions on a regular basis.
To a limited degree, various interest rate contracts including futures and
options, interest rate swaps and interest rate caps and floors may be utilized
to manage interest rate risk by reducing net exposures. These interest rate
financial instruments involve, to varying degrees, credit risk and interest rate
risk. Credit risk is the possibility that a loss may occur if a counterparty to
a transaction fails to perform according to the terms of the contract. The
notional amount of interest rate financial instruments is the amount upon which
interest and other payments under the contract are based. The notional amount is
not exchanged and therefore, the notional amounts should not be taken as a
measure of credit risk. See Notes 3 and 10 of Notes to Consolidated Financial
Statements contained elsewhere within this report for additional information.
Futures and options positions and interest rate contracts may also be utilized
to minimize the price volatility of certain assets held as trading securities.
Changes in the market value of these positions are recognized in the
Consolidated Statements of Income in the period for which the change occurred.
30
The following table summarizes the estimated increase (decrease) in Webster's
economic value of Webster's assets, liabilities and off-balance sheet contracts,
its equity at risk, at December 31, 2001 and 2000, and the projected change to
economic values, if interest rates instantaneously increase or decrease by 100
basis points.
Estimated Market Value Change
Book Market -----------------------------
(Dollars in thousands) Value Value -100 BP +100 BP
- -----------------------------------------------------------------------------------------------------------------------------------
2001
- ----
Assets $ 11,857,382 11,614,903 233,981 (286,658)
Liabilities 10,850,915 10,786,867 241,037 (184,241)
Net dollar impact (7,056) (102,417)
Net change as percent of Tier I Capital (0.9)% (12.3)
2000
- ----
Assets $ 11,249,508 10,988,859 195,364 (236,007)
Liabilities 10,359,134 10,189,291 175,746 (165,869)
Off-Balance sheet contracts 3,192 3,192 (1,334) 2,806
Net dollar impact 18,284 (67,332)
Net change as percent of Tier I Capital 2.7% (9.8)
The book value of assets exceeded the market value at December 31, 2001 and 2000
because the equity at risk model assigns no value to goodwill and other
intangible assets, which totaled $320.1 million and $326.1 million,
respectively. The above table includes interest-earning assets that are not
directly impacted by changes in interest rates. The assets include equity
securities of $169.9 million at December 31, 2001 and $175.7 million at December
31, 2000. The equity securities include $126.6 million of FHLB stock, $5.4
million of preferred stock and $37.9 million in common stock at December 31,
2001. See Note 3 of Notes to Consolidated Financial Statements contained
elsewhere within this report for further information concerning investment
securities. Values for mortgage servicing rights have been included in the
tables above as movements in interest rates affect the valuation of the
servicing rights.
The following table summarizes the estimated increase (decrease) in Webster's
net income for the twelve month period beginning at December 31, 2001 and 2000,
if interest rates instantaneously increase or decrease by 100 basis points.
Estimated Net Income Impact
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands) -100 BP +100 BP
- -------------------------------------------------------------------------------------------------------------------
2001
- ----
Net dollar change $ 595 (2,300)
Net change as percent of base 0.4% (1.5)
2000
- ----
Net dollar change $ 1,540 (8,413)
Net change as percent of base 1.2% (6.3)
These estimates assume that management does not take any action to mitigate any
negative effects from changing interest rates. The economic values and net
income estimates are subject to factors that could cause actual results to
differ. Management believes that Webster's interest rate risk position at
December 31, 2001 represents a reasonable level of risk.
31
FINANCIAL CONDITION
- -------------------
At December 31, 2001, total assets were $11.9 billion, an increase of $607.9
million, or 5.4%, as compared to total assets of $11.2 billion at December 31,
2000. The increase in total assets for the current year period was primarily due
to an increase in investment securities of $594.1 million as compared to
December 31, 2000. Total liabilities increased $531.8 million for the current
year period primarily due to increases in deposits and borrowings of $85.3
million and $503.1 million, respectively. Total equity at December 31, 2001 was
$1.0 billion, a $116.1 million increase from $890.4 million at December 31,
2000.
Securities increased by $594.1 million, or 17.4%, to $4.0 billion at December
31, 2001. As mortgage loans prepaid at accelerated speeds due to the low
interest rate environment during 2001, Webster invested more of its available
funds in its securities portfolio. These additional investments were primarily
mortgage-related securities, as their balance rose to $3.6 billion at December
31, 2001 from $2.8 billion, an increase of 26.4%.
Loans receivable, net increased $50.7 million, or 0.7%, to $6.9 billion at
December 31, 2001. While the net balance increased slightly, Webster made
progress in achieving its strategic plan for the loan portfolio. The plan called
for an increase in the percentage of outstanding commercial and consumer loans,
while lessening the reliance on residential mortgage lending. Residential
mortgage decreased to 51.4% of net loans at December 31, 2001 from 60.8% a year
earlier. Commercial and consumer loans increased to 34.1% and 15.9%,
respectively, from 30.3% and 10.3%, respectively, a year earlier.
Deposits increased $85.3 million, or 1.2%, to $7.1 billion at December 31, 2001.
Deposits also reflected the success of Webster's strategic plan. The increase
occurred entirely in the lower cost, non-maturity deposits, as demand deposits,
NOW accounts, regular savings and money market deposits increased by $579.5
million, or 16.3% while higher cost certificates of deposit decreased by $494.2
million, or 14.4%. Certificates of deposit decreased as a percentage of total
deposits to 41.4% at December 31, 2001 from 49.0% a year earlier. As a result of
the combined effects of the decrease in interest rates during 2001 and the
migration of deposits to lower cost, non-maturity deposits, the weighted average
interest rate dropped to 2.40% at December 31, 2001 from 3.34% a year earlier.
Total borrowings increased $503.1 million, or 16.6%, to $3.5 billion at December
31, 2001. Due to the current low interest rate environment, a portion of the
borrowings portfolio was extended to lock in the then current lower rates.
During 2001, $1.4 billion of FHLB advances outstanding at December 31, 2000
matured. New borrowings consisted of approximately $800 million refinanced into
advances due within one year, while $550 million were refinanced into advances
which mature within 3 years, $50 million within 5 years and $100 million within
2 years. The lengthening effect of these transactions should reduce, to some
extent, the volatility of borrowing costs over the short term.
Total shareholders' equity increased to over $1 billion for the first time
during 2001, ending the year at $1.0 billion, an increase of $116.1 million or
13.0%. The major components contributing to this increase were undistributed net
income of $100.2 million and the unrealized net increase in the value of
available for sale securities, net of taxes, of $16.7 million.
ASSET QUALITY
- -------------
The slowdown in economic growth that began in 2001 had an impact on the
Company's business during the year. The increases in nonperforming assets, past
due loans, classified loans and charge-offs levels are reflective of the general
slowdown in business activity. Management, as a result of its quarterly review
of the loan portfolios, increased the loan loss provision in the second half of
the year in recognition of these risk factors. The level of the overall loan
loss allowance has been increased to 1.40% of gross loans at year end.
Management believes the level of the allowance at December 31, 2001 is adequate
for the level of risks in the portfolio.
Nonperforming assets, classified assets, loan delinquency and credit losses are
considered by Webster to be key measures of asset quality. Asset quality is one
of the key factors in the determination of the level of the allowance for loan
losses. See "Allowance for Loan Losses" contained elsewhere within this section
for further information on the allowance.
32
NONPERFORMING ASSETS
Webster devotes significant attention to maintaining asset quality through
conservative underwriting standards, active servicing of loans and aggressively
managing nonperforming assets. Nonperforming assets, which include nonaccrual
loans, loans past due 90 days or more and accruing and foreclosed properties
were $62.5 million and $44.3 million at December 31, 2001 and 2000,
respectively. The aggregate amount of nonperforming assets increased as a
percentage of total assets to .53% at December 31, 2001 from .39% at December
31, 2000.
Nonaccrual loans were $57.4 million at December 31, 2001, compared to $41.0
million at December 31, 2000. The ratio of nonaccrual loans to gross loans was
.82% and .58% at December 31, 2001 and 2000, respectively. The allowance for
loan losses at December 31, 2001 was $97.3 million and represented 170% of
nonaccrual loans and 1.40% of total loans. The allowance for loan losses at
December 31, 2000 was $90.8 million and represented 221% of nonaccrual loans and
1.31% of total loans. Interest on nonaccrual loans that would have been recorded
as additional income for the years ended December 31, 2001, 2000 and 1999 had
the loans been current in accordance with their original terms approximated $3.9
million, $3.6 million, and $3.0 million, respectively. See Note 1 of Notes to
Consolidated Financial Statements contained elsewhere within this report for
information concerning Webster's nonaccrual loan policy.
The increase in nonaccrual loans of $16.4 million, or 39.9%, was due entirely to
an increase in commercial nonaccrual loans, while declines occurred in each of
the other loan categories. The increase in commercial nonaccruals resulted from
the addition of $7.3 million of nonaccruing leases from Center Capital, which
was purchased in March 2001, one commercial middle market credit of $8.0 million
and one specialized lending unit loan of $5.4 million. The increase in
nonaccruals at Center Capital is comprised of 230 loans, distributing the
potential for loss over many customers. In addition to the equipment collateral,
the Company generally obtains personal guarantees, where possible, and its net
charge-offs ratio for the past three years has averaged 0.20%.
The following table details Webster's nonperforming assets for the last five
years.
At December 31,
-------------------------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Residential $ 7,677 8,842 11,490 12,418 34,731
Commercial 47,916 29,868 25,722 16,449 13,626
Consumer 1,823 2,324 1,182 1,852 3,624
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 57,416 41,034 38,394 30,719 51,981
- -----------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial -- -- 698 1,209 1,060
Foreclosed Properties:
Residential and consumer 2,504 2,284 2,698 1,715 8,804
Commercial 2,534 1,011 2,210 3,447 6,335
- -----------------------------------------------------------------------------------------------------------------------------------
Total foreclosed property 5,038 3,295 4,908 5,162 15,139
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 62,454 44,329 44,000 37,090 68,180
- -----------------------------------------------------------------------------------------------------------------------------------
It is Webster's policy that all loans 90 or more days past due are placed in
nonaccruing status. Occasionally, there are circumstances that cause loans to be
placed in the 90 days and accruing category, for example, a matured loan that
will be renewed, or the timing of proper file documentation to effect the
nonaccrual change.
33
TROUBLED DEBT RESTRUCTURES
The following accruing loans are considered troubled debt restructurings
consistent with SFAS 15. A modification of terms constitutes a troubled debt
restructuring if the Bank, for reasons related to the debtor's financial
difficulties, grants a concession to the debtor that it would not otherwise
consider.
At December 31,
-------------------------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Residential $ 1,262 1,588 1,273 4,649 4,500
Commercial real estate 3,767 3,842 4,033 -- --
Commercial -- -- 33 4,258 4,678
Consumer 204 32 564 2,089 2,100
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 5,233 5,462 5,903 10,996 11,278
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER PAST DUE LOANS
The following table sets forth information as to the Bank's loans past due 30-89
days.
December 31,
--------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Principal of loans Principal of loans Principal of loans Principal of loans Principal of loans
(Dollars in thousands) Balances outstanding Balances outstanding Balances outstanding Balances outstanding Balances outstanding
- -----------------------------------------------------------------------------------------------------------------------------------
Residential $ 18,359 0.26% 20,974 0.30 20,499 0.34 26,727 0.48 31,479 0.56
Commercial real estate 22,973 0.33 16,101 0.23 11,865 0.19 12,369 0.22 8,686 0.16
Commercial 16,286 0.23 10,883 0.16 7,104 0.12 5,613 0.10 4,061 0.07
Consumer 5,260 0.08 6,135 0.09 4,746 0.08 6,873 0.13 6,466 0.12
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 62,878 0.90% 54,093 0.78 44,214 0.73 51,582 0.93 50,692 0.91
- -----------------------------------------------------------------------------------------------------------------------------------
CLASSIFIED LOANS
Under the Bank's problem loan classification system, problem loans are
classified as substandard, doubtful or loss (collectively classified loans),
depending on the presence of certain characteristics. A loan is considered
substandard if, in the opinion of management, there are potential deficiencies
which could result in the loan becoming inadequately protected by the current
net worth and paying capacity of the obligor or by the collateral pledged, if
any. Substandard loans include those characterized by the distinct possibility
that the institution could sustain some loss if the deficiencies are not
corrected. Loans classified as doubtful have all of the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
that are present make collection or liquidation in full on the basis of
currently existing facts, conditions and values, highly questionable and
improbable. Loans classified as loss are those considered uncollectible and of
such little value that to continue to report them as loans without the
establishment of a specific loss reserve is not warranted. The Bank's loan
classification system is consistent with the classification system prescribed by
the OTS.
When loans are classified as either substandard or doubtful, a portion of the
allowance for loan losses in an amount deemed prudent by management is allocated
as either a specific reserve or a general reserve against such loans. Specific
reserves represent an allocation of the allowance against specific credits where
a deficiency in collateral value or cash flow exists. See Note 4 of Notes to
Consolidated Financial Statements included elsewhere in this report for
additional information, including the recognition of cash basis interest income.
All other substandard or doubtful loans receive an allocation of a general
reserve. General reserves represent a portion of the allowance for loan losses
which has been allocated to recognize the inherent risk associated with these
loans. When loans are classified as loss, a specific allowance for the loss is
established equal to 100% of the amount of the loan and a charge-off is
subsequently taken for such amount. An institution's determination as to the
classification of its loans and the amount of its allocated reserves is subject
to review by the OTS, which can require the establishment of additional reserves
if in disagreement with the institution.
34
The following table summarizes Webster's classified loans (substandard, doubtful
and loss), including nonperforming loans at December 31, 2001 and 2000.
Commercial
------------------------
Business
Total Residential Banking* Specialized CRE Consumer
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Substandard:
Accruing $ 88,397 1,872 41,751 44,482 -- 292
Nonaccruing 47,846 7,677 32,693 5,548 275 1,653
- ------------------------------------------------------------------------------------------------------------------------------------
Total substandard 136,243 9,549 74,444 50,030 275 1,945
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful:
Accruing 66 54 -- -- -- 12
Nonaccruing 4,464 -- 895 3,399 -- 170
- ------------------------------------------------------------------------------------------------------------------------------------
Total doubtful 4,530 54 895 3,399 -- 182
- ------------------------------------------------------------------------------------------------------------------------------------
Loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $140,773 9,603 75,339 53,429 275 2,127
- ------------------------------------------------------------------------------------------------------------------------------------
Classified as a percent of loans 2.0% 0.3 7.9 13.0 -- 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial
------------------------
Business
Total Residential Banking* Specialized CRE Consumer
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Substandard:
Accruing $ 29,448 1,912 27,015 -- 516 5
Nonaccruing 34,911 8,842 24,038 -- -- 2,031
- ------------------------------------------------------------------------------------------------------------------------------------
Total substandard 64,359 10,754 51,053 -- 516 2,036
- ------------------------------------------------------------------------------------------------------------------------------------
Doubtful:
Accruing 60 55 -- -- -- 5
Nonaccruing 6,071 -- 663 5,167 -- 241
- ------------------------------------------------------------------------------------------------------------------------------------
Total doubtful 6,131 55 663 5,167 -- 246
- ------------------------------------------------------------------------------------------------------------------------------------
Loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 70,490 10,809 51,716 5,167 516 2,282
- ------------------------------------------------------------------------------------------------------------------------------------
Classified as a percent of loans 1.0% 0.3 6.7 1.2 0.1 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
* Includes Middle Market, Small Business Banking and Lease Financing.
The increase of $70.3 million in classified loans can generally be attributed to
the impact of the slowdown in the economy during the year. This increase
occurred primarily in two portfolios; a $48.3 million increase in classified
Specialized loans, $44.5 accruing interest, and of the $23.6 million increase in
classified Business Banking loans, $14.7 are accruing interest. Improvements
were achieved in the Residential, Consumer and CRE portfolios. Classified loans
as a percent of total loans increased to 2.0% from 1.0% the prior year.
Classified as a percentage of loans in the Specialized portfolio increased to
13.0% at December 31, 2001 from 1.2% at December 31, 2000 due to the national
economic slowdown. Business Banking loans increased to 7.9% from 6.7% the prior
year.
Because Webster believes that early identification and management of problem
loans serves to minimize future losses, it employs a rigorous portfolio review
and management process, which identifies deteriorating credit risk and
proactively manages problem loans. For example, of the $44.5 million in the
Specialized portfolio classified as substandard and accruing, $31.1 million were
not classified as such by SNCP. At December 31, 2001, $52.3 million of
nonperforming loans (excluding accruing troubled debt restructurings) were
included in the classified loan total. The remaining classified loans of $88.5
million continued to perform in accordance with their contractual terms and to
accrue interest. Under the definition of substandard above, these loans are
considered by management to be potential problem loans.
35
ALLOWANCE FOR LOAN LOSSES
- -------------------------
METHODOLOGY
The allowance for loan losses is maintained at a level estimated by management
to provide adequately for probable losses inherent in the loan portfolio.
Probable losses are estimated based upon a quarterly review of the loan
portfolio, past loss experience, specific problem loans, economic conditions and
other pertinent factors which, in management's judgment, deserve current
recognition in estimating loan losses. In assessing the specific risks inherent
in the portfolio, management takes into consideration the risk of loss on
nonaccrual loans, classified loans and watch list loans including an analysis of
the collateral for such loans. The allowance for loan losses at December 31,
2001 and 2000 totaled $97.3 million and $90.8 million, respectively. Management
believes that the allowance for loan losses at December 31, 2001 is adequate to
cover expected losses inherent in the loan portfolio.
Management considers the adequacy of the allowance for loan losses a critical
accounting policy, consistent with the SEC's financial release concerning
critical accounting policies. As such, the adequacy of allowance for loan losses
is subject to judgement in its determination. Actual loan losses could differ
materially from management's calculation if actual loss factors and conditions
differ significantly from the assumptions utilized by management. These factors
and conditions include the general economic conditions within Connecticut and
nationally, trends within industries where the loan portfolio is concentrated,
real estate values, interest rates and the financial condition of individual
borrowers. While management believes the allowance for loan losses is adequate
as of December 31, 2001, actual results may prove different and these
differences could be significant.
Webster's methodology for assessing the appropriateness of the allowance
consists of several key elements. The loan portfolio is segmented into pools of
loans that are similar in type and risk characteristic. These homogeneous pools
are tracked over time and historic delinquency, nonaccrual and loss information
is collected and analyzed. In addition, problem loans are identified and
analyzed individually on a periodic basis to detect specific probable losses.
Webster collects industry delinquency, nonaccrual and loss data for the same
portfolio segments for comparison purposes.
Webster analyzes the data and estimates probable losses in the portfolio by
calculating formula allowances for homogeneous pools of loans and classified
loans and specific allowances for impaired loans. The formula allowance is
calculated by applying loss factors to the loan pools and certain unused
commitments, based on historic default and loss rates, internal risk ratings,
and other risk-based characteristics. Changes in risk ratings, and other risk
factors, from period to period for both performing and nonperforming loans
affect the calculation of the formula allowance. Loss factors are based on
Webster's loss experience, and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Webster considers the following when determining probable
losses:
o Webster utilizes migration models, which track the dynamic business
characteristics inherent in the specific portfolios. The assumptions are
updated periodically to match changes in the business cycle.
o Pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs. Pooled loans are loans that are homogeneous in
nature, such as residential and consumer loans.
o The loan portfolios are characterized by historical statistics such as
default rates, cure rates, loss in event of default rates and internal risk
ratings.
o Webster statistically evaluates the impact of larger concentrations in the
commercial loan portfolio.
o Comparable industry charge-off statistics by line of business, broadly
defined as residential, consumer, home equity and second mortgages,
commercial real estate and commercial and industrial lending, are utilized
as factors in calculating loss estimates in the loan portfolios.
o Actual losses by portfolio segment are reviewed to validate estimated future
probable losses.
36
ALLOWANCE FOR LOAN LOSSES
At December 31, 2001, Webster's allowance for loan losses was $97.3 million, or
1.4% of the total loan portfolio, and 169% of total nonaccrual loans. This
compares with an allowance for loan losses of $90.8 million or 1.3% of the total
loan portfolio, and 221% of total nonaccrual loans at December 31, 2000.
Net charge-offs for 2001 totaled $9.7 million as compared to $4.6 million for
2000 reflecting an increase in net charge-offs of $5.1 million, for the current
period. The increase was primarily the result of commercial and industrial net
charge-offs being $5.5 million higher for 2001. The increase is primarily due to
$3.3 million of specialized lending charge-offs and $2.0 million of commercial
loan charge-offs. Three loan relationships accounted for $3.7 million of the
overall increase.
Management performs its review of the loan portfolio, loan loss allowance and
considers various factors when determining the adequacy of the allowance. This
review included the specialized lending portfolio and the additional risks
inherent in this portfolio. Based upon this review, management believes that the
allowance for loan losses at December 31, 2001 is adequate to cover probable
losses in the loan portfolio.
A summary of the activity in the allowance for loan losses for the last five
years follows:
For the years ended December 31,
-------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 90,809 72,658 65,201 71,599 63,047
Allowances from purchase transactions 1,851 10,980 3,647 -- 2,108
Reclassification of allowance for segregated
asset losses -- -- -- 2,623 --
Provisions charged to operations 14,400 11,800 9,000 8,103 26,449
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal 107,060 95,438 77,848 82,325 91,604
- -----------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Residential (1,096) (1,583) (3,246) (13,662) (16,281)
Commercial (8,978) (3,781) (2,376) (2,644) (5,446)
Commercial real estate (a) -- -- -- (1,400) (593)
Consumer (1,501) (1,452) (1,784) (3,556) (4,305)
- -----------------------------------------------------------------------------------------------------------------------------------
(11,575) (6,816) (7,406) (21,262) (26,625)
Recoveries:
Residential 333 372 838 1,081 4,368
Commercial 1,267 1,571 1,079 2,755 1,697
Commercial real estate (a) -- -- -- -- --
Consumer 222 244 299 302 555
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (9,753) (4,629) (5,190) (17,124) (20,005)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 97,307 90,809 72,658 65,201 71,599
- -----------------------------------------------------------------------------------------------------------------------------------
The ratio of net charge-offs to average loans outstanding for the last five
years follows:
For the years ended December 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Residential 0.02% 0.03 0.06 0.31 0.30
Commercial 0.58 0.21 0.21 0.43 1.21
Consumer 0.16 0.19 0.28 0.57 0.64
- -----------------------------------------------------------------------------------------------------------------------------------
Total 0.14% 0.07 0.09 0.32 0.37
- -----------------------------------------------------------------------------------------------------------------------------------
(a) All small business loans, both commercial and commercial real estate, are
considered commercial for purposes of charge-offs and recoveries.
37
The following table presents an allocation of the Bank's allowance for loan
losses at the dates indicated and the related percentage of loans in each
category to the Bank's loan receivable portfolio.
At December 31,
-------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
(Dollars in thousands) Amount loans Amount loans Amount loans Amount loans Amount loans
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end
of period applicable to:
Residential mortgage $ 17,614 50.67% 18,321 60.01 25,196 63.97 23,237 69.64 30,635 72.09
Commercial real estate 22,894 13.99 20,865 12.40 20,630 12.16 22,309 11.06 17,702 10.52
Commercial loans 47,390 19.63 43,798 17.48 20,566 15.01 13,430 9.85 12,096 6.61
Consumer loans 9,409 15.71 7,825 10.11 6,266 8.86 6,225 9.45 11,166 10.78
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 97,307 100.00% 90,809 100.00 72,658 100.00 65,201 100.00 71,599 100.00
- -----------------------------------------------------------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a banking institution are monetary in nature. As a result,
interest rates have a more significant impact on Webster's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.
RECENT FINANCIAL ACCOUNTING STANDARDS
- -------------------------------------
On October 3, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS" or "Statement") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supersedes SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This Statement also supersedes the accounting and reporting provisions of APB
Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The Statement changes financial reporting by
requiring that one accounting model be used for long-lived assets to be disposed
of by broadening the presentation of discontinued operations to include more
disposal transactions. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The provisions of this Statement are to be applied
prospectively. Webster does not expect any material impact on its financial
statements when this Statement is adopted.
On August 16, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Under this Statement, the liability is discounted and the
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. The FASB issued this
Statement to provide consistency for the accounting and reporting of liabilities
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Earlier application is
permitted. Webster does not expect any material impact on its financial
statements when this Statement is adopted.
38
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. Statement 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Currently, the FASB has stated that the unidentifiable intangible asset acquired
in the acquisition of a bank or thrift (including acquisitions of branches),
where the fair value of the liabilities assumed exceeds the fair value of the
assets acquired, should continue to be accounted for under SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions." Under
Statement 72, all of the intangible assets associated with branch acquisitions
recorded on the Company's consolidated balance sheet as of December 31, 2001
would continue to be amortized, as in prior periods. The FASB has announced that
additional research will be performed to decide whether unidentifiable
intangible assets recorded under Statement 72 should be accounted for similarly
to goodwill under Statement 142. However, issuance of a final opinion with
respect to this matter is not expected until the fourth quarter of 2002.
Webster adopted the provisions of Statement 141 effective July 1, 2001 and such
adoption did not have an impact on the consolidated financial statements.
Webster is required to adopt the provisions of Statement 142 effective January
1, 2002. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continues to be amortized prior to the adoption of
Statement 142.
Statement 141 requires, upon adoption of Statement 142, a company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the carrying amount of the reporting unit. To the extent the carrying
amount of a reporting unit exceeds the fair value of the reporting unit, an
indication exists that the reporting unit goodwill may be impaired and the
Company must perform the second step of the transitional impairment test. In the
second step, the Company must compare the implied fair value of the reporting
unit goodwill with the carrying amount of the reporting unit goodwill, both of
which would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to all
of the assets (recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation, in accordance with
Statement 141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of income.
Finally, any unamortized negative goodwill existing at the date Statement 142 is
adopted must be taken into income as the cumulative effect of a change in
accounting principle.
39
As of the date of adoption, Webster expects to have unamortized goodwill in the
amount of $222.7 million, unamortized identifiable intangible assets in the
amount of $76.2 million, unamortized unidentifiable intangible assets subject to
the provisions of Statement 72 of $20.3 million, all of which will be subject to
the transition provisions of Statements 141 and 142. For the year ended December
31, 2001, amortization expense related to goodwill was $14.0 million, to
identifiable intangibles was $16.1 million and to Statement 72 unidentifiable
intangible assets was $1.1 million. While our transitional impairment analysis
is not complete, management does not expect any significant transitional
impairment losses. Absent any impairment losses, it is estimated at this time
that diluted earnings per share for the 2002 fiscal year will be favorably
impacted by approximately $.28 per share due to the cessation of amortization of
goodwill. Impairment losses, if any, whether transitional or subsequent to
adoption of Statement 142, may offset some or all of this favorable impact.
Identifiable intangibles, such as core deposit intangibles, have continued to be
amortized and recognized as an expense.
TAXATION
- --------
DEFERRED TAX ASSET, NET
At December 31, 2001, Webster's net deferred tax asset approximated $33.2
million, including a valuation allowance of approximately $11.0 million for
state tax benefits that, in management's current estimate, will not be realized.
Management believes that Webster will generate sufficient taxable income in
future years to fully realize the net deferred tax asset, however, there can be
no absolute assurance that Webster will generate any specific level of future
taxable income. The Company has sufficient taxable income currently and in
carryback periods to expect full realization of its net deferred tax asset.
Management considers the valuation allowance for deferred tax assets to be a
critical accounting policy, consistent with the SEC's financial release on
critical accounting policies. As such, the determination of the valuation
allowance for deferred tax assets is subject to judgement. The actual
realization of the assets could differ materially from that recognized in the
consolidated financial statements if actual factors and conditions differ from
those used by management. These factors and conditions include federal and state
tax laws and regulations and future levels of Webster taxable income.
FEDERAL INCOME TAX LEGISLATION
Certain legislation enacted during August 1996: 1) eliminated the "thrift bad
debt" method of calculating bad debt deductions after 1995; 2) required the
recapture (into taxable income) of certain post-1987 bad debt reserves; and 3)
provided for more limited circumstances in which certain pre-1988 bad debt
reserves would be recaptured. Webster had previously recorded a deferred tax
liability for the post-1987 reserves, and its total tax expense for financial
reporting purposes was not affected by the legislation. Webster's pre-1988
reserves at both December 31, 2001 and 2000 were approximately $50.0 million,
and it does not expect such reserves to be recaptured into taxable income.
STATE INCOME TAX LEGISLATION
During May 1998, the State of Connecticut enacted tax legislation (effective in
1999) allowing for the formation of a Passive Investment Company ("PIC") by a
financial service company ("FSC"). The legislation exempts a PIC from
Connecticut taxation and also exempts dividends paid from a PIC to a related,
qualified FSC from Connecticut tax. Webster Bank, a qualified FSC under the
legislation, organized a PIC that began operation during the first quarter of
1999. The PIC reduced Webster's Connecticut tax expense beginning with tax year
1999 and a deferred tax charge was taken in 1998 as a result of its formation.
40
FORWARD LOOKING STATEMENTS
- --------------------------
This Annual Report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products services and prices. Such developments, or any combination thereof,
could have an adverse impact on Webster's financial position and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," on pages 29 through 31 under the caption
"Asset/Liability Management and Market Risk".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Pages F-1 through F-43 contained within this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding the directors and executive officers of the Corporation is
omitted from this report as the Corporation has filed its definitive proxy
statement within 120 days after the end of the fiscal year covered by this
Report, and the information included therein is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information regarding compensation of executive officers and directors is
omitted from this Report as the Corporation has filed a definitive proxy
statement within 120 days after the end of the fiscal year covered by this
Report, and the information included therein (excluding the Personnel Resources
Committee Report on Executive Compensation and the Comparative Company
Performance information) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required by this Item is omitted from this Report as the Corporation
has filed a definitive proxy statement within 120 days after the end of the
fiscal year covered by this Report, and the information included therein is
incorporated herein by reference.
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain relationships and related transactions is omitted
from this Report as the Corporation has filed a definitive proxy statement
within 120 days after the end of the fiscal year covered by this Report, and the
information included therein is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) The Consolidated Financial Statements of Registrant and its subsidiaries
are included within Item 8 of Part II of this report.
(a)(2) All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(a)(3) The exhibits listed on the Exhibit Index page of this Annual Report are
either filed as part of this Report or are incorporated herein by reference;
references to First Federal Bank now mean Webster Bank:
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------
Exhibit No. 3. Certificate of Incorporation and Bylaws.
3.1 Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Corporation's Annual Report on Form
10-K filed within the SEC on March 29, 2000 and incorporated herein by reference).
3.2 Certificate of Amendment (filed as Exhibit 3.2 to the Corporation's Annual Report on Form 10-K
filed with the SEC on March 29, 2000 and incorporated herein by reference).
3.3 Bylaws, as amended (filed as Exhibit 3 to the Corporation's Registration Statement on Form S-8 filed with the
SEC on July 25, 2000 and incorporated herein by reference).
Exhibit No. 4 Instruments Defining the Rights of Security Holders.
4.1 Specimen common stock certificate (filed as Exhibit 4.1 to the Corporation's Registration Statement on Form
S-3 (File No. 333-81563) filed with the SEC on June 25, 1999 and incorporated herein by reference).
4.2 Rights Agreement, dated as of February 5, 1996, between the Corporation and Chemical Mellon Shareholder
Services, L.L.C. (filed as Exhibit 1 to the Corporation's Current Report on Form 8-K filed with the SEC on
February 12, 1996 and incorporated herein by reference).
4.3 Amendment No. 1 to Rights Agreement, entered into as of November 4, 1996, by and between the Corporation and
ChaseMellon Shareholder Services, L.L.C. (filed as an exhibit to the Corporation's Current Report on Form 8-K
filed with the SEC on November 25, 1996 and incorporated herein by reference).
4.4 Amendment No. 2 to Rights Agreement, entered into as of October 30, 1998, between the Corporation and
American Stock Transfer & Trust Company (filed as Exhibit 1 to the Corporation's Current Report on Form 8-K
filed with the SEC on October 30, 1998 and incorporated herein by reference).
42
Exhibit No. 10. Material Contracts.
10.1 1986 Stock Option Plan of Webster Financial Corporation (filed as Exhibit 10(a) to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1986 and incorporated here in by reference).
10.2 Amendment to 1986 Stock Option Plan (filed as Exhibit 10.3 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 and incorporated herein by reference).
10.3 Mechanics Savings Bank 1996 Officer Stock Plan (filed as Exhibit 10.1 of MECH Financial, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).
10.4 Amendment No. 1 to Mechanics Savings Bank 1996 Officer Stock Option Plan (filed as Exhibit 4.1 (b) of MECH
Financial Inc.'s Registration Statement on Form S-8 as filed with the SEC on April 2, 1998 and incorporated
herein by reference).
10.5 Mechanics Savings Bank 1996 Director Stock Option Plan (incorporated by reference to Exhibit 10.2 of MECH
Financial, Inc.'s Annual Report on Form 10-K filed with the SEC on March 30, 1998 and incorporated herein by
reference).
10.6 Amendment No. 1 to Mechanics Savings Bank 1996 Director Stock Option Plan (filed as Exhibit 4.2 (b) of MECH
Financial, Inc.'s Registration Statement on Form S-8 as filed with the SEC on April 2, 1998 and incorporated
herein by reference).
10.7 New England Community Bancorp, Inc., 1997 Non-Officer's Directors' Stock Option Plan (filed as Exhibit 4.1 of
New England Community Bancorp, Inc.'s Registration Statement on Form S-8 as filed with the SEC on October 6,
1998 and incorporated herein by reference).
10.8 Amended and Restated 1992 Stock Option Plan (filed as Exhibit 99.2 to the Corporation's Registration
Statement on Form S-8, filed with the SEC on August 8, 2001 and incorporated herein by reference).
10.9 Economic Value Added Incentive Plan (the description of the plan in the last paragraph that begins on page 17
of the Corporation's definitive proxy materials for the 2000 Annual Meeting of Shareholders is incorporated
herein by reference).
10.10 Performance Incentive Plan (filed as Exhibit A to the Corporation's definitive proxy materials for the
Corporation's 1996 Annual Meeting of Shareholders and incorporated herein by reference).
10.11 Amendment to Webster Financial Corporation Performance Incentive Plan as amended and restated effective
January 1, 1996 (filed as Exhibit 10.11 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and incorporated herein by reference).
10.12 Amended and Restated Deferred Compensation Plan for Directors and Officers of Webster Bank (filed as Exhibit
10.12 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).
10.13 First Amended and Restated Directors Retainer Fees Plan (filed as Exhibit 10.3 to the Corporation's Quarterly
Report on Form 10-Q filed with the SEC on August 14, 1998 and incorporated herein by reference).
43
10.14 2001 Directors Retainer Fees Plan (filed as Exhibit A to the Corporation's Definitive Proxy Statement filed
with the SEC on March 21, 2001 and incorporated herein by reference).
10.15 Supplemental Retirement Plan for Employees of First Federal Bank, as amended and restated effective as of
October 1, 1994 (filed as Exhibit 10.26 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference).
10.16 Amendment No. 1 to the Supplemental Retirement Plan for Employees of First Federal Bank (filed as Exhibit
10.15 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).
10.17 Amendment No. 2 to the Supplemental Retirement Plan for Employees of First Federal Bank (filed as Exhibit
10.16 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and
incorporated herein by reference).
10.18 Amendment No. 3 to the Supplemental Retirement Plan for Employees of Webster Bank (filed as Exhibit 10.17 to
the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated
herein by reference).
10.19 Qualified Performance-Based Compensation Plan (filed as Exhibit A to the Corporation's definitive proxy
materials for the Corporation's 1998 Annual Meeting of Shareholders and incorporated herein by reference).
10.20 Employee Stock Purchase Plan (filed as Appendix A to the Company's Definitive Proxy Statement filed with the
SEC on March 23, 2000).
10.21 Employment Agreement, dated as of January 1, 1998, among James C. Smith, the Corporation and Webster Bank
(filed as Exhibit 10.27 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and incorporated herein by reference).
10.22 Employment Agreement, dated as of January 1, 1998, among William T. Bromage, the Corporation and Webster Bank
(filed as Schedule 10.27 to Exhibit 10.27 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by reference).
10.23 Employment Agreement, dated as of January 1, 1998, among Peter K. Mulligan, the Corporation and Webster Bank
(filed as Schedule 10.27 to Exhibit 10.27 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by reference).
10.24 Employment Agreement, dated as of January 1, 1998, among Ross M. Strickland, the Corporation and Webster Bank
(filed as Schedule 10.27 to Exhibit 10.27 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by reference).
10.25 Amendment to Employment Agreement, entered into as of March 17, 1998, by and among Webster Bank, the
Corporation and James C. Smith (filed as Exhibit 10.28 to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.26 Amendment to Employment Agreement, entered into as of March 17, 1998, by and among Webster Bank, the
Corporation and William T. Bromage (filed as Schedule 10.28 to Exhibit 10.28 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference).
44
10.27 Amendment to Employment Agreement, entered into as of March 17, 1998, by and among Webster Bank, the
Corporation and Peter K. Mulligan (filed as Schedule 10.28 to Exhibit 10.28 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.28 Amendment to Employment Agreement, entered into as of March 17, 1998, by and among Webster Bank, the
Corporation and Ross M. Strickland (filed as Schedule 10.28 to Exhibit 10.28 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.29 Change of Control Employment Agreement, dated as of December 15, 1997, by and between the Corporation and
James C. Smith (filed as Exhibit 10.29 to the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 and incorporated herein by reference).
10.30 Change of Control Employment Agreement, dated as of December 15, 1997, by and between the Corporation and
William T. Bromage (filed as Schedule 10.29 to Exhibit 10.29 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.31 Change of Control Employment Agreement, dated as of December 15, 1997, by and between the Corporation and
Peter K. Mulligan (filed as Schedule 10.29 to Exhibit 10.29 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.32 Change of Control Employment Agreement, dated as of December 15, 1997, by and between the Corporation and
Ross M. Strickland (filed as Schedule 10.29 to Exhibit 10.29 to the Corporation's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and incorporated herein by reference).
10.33 Employment Agreement, dated as of March 30, 2001, among William J. Healy, the Corporation and Webster Bank
(filed as Exhibit 10.1 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 30,
2001 and incorporated herein by reference).
10.34 Change of Control Employment Agreement, dated as of March 30, 2001, by and between Webster Financial
Corporation and William J. Healy (filed as Exhibit 10.2 to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 30, 2001 and incorporated herein by reference).
10.35 Purchase and Assumption Agreement, dated as of October 2, 1992, among the Federal Deposit Insurance
Corporation (the "FDIC"), in its corporate capacity as receiver of First Constitution Bank, the FDIC and
First Federal Bank (filed as Exhibit 2 to the Corporation's Current Report on Form 8-K filed with the SEC on
October 19, 1992 and incorporated herein by reference).
10.36 Amendment No. 1 to Purchase and Assumption Agreement, made as of August 8, 1994, by and between the FDIC, the
FDIC as receiver of First Constitution Bank, and First Federal Bank (filed as Exhibit 10.36 to the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein
by reference).
10.37 Indenture, dated as of June 15, 1993, between the Corporation and Chemical Bank, as trustee, relating to the
Corporation's 8 3/4% Senior Notes due 2000 (filed as Exhibit 99.5 to the Corporation's Current Report on Form
8-K/A filed with the SEC on November 10, 1993 and incorporated herein by reference).
45
10.38 Junior Subordinated Indenture, dated as of January 29, 1997 between the Corporation and The Bank of New York,
as trustee, relating to the Corporation's Junior Subordinated Deferrable Interest Debentures (filed as
Exhibit 10.41 to the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and
incorporated herein by reference).
Exhibit No. 21 Subsidiaries.
Exhibit No. 23 Consent of KPMG LLP
(b) Reports on Form 8-K
No reports were filed for the fourth quarter period ending December 31, 2001.
(c) Exhibits to this Form 10-K are attached or incorporated herein by reference as stated above.
(d) Not applicable.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 8, 2002.
WEBSTER FINANCIAL CORPORATION
By /s/ James C. Smith
------------------------------------
James C. Smith
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 8, 2002.
Name: Title:
----- ------
/s/ James C. Smith Chairman and Chief Executive Officer
---------------------------------------------- (Principal Executive Officer)
James C. Smith
/s/ William J. Healy Executive Vice President and
---------------------------------------------- Chief Financial Officer
William J. Healy (Principal Financial and Accounting Officer)
/s/ Achille A. Apicella Director
----------------------------------------------
Achille A. Apicella
/s/ Joel S. Becker Director
----------------------------------------------
Joel S. Becker
/s/ O. Joseph Bizzozero, Jr. Director
----------------------------------------------
O. Joseph Bizzozero, Jr.
/s/ William T. Bromage President and Director
----------------------------------------------
William T. Bromage
47
/s/ George T. Carpenter Director
----------------------------------------------
George T. Carpenter
/s/ John J. Crawford Director
----------------------------------------------
John J. Crawford
/s/ Robert A. Finkenzeller Director
----------------------------------------------
Robert A. Finkenzeller
/s/ Edgar C. Gerwig Director
----------------------------------------------
Edgar C. Gerwig
/s/ C. Michael Jacobi Director
----------------------------------------------
C. Michael Jacobi
/s/ John F. McCarthy Director
----------------------------------------------
John F. McCarthy
/s/ Michael G. Morris Director
----------------------------------------------
Michael G. Morris
/s/ Sister Marguerite F. Waite Director
----------------------------------------------
Sister Marguerite F. Waite
48