UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 2002.
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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.
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WEBSTER FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
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(Address of principal executive offices) (Zip Code)
(203) 753-2921
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 45,978,598
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Class Outstanding at October 31, 2002
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Statements of Condition at September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income for the three and nine months ended September 30, 2002
and 2001 (unaudited) 4
Consolidated Statements of Comprehensive Income for the three and nine months ended
September 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2002
and 2001 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002
and 2001 (unaudited) 7
Notes to Consolidated Interim Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4. Controls and Procedures 42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 2. Changes in Securities and Use of Proceeds 43
Item 3. Defaults upon Senior Securities 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 5. Other Information 43
Item 6. Exhibits and Reports on Form 8-K 43
SIGNATURE 44
CERTIFICATIONS 45
EXHIBITS 47
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. INTERIM FINANCIAL STATEMENTS
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CONSOLIDATED STATEMENTS OF CONDITION
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(unaudited)
SEPTEMBER 30, DECEMBER 31,
(In thousands, except share and per share data) 2002 2001
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ASSETS:
Cash and due from depository institutions $ 212,606 218,908
Short-term investments 30,542 35,937
Securities: (Note 2)
Trading, at fair value 1,104 --
Available for sale, at fair value 4,106,734 3,999,133
Loans receivable, net (Notes 3 and 4) 8,190,459 6,869,911
Goodwill (Note 13) 232,910 243,008
Intangible assets (Note 13) 64,144 76,163
Cash surrender value of life insurance 169,803 163,023
Premises and equipment, net 82,667 82,808
Accrued interest receivable 58,480 54,288
Deferred tax asset, net (Note 5) 10,264 33,158
Prepaid expenses and other assets 113,860 81,045
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Total assets $13,273,573 11,857,382
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 8) $ 7,353,423 7,066,471
Federal Home Loan Bank advances (Note 6) 2,362,298 2,531,179
Securities sold under agreements to repurchase and other borrowings (Note 7) 2,291,665 1,002,185
Accrued expenses and other liabilities 82,679 91,503
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Total liabilities 12,090,065 10,691,338
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Corporation-obligated mandatorily redeemable capital securities of
subsidiary trusts (Note 16) 132,650 150,000
Preferred stock of subsidiary corporation 9,577 9,577
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized - 200,000,000 shares
Issued - 49,507,192 shares at September 30, 2002 and
49,502,742 at December 31, 2001 495 495
Paid-in capital 415,118 415,194
Retained earnings 676,841 590,254
Treasury stock at cost, 3,091,768 shares at September 30, 2002
and 353,325 shares at December 31, 2001 (108,838) (10,141)
Unearned compensation (3,224) (3,998)
Employee Stock Ownership Plan shares purchased with debt -- (286)
Accumulated other comprehensive income 60,889 14,949
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Total shareholders' equity 1,041,281 1,006,467
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Total liabilities and shareholders' equity $13,273,573 11,857,382
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See accompanying notes to consolidated interim financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share data) 2002 2001 2002 2001
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INTEREST INCOME:
Loans $ 118,492 127,991 344,014 401,321
Securities and short-term investments 55,507 60,572 174,445 178,311
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Total interest income 173,999 188,563 518,459 579,632
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INTEREST EXPENSE:
Deposits (Note 8) 36,169 53,627 112,787 170,765
Borrowings 35,240 41,385 104,034 137,161
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Total interest expense 71,409 95,012 216,821 307,926
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Net interest income 102,590 93,551 301,638 271,706
Provision for loan losses (Note 4) 5,000 4,000 13,000 10,400
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Net interest income after provision for loan losses 97,590 89,551 288,638 261,306
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NONINTEREST INCOME:
Deposit service charges 15,798 14,142 44,528 41,699
Loan and loan servicing fees 6,168 5,131 15,896 13,698
Insurance revenue 6,386 5,806 20,198 16,393
Trust and investment services 3,758 4,984 12,213 13,969
Financial advisory services 5,997 3,942 14,313 12,239
Increase in cash surrender value of life insurance 2,311 2,211 6,780 6,926
Gain on sale of securities, net 4,912 2,566 9,443 8,609
Other 777 1,709 3,834 8,547
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Total noninterest income 46,107 40,491 127,205 122,080
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NONINTEREST EXPENSE:
Compensation and benefits 43,302 35,827 124,698 107,506
Occupancy 6,665 6,057 19,162 19,463
Furniture and equipment 7,559 7,032 20,939 20,903
Intangible asset amortization (Note 13) 3,978 7,888 12,020 23,338
Marketing 2,622 2,045 7,484 6,428
Professional services 2,746 2,896 7,893 7,008
Capital securities (Note 16) 3,233 3,616 10,386 10,847
Branch reconfiguration -- -- -- 3,703
Acquisition expenses 1,349 -- 1,965 --
Other 12,675 11,840 34,624 32,529
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Total noninterest expense 84,129 77,201 239,171 231,725
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Income before income taxes, extraordinary item and
cumulative effect of change in method of accounting 59,568 52,841 176,672 151,661
Income taxes 19,144 17,810 56,061 51,516
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Income before extraordinary item and cumulative effect
of change in method of accounting 40,424 35,031 120,611 100,145
Extraordinary item - early extinguishment of debt (net
of taxes) (Note 10) -- -- -- (1,209)
Cumulative effect of change in method of accounting (net
of taxes) (Note 11) -- -- (7,280) (2,418)
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NET INCOME $ 40,424 35,031 113,331 96,518
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Net Income per common share: (Notes 12 and 13)
Basic $ 0.85 0.71 2.35 1.97
Diluted 0.84 0.70 2.31 1.94
Dividends paid per common share 0.19 0.17 0.55 0.50
See accompanying notes to consolidated interim financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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THREE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001
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Net income $ 40,424 35,031
Other comprehensive income, net of tax:
Unrealized net holding gains on securities available for sale
arising during the period (net of income tax effect of $11,328
and $31,045 for 2002 and 2001, respectively) 17,083 46,811
Reclassification adjustment for net gains included in
net income (net of income tax effect of $1,923
and $974 for 2002 and 2001, respectively) (2,900) (1,468)
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Other comprehensive income 14,183 45,343
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Comprehensive income $ 54,607 80,374
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NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001
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Net income $113,331 96,518
Other comprehensive income, net of tax:
Unrealized net holding gains on securities available for sale
arising during the period (net of income tax effect of $34,884
and $35,291 for 2002 and 2001, respectively) 52,175 53,381
Reclassification adjustment for net gains included in
net income (net of income tax effect of $3,756
and $3,283 for 2002 and 2001, respectively) (5,662) (4,954)
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Other comprehensive income 46,513 48,427
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Comprehensive income $159,844 144,945
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See accompanying notes to consolidated interim financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
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Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
Common Paid-in Retained Treasury Compen- Purchased Income
(In thousands,) Stock Capital Earnings Stock sation With Debt (Loss) Total
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NINE MONTHS ENDED SEPTEMBER 30, 2001
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BALANCE, DECEMBER 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642) (890) 890,374
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Net income for the nine months
ended September 30, 2001 -- -- 96,518 -- -- -- -- 96,518
Dividends paid -- -- (24,628) -- -- -- -- (24,628)
Allocation of ESOP shares -- 440 -- -- -- 356 -- 796
Exercise of stock options -- (2,149) -- 9,931 -- -- -- 7,782
Common stock repurchased -- -- -- (3,881) -- -- -- (3,881)
Consideration granted for
purchase acquisitions -- 221 -- 1,181 -- -- -- 1,402
Restricted stock grants, net
of amortization -- 1,083 -- 1,526 (1,599) -- -- 1,010
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 48,427 48,427
Other, net -- 38 (9) -- -- -- -- 29
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BALANCE, SEPTEMBER 30, 2001 $ 495 415,967 561,959 (4,604) (3,239) (286) 47,537 1,017,829
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NINE MONTHS ENDED SEPTEMBER 30, 2002
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BALANCE, DECEMBER 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
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Net income for the nine months
ended September 30, 2002 -- -- 113,331 -- -- -- -- 113,331
Dividends paid -- -- (26,724) -- -- -- -- (26,724)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (1,371) -- 6,438 -- -- -- 5,067
Stock option grants -- 967 -- -- -- -- -- 967
Common stock repurchased -- -- -- (107,793) -- -- -- (107,793)
Restricted stock grants, net
of amortization -- (109) (20) 2,658 774 -- -- 3,303
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 46,513 46,513
Employee Stock Purchase Plan -- (144) -- -- -- -- -- (144)
Other, net -- 10 -- -- -- -- (573) (563)
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BALANCE, SEPTEMBER 30, 2002 $ 495 415,118 676,841 (108,838) (3,224) -- 60,889 1,041,281
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See accompanying notes to consolidated interim financial statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001
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OPERATING ACTIVITIES:
Net income $ 113,331 96,518
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 13,000 10,400
Depreciation and amortization 17,156 16,016
Amortization (accretion) of securities premiums/discounts, net 1,047 (1,051)
Amortization (accretion) of loan premiums/discounts, net 6,520 (2,667)
Amortization of intangible assets 12,020 23,338
Cumulative effect of change in accounting method (Note 11) 11,200 3,614
Gains on sale of foreclosed properties, net (261) (674)
Gains on sale of securities, net (9,418) (8,237)
Gains on the sale of loans, net (3,471) (2,694)
Gains on trading securities, net (25) (372)
(Increase) decrease in trading securities (1,079) 6
Loans originated for sale (1,112,187) (560,226)
Proceeds from sale of loans originated for sale 940,520 502,033
(Increase) decrease in interest receivable (3,332) 7,925
Increase in prepaid expenses and other assets, net (45,503) (119,668)
Increase (decrease) in interest payable 7,508 (17,519)
(Decrease) increase in accrued expenses and other liabilities, net (13,096) 91,232
Increase in cash surrender value of life insurance (6,780) (6,926)
Proceeds from life insurance contract surrender -- 19,531
Other, net (396) --
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Net cash (used) provided by operating activities (73,246) 50,579
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INVESTING ACTIVITIES:
Purchases of securities, available for sale (1,491,071) (1,512,045)
Principal collected on securities 988,951 429,485
Maturities of securities 4,195 54,993
Proceeds from sale of securities, available for sale 476,336 775,398
Decrease in short-term investments, net 5,395 7
(Increase) decrease in loans, net (738,298) 307,373
Proceeds from sale of foreclosed properties 3,643 5,690
Purchase of premises and equipment, net (12,178) (3,747)
Net cash paid for asset acquisition (430,120) (17,263)
Other, net (660) --
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Net cash (used) provided by investing activities (1,193,807) 39,891
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FINANCING ACTIVITIES:
Increase (decrease) in deposits 286,952 (16,125)
Repayment of FHLB advances (8,597,908) (10,341,724)
Proceeds from FHLB advances 8,429,027 10,166,413
Net increase in securities sold under agreement to repurchase and
other borrowings 1,289,480 152,278
Cash dividends paid to common shareholders (26,724) (24,628)
Redemption of Series A preferred stock of subsidiary corporation -- (40,000)
Redemption of capital securities (17,350) --
Exercise of stock options 5,067 7,782
Common stock repurchased (107,793) (3,881)
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Net cash provided (used) by financing activities 1,260,751 (99,885)
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Decrease in cash and cash equivalents (6,302) (9,415)
Cash and cash equivalents at beginning of period 218,908 265,035
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Cash and cash equivalents at end of period $ 212,606 255,620
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See accompanying notes to consolidated interim financial statements.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
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NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001
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SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 56,236 30,069
Interest paid 209,314 325,444
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties $ 2,048 4,182
Reclassification of held to maturity securities to available for sale (fair
value of $248,215 at January 1, 2001) -- 261,747
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Assets acquired and liabilities assumed in purchase business combinations were
as follows:
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NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001
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Fair value of noncash assets acquired in purchase acquisitions $ 430,584 247,040
Fair value of liabilities assumed in purchase acquisitions 464 251,842
Common stock issued in purchase business combinations -- 1,402
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See accompanying notes to consolidated interim financial statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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The Consolidated Interim Financial Statements include the accounts of Webster
Financial Corporation ("Webster" or the "Company") and its subsidiaries. The
Consolidated Interim Financial Statements and Notes thereto have been prepared
in conformity with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany transactions have been eliminated in consolidation.
Amounts in prior period financial statements are reclassified whenever necessary
to conform to current period presentations. The results of operations for the
three and nine months ended September 30, 2002 are not necessarily indicative of
the results which may be expected for the year as a whole.
The preparation of the Consolidated Interim Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the Consolidated Interim Financial Statements and
the reported amounts of revenues and expenses for the periods presented. The
actual results of Webster could differ from those estimates. Material estimates
that are susceptible to near-term changes include the determination of the
allowance for loan losses and the valuation allowance for the deferred tax
asset. These Consolidated Interim Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and Notes thereto
included in Webster's 2001 Annual Report on Form 10-K for the year ended
December 31, 2001.
NOTE 2: SECURITIES
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A summary of securities follows:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
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Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
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TRADING SECURITIES:
Municipal securities (a) $ 1,104 -- -- 1,104 -- -- -- --
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AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes -- -- -- -- 2,014 -- -- 2,014
Municipal bonds and notes 98,424 6,095 (1) 104,518 78,349 1,266 (536) 79,079
Corporate bonds and notes 154,302 1,469 (6,341) 149,430 207,024 786 (18,428) 189,382
Equity securities (b) 156,681 4,817 (887) 160,611 166,351 7,649 (4,114) 169,886
Mortgage-backed securities (c) 3,593,358 99,181 (364) 3,692,175 3,519,067 50,008 (10,303) 3,558,772
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Total $ 4,002,765 111,562 (7,593) 4,106,734 3,972,805 59,709 (33,381) 3,999,133
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(a) For trading securities, amortized cost equals market value and includes
recognized gains and losses.
(b) As of September 30, 2002, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $127.5 million, preferred stock of
$5.8 million and common stock of $27.3 million. The fair value of equity
securities at December 31, 2001 consisted of FHLB stock of $126.6 million,
preferred stock of $5.4 million and common stock of $37.9 million.
(c) Includes mortgage-backed securities comprised of Fannie Mae, Freddie Mac,
Government National Mortgage Association and non-agency issued
mortgage-backed securities
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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As part of its continuous review of the investment portfolio, management
evaluates unrealized losses on securities for declines in value that are other
than temporary in nature. During the nine months ended September 30, 2002,
Webster recorded writedowns of $1.8 million, included in the Consolidated
Statements of Income under gain on sale of securities, net for two equity
holdings whose value decline was deemed to be other than temporary in nature. No
other declines deemed to be other than temporary occurred in the three months
ended September 30, 2002.
NOTE 3: LOANS RECEIVABLE, NET
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A summary of loans, net follows:
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(Dollars in thousands) SEPTEMBER 30, 2002 DECEMBER 31, 2001
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Amount % Amount %
------ ---- ------ ---
Residential mortgage loans:
1-4 family units $ 3,279,138 40.0% $ 3,058,662 44.5%
Multi-family units 117,333 1.4 104,038 1.5
Construction 142,161 1.7 223,583 3.3
Loans held for sale 315,585 3.9 143,918 2.1
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Total residential mortgage loans 3,854,217 47.0 3,530,201 51.4
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Commercial loans:
Commercial non-mortgage 1,493,458 18.2 1,046,874 15.2
Equipment financing 390,757 4.8 320,704 4.7
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Total commercial loans 1,884,215 23.0 1,367,578 19.9
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Commercial real estate:
Commercial mortgage 884,030 10.8 892,145 13.0
Commercial construction 121,266 1.5 82,831 1.2
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Total commercial real estate 1,005,296 12.3 974,976 14.2
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Consumer loans:
Home equity credit loans and lines 1,522,206 18.6 1,038,350 15.1
Other consumer 40,643 0.5 56,113 0.8
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Total consumer loans 1,562,849 19.1 1,094,463 15.9
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Total loans 8,306,577 101.4 6,967,218 101.4
Less: allowance for loan losses (116,118) (1.4) (97,307) (1.4)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net $ 8,190,459 100.0% $ 6,869,911 100.0%
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At September 30, 2002, net loans included $13.8 million of net discounts and
$27.8 million of net deferred costs. At December 31, 2001, net loans included
$17.2 million of net discounts and $19.0 million of net deferred costs. The
unadvanced portions of closed construction loans totaled $73.8 million and $78.2
million at September 30, 2002 and December 31, 2001, respectively.
At September 30, 2002 and December 31, 2001, residential mortgage origination
commitments totaled $698.1 million and $158.2 million, respectively. Residential
commitments outstanding at September 30, 2002 consisted of adjustable rate and
fixed rate mortgages of $49.0 million and $649.1 million, respectively, at rates
ranging from 4.5% to 7.7%. Residential commitments outstanding at December 31,
2001 consisted of adjustable rate and fixed rate mortgages of $46.5 million and
$111.7 million, respectively, at rates ranging from 5.4% to 7.5%. Commitments to
originate loans generally expire within 60 days. At September 30, 2002 and
December 31, 2001, Webster also had outstanding commitments to sell residential
mortgage loans of $486.9 million and $195.4 million, respectively.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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At September 30, 2002 and December 31, 2001, unused portions of home equity
credit lines extended were $984.8 million and $754.7 million, respectively.
Unused commercial lines of credit, letters of credit, standby letters of credit,
equipment financing commitments and outstanding commercial loan commitments
totaled $1.6 billion and $800.3 million at September 30, 2002 and December 31,
2001, respectively, including an increase of $647.8 million in the third
quarter due to the Whitehall asset purchase.
At September 30, 2002 and December 31, 2001, Webster serviced, for the benefit
of others, mortgage loans totaling approximately $1.4 billion and $1.2 billion,
respectively.
NOTE 4: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The allowance for loan losses is maintained at a level deemed by management
adequate to absorb probable losses inherent in the loan portfolio. The allowance
is increased by provisions charged to operating expense and by recoveries on
loans previously charged-off, and reduced by charge-offs on loans.
The following table provides a summary of the activity in the allowance for loan
losses for the indicated periods:
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THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 99,698 96,135 97,307 90,809
Provisions charged to operations 5,000 4,000 13,000 10,400
Allowance for purchased loans 16,338 -- 16,338 1,851
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121,036 100,135 126,645 103,060
CHARGE-OFFS:
Residential 249 325 799 847
Commercial (a) 4,921 3,404 10,175 5,897
Commercial real estate -- -- -- --
Consumer 246 281 872 1,106
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Total charge-offs 5,416 4,010 11,846 7,850
RECOVERIES:
Residential 19 120 155 302
Commercial (a) 400 361 1,006 969
Commercial real estate -- -- -- --
Consumer 79 48 158 173
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Total recoveries 498 529 1,319 1,444
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Net charge-offs 4,918 3,481 10,527 6,406
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Balance at end of period $116,118 96,654 116,118 96,654
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Ratio of net charge-offs to average loans outstanding
during the period (annualized) 0.25% 0.20 0.19 0.12
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(a) All small business loans, both commercial and commercial real estate, are
considered commercial for purposes of charge-offs and recoveries.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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NOTE 5: DEFERRED TAX ASSET, NET
- -------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 2002
and December 31, 2001 are summarized below. Temporary differences arise for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A 100% valuation allowance has been applied to the State
of Connecticut deferred tax assets since Webster expects to have minimal
Connecticut income tax liability for the foreseeable future.
- --------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss and other allowances, net $ 40,149 39,839
Intangibles 12,146 8,023
Loan discounts 8,458 10,214
Net operating loss and credit carryforwards 7,266 9,767
Accrued compensation and benefits 9,708 6,163
Other accrued expenses 1,932 3,073
Lease financing costs 1,122 1,709
Depreciation and amortization 1,428 --
Other assets-investments 715 219
Other 272 697
- --------------------------------------------------------------------------------------------------------
Total deferred tax assets 83,196 79,704
Less: state tax valuation allowance, net of federal benefit (9,573) (10,959)
- --------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance $ 73,623 68,745
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale $ 41,366 10,498
Intangibles 13,803 15,744
Loan premiums and deferred fees 2,646 3,915
Compensation and benefits 1,361 2,026
Mortgage servicing rights 3,286 1,815
Accrued dividends 484 570
Depreciation and amortization -- 402
Other 413 617
- --------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 63,359 35,587
- --------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 10,264 33,158
- --------------------------------------------------------------------------------------------------------
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
- ---------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
Total Total
(Dollars in thousands) Outstanding Callable Outstanding Callable
- -----------------------------------------------------------------------------------------------------------------------------------
FIXED RATE:
1.25% to 6.87% due in 2002 $ 265,310 -- 883,000 --
0.95% to 6.67% due in 2003 315,232 -- 313,440 --
1.99% to 6.78% due in 2004 750,227 -- 550,320 100,000
2.97% to 6.25% due in 2005 150,295 100,000 102,802 100,000
4.68% to 6.31% due in 2006 52,164 -- 52,558 --
4.88% to 6.98% due in 2007 702,296 500,000 502,362 500,000
4.49% to 5.93% due in 2008 29,493 27,000 29,773 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 487 -- 521 --
6.60% due in 2011 2,069 -- 2,200 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- -----------------------------------------------------------------------------------------------------------------------------------
2,282,573 642,000 2,451,976 742,000
VARIABLE RATE:
5.76% due in 2004 80,000 -- 80,000 --
- -----------------------------------------------------------------------------------------------------------------------------------
2,362,573 642,000 2,531,976 742,000
Unamortized discount on FHLB advances (275) -- (797) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total FHLB advances, net $ 2,362,298 642,000 2,531,179 742,000
- -----------------------------------------------------------------------------------------------------------------------------------
During the third quarter 2002 period, the Bank received a $2.5 million one-year
advance at a rate of 0.95%. This advance is part of the FHLB's Affordable
Housing Program ("AHP") in which Webster chose to participate. The $2.5 million
advance is part of an overall $4.2 million award to the Bank by FHLB through the
AHP. The program is designed to act as an indirect subsidy to construction or
redevelopment projects to allow for decreased interest and/or operating costs
and thereby help keep rents at an affordable level.
FHLB advances are secured by a blanket security agreement. This agreement
requires the Bank to maintain as collateral certain qualifying assets,
principally mortgage loans and securities. At September 30, 2002, Webster had
$460.2 million of additional borrowing capacity at the FHLB. Investment
securities were not utilized as qualifying collateral. Had securities been used
for collateral, additional borrowing capacity would be approximately $1.8
billion at September 30, 2002. At September 30, 2002, the Bank was in compliance
with the FHLB collateral requirements.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
- ---------------------------------------------------------------------------
Repurchase agreements are primarily collateralized by U.S. Government Agency
mortgage-backed securities. The quarter average balance for borrowings under
short-term repurchase agreements exceeded 30% of total shareholders' equity at
September 30, 2002.
The following table summarizes balances for securities sold under agreement to
repurchase and other borrowings:
- ------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 1,375,367 571,675
Federal funds purchased 262,000 180,000
Senior notes 126,000 126,000
Treasury tax and loan 528,298 124,510
- ------------------------------------------------------------------------------------------------------------
Total $ 2,291,665 1,002,185
- ------------------------------------------------------------------------------------------------------------
Information concerning short-term borrowings for securities sold under
agreements to repurchase is summarized below:
- ------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
Quarter end balance $ 1,375,367 571,675
Quarter average balance 1,296,531 532,147
Highest month end balance during quarter 1,375,367 631,947
Weighted-average maturity date 2.0 months 2.7 months
Weighted-average interest rate 1.70% 1.96
Amortized cost of collateral $ 1,398,757 571,241
Fair value of collateral 1,448,629 584,340
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8: DEPOSITS
- ----------------
The following table sets forth deposit accounts showing balances by account type
in dollars and as percentages of total deposits at the dates indicated.
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
% of % of
(Dollars in thousands) Amount total Amount total
- -------------------------------------------------------------------------------------------------------------------
Demand deposits $ 911,283 12.4% $ 905,206 12.8%
NOW accounts 863,625 11.7 803,416 11.4
Regular savings, escrow and MMDAs 2,858,477 38.9 2,430,691 34.4
Certificates of deposit 2,624,344 35.7 2,831,345 40.0
- -------------------------------------------------------------------------------------------------------------------
Total retail deposits 7,257,729 98.7 6,970,658 98.6
Treasury certificates of deposit 95,694 1.3 95,813 1.4
- -------------------------------------------------------------------------------------------------------------------
Total deposits $7,353,423 100.0% $7,066,471 100.0%
- -------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(In thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
NOW accounts $ 1,166 1,296 3,352 3,906
Regular savings, escrow and MMDAs 12,026 14,017 33,372 39,526
Certificates of deposit 22,386 36,533 74,237 121,069
- -------------------------------------------------------------------------------------------------------------------
Total retail deposits 35,578 51,846 110,961 164,501
Treasury certificates of deposit 591 1,781 1,826 6,264
- -------------------------------------------------------------------------------------------------------------------
Total deposits $36,169 53,627 112,787 170,765
- -------------------------------------------------------------------------------------------------------------------
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9: BUSINESS SEGMENTS
- -------------------------
Webster has three business segments. These segments are Retail Banking, Business
Banking and Treasury. The organizational hierarchies that define the business
segments are periodically reviewed and revised. Results may be restated, when
necessary, to reflect changes in the organizational structure. The following
table presents the condensed statements of income and total assets for Webster's
reportable segments.
Operating income and total assets by business segment for the quarter and year
to date are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 62,336 19,367 20,887 -- 102,590
Provision for loan losses 1,386 3,614 -- -- 5,000
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision 60,950 15,753 20,887 -- 97,590
Noninterest income 26,357 10,589 9,161 -- 46,107
Noninterest expense 53,240 19,085 8,379 3,425 84,129
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,067 7,257 21,669 (3,425) 59,568
Income taxes 10,949 2,332 6,964 (1,101) 19,144
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 23,118 4,925 14,705 (2,324) 40,424
- ---------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,438,914 2,550,825 4,283,834 -- 13,273,573
THREE MONTHS ENDED SEPTEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 56,131 16,622 20,798 -- 93,551
Provision for loan losses 363 3,637 -- -- 4,000
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision 55,768 12,985 20,798 -- 89,551
Noninterest income 26,420 7,522 6,549 -- 40,491
Noninterest expense 52,816 14,080 6,828 3,477 77,201
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 29,372 6,427 20,519 (3,477) 52,841
Income taxes 9,900 2,166 6,916 (1,172) 17,810
- -------------------------------------------------------------------------------------------------------------------
Net income $ 19,472 4,261 13,603 (2,305) 35,031
- -------------------------------------------------------------------------------------------------------------------
Total assets at period end $5,436,437 1,973,351 4,212,463 -- 11,622,251
NINE MONTHS ENDED SEPTEMBER 30, 2002
- ---------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 173,944 47,798 79,896 -- 301,638
Provision for loan losses 4,445 8,555 -- -- 13,000
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision 169,499 39,243 79,896 -- 288,638
Noninterest income 80,222 27,623 19,360 -- 127,205
Noninterest expense 158,617 48,550 21,892 10,112 239,171
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 91,104 18,316 77,364 (10,112) 176,672
Income taxes 28,907 5,812 24,549 (3,207) 56,061
- -------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in method of accounting 62,197 12,504 52,815 (6,905) 120,611
Cumulative effect of change in method
of accounting (net of taxes) -- (7,280) -- -- (7,280)
- -------------------------------------------------------------------------------------------------------------------
Net income $ 62,197 5,224 52,815 (6,905) 113,331
- -------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,438,914 2,550,825 4,283,834 -- 13,273,573
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $ 178,972 49,158 43,576 -- 271,706
Provision for loan losses 3,452 6,948 -- -- 10,400
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision 175,520 42,210 43,576 -- 261,306
Noninterest income 76,482 22,321 23,277 -- 122,080
Noninterest expense 161,582 39,786 19,925 10,432 231,725
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item and cumulative effect of
change in method of accounting 90,420 24,745 46,928 (10,432) 151,661
Income taxes 30,712 8,405 15,941 (3,542) 51,516
- ---------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item and
cumulative effect of change in method
of accounting 59,708 16,340 30,987 (6,890) 100,145
Extraordinary item-early extinguishment
of debt (net of taxes) -- -- (1,209) -- (1,209)
Cumulative effect of change in method
of accounting (net of taxes) -- -- (2,418) -- (2,418)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 59,708 16,340 27,360 (6,890) 96,518
- ---------------------------------------------------------------------------------------------------------------------
Total assets at period end $5,436,437 1,973,351 4,212,463 -- 11,622,251
Retail Banking
- --------------
The Retail Banking segment includes investment and insurance services, consumer
lending and the Bank's deposit generation and direct banking activities, which
include the operation of automated teller machines and telebanking customer
support, sales and small business banking. The Retail Banking segment also
includes the Bank's residential real estate loan origination, loan servicing and
secondary marketing activities.
Business Banking
- ----------------
The Business Banking segment includes the Bank's commercial and industrial,
equipment financing and commercial real estate lending activities. This segment
also includes business deposits, cash management activities for business
banking, financial advisory services, government finance and all trust
activities including Webster Financial Advisors.
Treasury
- --------
The Treasury segment includes short-term investments, investment securities,
Federal Home Loan Bank advances, repurchase agreements and other borrowings.
Adjustments
- -----------
Management fully allocates indirect expenses to its segments. These expenses
include administration, finance, operations and other support functions.
Adjustments for expenses not allocated to any segment for the three and nine
month periods ending September 30, 2002 and 2001 were capital securities expense
of $3.2 million, $10.4 million, $3.6 million and $10.8 million, respectively,
and minority interest credits and (charges) of ($192,000), $274,000, and
$139,000, $415,000, respectively.
Allocations to segments are subject to periodic adjustment as the internal
management accounting system is revised and business or product lines within the
segments change. Also, because the development and application of these
methodologies is a dynamic process, the financial results presented may be
periodically revised.
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10: EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
- ----------------------------------------------------------
In January 2001, a $1.8 million charge to earnings, or $1.2 million, net of
taxes, was recorded for the early extinguishment of debt. A prepayment penalty
was incurred on seven Federal Home Loan Bank advances totaling $155.3 million
with rates between 6.30% and 8.20% and remaining maturity dates ranging from 1
month to 20 months.
NOTE 11: CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING
- ------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. Under this Statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
SFAS No. 133, as amended by SFAS No. 137, was effective for all fiscal quarters
of fiscal years beginning after June 15, 2001. In June 2001, the FASB issued
SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities, an
amendment to SFAS No. 133". This Statement amended the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain hedging
activities. Upon adoption, hedging relationships must be designated anew and
documented pursuant to the provisions of this Statement. The Company implemented
SFAS No. 133 as of January 1, 2001. The implementation of SFAS No. 133 resulted
in a $3.6 million charge to earnings, or $2.4 million net of taxes, for
derivatives that did not qualify for hedge accounting under SFAS No. 133.
Webster also reclassified all held to maturity securities to available for sale
as permitted under SFAS No. 133, as amended.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". The Company adopted the
provisions of SFAS No. 141 effective July 1, 2001 and adopted the provisions of
SFAS No. 142 effective January 1, 2002.
During the second quarter of 2002, Webster completed its review of the carrying
value of its goodwill and other intangible assets in compliance with the
requirements of SFAS No. 142. As a result of this review, Webster determined
that a portion of the goodwill related to its investment in Webster D&P
Holdings, Inc. ("Duff & Phelps") was impaired, and recorded a one-time
transitional charge of $11.2 million, or $7.3 million after taxes. The charge
was recorded effective January 1, 2002 and is included in the Consolidated
Statements of Income for the nine months ended September 30, 2002 in accordance
with the transitional rules under SFAS 142. This review revealed no impairment
in any other portion of goodwill. See Note 13 of Notes to Consolidated Interim
Financial Statements for further information concerning SFAS Nos. 141 and 142.
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12: NET INCOME PER COMMON SHARE
- ------------------------------------
The following tables reconcile the components of basic and diluted earnings per
share.
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $40,424 35,031 113,331 96,518
- ---------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 47,303 49,223 48,240 49,095
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.85 0.71 2.35 1.97
- ---------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income $40,424 35,031 113,331 96,518
- ---------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 47,303 49,223 48,240 49,095
Potential common stock: options 818 706 851 666
- ---------------------------------------------------------------------------------------------------------------
Total weighted-average diluted shares 48,121 49,929 49,091 49,761
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.84 0.70 2.31 1.94
- ---------------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2002 and 2001, options to purchase
80,552 and 434,500 shares of common stock at exercise prices between $36.10 and
$39.45 and $33.75 and $36.69 respectively, were not considered in the
computation of potential common stock since the options' exercise prices were
greater than the average market price of Webster common stock. The average
market prices for the 2002 and 2001 third quarters were $36.04 and $33.30,
respectively. See Note 13 of Notes to Consolidated Interim Financial Statements
for information on the effect of SFAS Nos. 142 and 147 on earnings per share.
For the nine months ended September 30, 2002 and 2001, options to purchase
72,050 and 722,505 shares of common stock at exercise prices between $36.69 and
$39.45 and $31.10 and $36.69, respectively, were also not considered in the
computation of potential common stock since the option's exercise prices were
greater than the average market price of Webster common stock. The average
market prices for 2002 and 2001 year-to-date periods were $36.27 and $31.08,
respectively. See Note 13 of Notes to Consolidated Interim Financial Statements
for information on the effect of SFAS Nos. 142 and 147 on earnings per share.
NOTE 13: GOODWILL AND INTANGIBLE ASSETS
- ---------------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after September 30, 2001 as well as all purchase method business combinations
completed after September 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires 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. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and
adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141
requires that upon adoption of SFAS No. 142, the 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 SFAS No. 141 for recognition apart from goodwill. Upon
adoption of SFAS No. 142, the Company is 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
is required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any impairment loss
is to 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. SFAS No.
142 also requires impairment testing of goodwill within the first nine months of
adoption. Goodwill impairment testing is a two step process. The first step
involves comparing the fair value of a reporting unit to its carrying value. If
the carrying value of the reporting unit exceeds its fair value, step two is
required. The second step involves the allocation of the reporting unit's fair
value to all its assets and liabilities as if the reporting unit had been
acquired as of the date of measurement. The implied fair value of goodwill is
then determined and compared to its carrying value. Any impairment loss
resulting from completion of the transitional impairment test of goodwill will
be recognized as a cumulative effect of accounting change and will be recognized
in the first interim accounting period.
During the first quarter of 2002, upon the implementation of SFAS No. 142,
Webster performed a reevaluation of the remaining useful lives of all previously
recognized other intangible assets with finite useful lives and found no
adjustment necessary to the amortization periods used. Webster also found that
no reclassifications of intangible assets were required. The review of the
carrying value of goodwill was completed during the second quarter of 2002. As a
result, it was determined that a portion of the goodwill related to the
acquisition of Duff & Phelps, LLC was impaired. Accordingly, a one-time
transitional charge of $7.3 million, after taxes, was recognized retroactive to
January 1, 2002, in accordance with the provisions of SFAS No. 142. The
valuation analysis utilized a discounted cash flow analysis that valued a stream
of free cash flows, including a terminal value, to estimate an imputed value for
Duff & Phelps. No other portion of goodwill or other intangible assets was
determined to be impaired. The imputed value of Duff & Phelps has been impacted
by the extremely challenging business environment and especially by the slowdown
in mergers and acquisitions activity, which comprised a significant portion of
Duff & Phelps revenues at the date of Webster's purchase.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". SFAS No. 147 amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", and allows the
provisions of SFAS No. 142 to be applied to the purchase acquisitions of
financial institutions if certain criteria are met. Webster adopted SFAS No. 147
during the third quarter of 2002 with application effective as of January 1,
2002, as permitted by this statement. For the nine months ending September 30,
2002, Webster would have recorded $827,000 of intangible amortization expense
related to the previous acquisitions of Chase and Fleet-Boston branches. The
reported net income for the first and second quarters of 2002 was adjusted to
reverse the effects of recorded amortization, in accordance with the provision
of SFAS No. 147. In addition, $20.3 million of goodwill related to these branch
purchases was reclassified from intangible assets, which was subject to
amortization, to goodwill, which is subject to impairment analysis.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
Balances subject to amortization:
Intangible assets:
Core deposit intangibles $ 64,144 76,163
- -------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill $232,910 243,008
- -------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the nine months ended September
30, 2002 are as follows:
Retail Business
Banking Banking Total
- -------------------------------------------------------------------------------
Balance at January 1, 2002 $205,994 37,014 243,008
Impairment loss -- (11,200) (11,200)
Purchase price adjustments 45 369 414
Minority interest purchases -- 688 688
- -------------------------------------------------------------------------------
Balance at September 30, 2002 $206,039 26,871 232,910
- -------------------------------------------------------------------------------
Amortization of intangible assets for the three and nine months ended September
30, 2002 totaled $4.0 million and $12.0 million, respectively. Estimated annual
amortization expense of current intangible assets with finite useful lives,
absent any impairment or change in estimated useful lives, is summarized below
for each of the next five years.
(In thousands)
- -------------------------------------------------------------------------------
FOR YEARS ENDING DECEMBER 31,
2002 (full year) $ 15,998
2003 15,281
2004 15,262
2005 15,262
2006 11,088
- -------------------------------------------------------------------------------
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following adjusts reported 2001 net income and earnings per share to
consistently reflect the provisions of SFAS Nos. 142 and 147 in all periods.
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(In thousands, except for earnings per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME:
As reported $ 40,424 35,031 113,331 96,518
Add back: Goodwill amortization (net of tax) -- 3,756 -- 10,941
- ------------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 40,424 38,787 113,331 107,459
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
As reported $ 0.85 0.71 2.35 1.97
Add back: Goodwill amortization -- 0.08 -- 0.22
- ------------------------------------------------------------------------------------------------------------------------------
Adjusted basic EPS $ 0.85 0.79 2.35 2.19
- ------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
As reported $ 0.84 0.70 2.31 1.94
Add back: Goodwill amortization -- 0.08 -- 0.22
- ------------------------------------------------------------------------------------------------------------------------------
Adjusted diluted EPS $ 0.84 0.78 2.31 2.16
- ------------------------------------------------------------------------------------------------------------------------------
NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
At September 30, 2002, Webster had outstanding interest rate swaps with a
notional amount of $500 million. These swaps are to hedge FHLB advances and
qualify for fair value hedge accounting under SFAS No. 133. The swaps are used
to transform FHLB advances from fixed rate to floating rate debt. Three hundred
million dollars of the interest rate swaps mature in 2004 and two hundred
million dollars in 2007 and an equivalent amount of the hedged advances mature
on the two dates. At December 31, 2001, the Bank had no derivatives that
qualified for hedge accounting under SFAS No. 133.
The Bank transacts certain derivative products with its customer base. These
customer derivatives are offset with matching derivatives with other
counterparties in order to minimize the Bank's risk. The Bank's exposure with
respect to these derivatives is limited to nonperformance by either of the
parties in the transaction - the Bank's customer or the other counterparty.
The Bank also has rate lock commitments extended to borrowers that relate to the
origination of mortgage loans held for sale ("rate locks"). To mitigate the
interest rate risk inherent in rate locks, as well as closed mortgage loans held
for sale ("loans held for sale"), the Bank enters into mandatory forward
commitments to sell mortgage-backed securities and best efforts forward
commitments to sell individual mortgage loans ("forward commitments"). Rate
locks and forward commitments are considered to be derivatives under SFAS No.
133. The estimated fair value of the rate locks and forward commitments are
recorded on the balance sheet in either other assets or other liabilities, with
the offset to net gain on sales of loans, included in loan and loan servicing
fees.
The fair value of a rate lock is estimated based on the expected profit or loss
to be realized on the underlying loan, including the estimated value of the
servicing rights associated with the loan, as well as the probability that the
rate lock will be exercised by the borrower ("fallout factor"). For rate locks
associated with optional ("best efforts") forward commitments, fair value is
estimated based on the pricing specified in the related forward commitment. The
fair value of mandatory forward commitments is based on current pricing obtained
from independent third parties.
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
At September 30, 2002, the Company had rate locks of approximately $497.0
million, mandatory forward commitments of approximately $424.0 million, and best
efforts forward commitments of approximately $62.9 million. The recording of the
estimated fair value of the rate locks and forward commitments, offset by the
lower of cost or market adjustment on the residential mortgage loans held for
sale portfolio, did not significantly impact the Consolidated Interim Financial
Statements. At December 31, 2001, the Company had rate locks of approximately
$79.7 million, mandatory forward commitments of approximately $194.0 million,
and best efforts forward commitments of approximately $1.4 million.
NOTE 15: RECENT ACCOUNTING STANDARDS
- ------------------------------------
On October 1, 2002, FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions". The statement provides guidance on the accounting for the
acquisition of a financial institution and amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions". The Company adopted
SFAS No. 147 during the third quarter period, with a required effective date of
January 1, 2002. Refer to Note 13 of Notes to Consolidated Interim Financial
Statements for information concerning the impact of SFAS No. 147 on Webster.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they occur rather than at
the date of commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. Management does not expect any material impact on its financial
statements when the statement is adopted.
On July 24, 2002, Webster announced, effective July 1, 2002, it will begin using
SFAS No. 123, "Accounting for Stock-Based Compensation", as the method of
accounting for employee stock-based compensation. Under the provisions of SFAS
No. 123, Webster had previously elected to use APB No. 25 to account for
employee stock-based compensation. By electing to use the provisions of SFAS No.
123, compensation expense will be recorded for employee stock option grants
using the fair value method and amortized over the vesting period. Under current
guidance, the impact of using SFAS No. 123 to account for employee stock-based
compensation will be to reduce diluted earnings per share by $0.01 in 2002.
During the initial phase-in period, the effects of applying SFAS No. 123 are not
likely to be representative of the effect on future years, because generally
options vest over several years and additional grants are made each year. Refer
to Note 15 of Notes to Consolidated Financial Statements included in Webster's
2001 Annual Report on Form 10-K for more information on the effects of electing
to use SFAS No. 123 to account for employee stock-based compensation.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections". This statement amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for fiscal years beginning after May 15, 2002, with early
application encouraged. Management does not expect any material impact on its
financial statements when this statement is adopted.
On October 3, 2001, FASB issued SFAS 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,
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Unusual and Infrequently Occurring Events and Transactions". The changes in
this Statement improve 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. The Company
adopted SFAS No. 144 effective January 1, 2002, without material impact on its
financial statements.
On August 16, 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 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. 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. The Company
does not expect any material impact on its financial statements when this
Statement is adopted.
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". Statement No. 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. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of Statement No. 142. Statement No. 142 also requires 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". The Company
adopted the provisions of Statement No. 141 effective July 1, 2001 and the
provisions of Statement No. 142 effective January 1, 2002. Refer to Note 13 of
Notes to Consolidated Interim Financial Statements for information concerning
the impact of SFAS Nos. 141 and 142 on Webster.
NOTE 16: CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
- ---------------------------------------------------------------------------
SUBSIDIARY TRUSTS
- -----------------
In 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Company. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I was $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997.
On April 1, 1997, Eagle Financial Capital Trust I, subsequently renamed Webster
Capital Trust II ("Trust II"), completed a $50 million private placement of
10.00% capital securities. Proceeds from the issue were invested by Trust II in
junior subordinated deferrable debentures issued by Eagle due in 2027. These
debentures represent the sole assets of Trust II.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The subordinated debt securities are unsecured obligations of Webster and are
subordinate and junior in right of payment to all present and future senior
indebtedness of Webster. Webster has entered into guarantees, which together
with Webster's obligations under the subordinated debt securities and the
declarations of trust governing Trust I and Trust II, including its obligations
to pay costs, expenses, debts and liabilities (other than trust securities),
provides a full and unconditional guarantee of amounts on the capital
securities.
During the third quarter 2002, Webster purchased $2.4 million of its capital
securities that were issued by Webster Capital Trust I. At September 30, 2002,
Webster Capital Trust I, had remaining capital securities outstanding of $92.7
million and Webster Capital Trust II, had remaining capital securities
outstanding of $40.0 million. Refer to Webster's 2001 Annual Report filed on
Form 10-K for further information concerning Webster's Capital Trust I and II.
Expense of the securities, including amortization of issuance costs, for the
three months ended September 30, 2002 and 2001, was $3.2 million and $3.6
million, respectively, and for the nine months ended September 30, 2002 and
2001, was $10.4 million and $10.8 million, respectively.
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
GENERAL
- -------
Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank (the "Bank"), 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 Bank provides
business and consumer banking, mortgage lending, trust and investment services
and insurance services through 110 banking offices, 214 ATM's and its Internet
website (www.websteronline.com). Webster commenced trading of its common stock
on the New York Stock Exchange under the new symbol of "WBS" on October 17,
2002. Previous to this date, Webster's common stock traded on the NASDAQ under
the symbol of "WBST". The Bank was founded in 1935 and converted from a federal
mutual to a federal stock institution in 1986. Webster's financial reports can
be accessed through its website within 24 hours of filing with the SEC.
FINANCIAL CONDITION
- -------------------
Webster, on a consolidated basis at September 30, 2002 and December 31, 2001,
had total assets of $13.3 billion and $11.9 billion, respectively, including
total securities of $4.1 billion and $4.0 billion, respectively, and net loans
of $8.2 billion and $6.9 billion, respectively. At September 30, 2002 and
December 31, 2001, total deposits were $7.4 billion and $7.1 billion,
respectively, borrowings were $4.7 billion and $3.5 billion, respectively, and
shareholders' equity totaled $1.0 billion at each date.
Total assets increased $1.4 billion, or 11.9%, at September 30, 2002 from
December 31, 2001. The overall increase is primarily due to increases in loans
of $1.3 billion and securities of $108.7 million. The increase in loans was due
to increases in residential loans of $324.0 million, home equity loans of $483.9
million, equipment financing of $70.1 million and commercial loans of $446.6
million. The growth in the commercial loan portfolio is primarily due to the
purchase of approximately $451.0 million of asset-based loans from IBJ Whitehall
Business Credit Corporation in August 2002.
Total liabilities rose $1.4 billion or 13.1% at September 30, 2002 from December
31, 2001 primarily due to increases in borrowings of $1.1 billion and deposits
of $287.0 million. The increase in deposits was primarily the result of
increases in core deposits, consisting of demand, NOW, regular savings and MMDA
accounts, of $494.0 million that was partially offset by a decrease in
certificates of deposits of $207.0 million. The increase in total borrowings was
primarily due to funding needs resulting from the asset-based loan purchase.
Refer to Notes 6 and 7 of Notes to Consolidated Interim Financial Statements
contained within this report for further information on Webster's borrowings.
The net increase in total equity of $34.8 million is primarily due to net income
of $113.3 million, $46.5 million in tax-affected unrealized gains on the
available for sale securities and $5.1 million in stock option exercise
proceeds, partially offset by $107.8 million in repurchases of Webster common
stock and $26.7 million in common stock dividend payments.
During the second and third quarter 2002 periods, Webster acquired $17.3 million
of its capital securities that were issued by Webster Capital Trust I and II.
Refer to Note 16 of Notes to Consolidated Interim Financial Statements contained
within this report for further information concerning Webster's capital
securities.
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
LENDING ACTIVITIES
- ------------------
Webster, through its Bank and Bank's subsidiaries, originates various types of
residential, commercial and consumer loans. At September 30, 2002 and December
31, 2001, total loans were $8.3 billion and $7.0 billion, respectively. The Bank
offers commercial and residential permanent and construction mortgage loans,
commercial and industrial loans, asset-based lending, equipment financing and
various types of consumer loans including home equity lines of credit, home
equity loans and small business loans. At September 30, 2002 and December 31,
2001, residential loans represented 46% and 51% of Webster's loan portfolio and
commercial loans (including commercial real estate) represented 35% and 34%,
respectively. The remaining portion of the loan portfolios consisted of consumer
loans. Refer to Webster's 2001 Annual Report on Form 10-K for a complete
description of the Company's lending activities.
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. For the three and nine
months ending September 30, 2002, Webster originated $810.4 million and $1.7
billion, respectively, of total residential mortgage loans. For the three and
nine months ending September 30, 2001, Webster originated $324.1 million and
$813.7 million, respectively, of total residential loans. Substantially all this
originated loan volume is sold in the secondary market. Webster sells
residential mortgage loans in the secondary market in a manner consistent with
its asset/liability management objectives. At September 30, 2002 and December
31, 2001, Webster had $315.6 million and $143.9 million, respectively, of
residential mortgage loans held for sale. These loans are included in the totals
of the residential mortgage portfolio. At September 30, 2002 and December 31,
2001, the residential mortgage loan portfolio totaled $3.9 billion and $3.5
billion, respectively. The Bank originates both fixed rate and adjustable rate
residential mortgage loans. At September 30, 2002, approximately $1.3 billion,
or 32%, of the total residential mortgage loan portfolio were adjustable rate
loans. Adjustable rate mortgage loans are offered at initial interest rates
discounted from the fully-indexed rate. Adjustable rate loans originated during
2002 and 2001, when fully-indexed, will be 2.75% above the constant maturity
one-year U.S. Treasury yield index. At September 30, 2002, approximately $2.6
billion, or 68%, of the total residential mortgage loan portfolio were fixed
rate. A year earlier, at September 31, 2001, Webster's residential mortgage loan
portfolio totaled $3.8 billion, and was 62% fixed rate and 38% adjustable rate.
Commercial Lending
- ------------------
The Middle Market Lending unit has commercial lending relationships primarily
with companies located in Connecticut and with annual revenues ranging from $10
to $250 million. At September 30, 2002 and December 31, 2001, middle market
loans totaled $440.0 million and $492.0 million, respectively. The decline in
loans is primarily attributable to the slowdown in economic growth and the
resulting impact this had on Webster's commercial lending relationships. The
Bank provides these middle market customers a complete array of traditional
commercial credit facilities such as lines of credit, term loans, owner-occupied
commercial mortgages and interest-rate protection products. In addition, the
Bank provides cash management services, including automated investments, lock
box and account reconciliation services.
The Bank has a Specialized Lending unit, originally established as part of its
strategy to expand its commercial loan portfolio. The unit's objective is to
obtain geographic and industry diversification within the overall commercial
loan portfolio by participating in the broader national and syndicated lending
markets. A portion of the loans administered by the Specialized Lending unit is
monitored 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.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
At September 30, 2002 and December 31, 2001, the Specialized Lending portfolio
totaled $348.3 million and $363.9 million, respectively, of funded loans against
commitments of $584.1 million and $573.7 million, respectively. Additionally,
the Specialized Lending portfolio contained $85.9 million and $46.4 million of
collateralized debt obligations at September 30, 2002 and December 31, 2001,
respectively. The funded loans and collateralized debt obligations represented
approximately 5.2% and 5.8% of the total loan portfolio at September 30, 2002
and December 31, 2001, respectively. Originations totaled $54.2 million during
the third quarter of 2002, as compared to $25.8 million during the same period
in 2001. The increase in total loans since December 31, 2001 occurred primarily
in collateralized debt obligations. Collateralized debt obligations
("CDOs/CLOs") are securitizations of a diversified pool of bank loans. The pools
of loans are held by a special purpose entity that issues a combination of
investment grade and non-investment grade notes, as well as equity with which to
fund the loan pools. The CDO/CLO provides various forms of credit enhancements
for the benefit of the debt holders. All of the CDO/CLO debt instruments held by
Webster are rated Baa3 or higher by Moody's Investor Services, or have
comparable ratings from another nationally recognized rating agency.
A summary of the Specialized Lending portfolio by type of industry follows:
- ------------------------------------------------------------------------------------------
(In thousands) SEPTEMBER 30, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------
INDUSTRY:
Manufacturing $ 80,950 99,584
Wireless communications 45,275 58,246
Cable 49,953 58,364
Advertising/Publishing 49,957 46,171
Towers and integrated communication providers 31,609 35,858
Competitive local exchange carriers 15,758 16,275
Radio/TV broadcasting 16,909 21,161
Pharmaceuticals 9,308 --
Energy 6,283 --
All other 42,298 28,256
- ------------------------------------------------------------------------------------------
Total 348,300 363,915
Collateralized debt obligations 85,910 46,380
- ------------------------------------------------------------------------------------------
Total loans $434,210 410,295
- ------------------------------------------------------------------------------------------
In addition to the loans administered by the Specialized Lending unit, Webster
had $161.3 million of loans that are also monitored by the SNCP against
commitments of $226.3 million at September 30, 2002. This compares with $148.2
million of loans and $214.0 million of commitments at December 31, 2001. These
loans are located primarily in the Northeast region and are commercial and
commercial real estate loans. The loans are managed by the Bank's commercial
division, whose focus is primarily middle market lending. These SNCP loans are
distinguished from the Specialized Lending unit SNCP loans by being relatively
smaller transactions where the Bank, in most cases, has a direct relationship
with the borrower.
The Small Business Banking unit ("SBB") provides a full complement of loan and
deposit products to small businesses located throughout Connecticut. Their
target market is businesses with annual revenues of up to $10 million. This
market represents a significant percentage of commercial businesses located in
Connecticut. SBB uses the Bank's branch network as well as dedicated business
development officers to fully service its existing customer base and call on
potential new customers. The Fair Isaac credit scoring model is utilized to
assist in loan approvals of
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
up to $250,000 and offers a $50,000 same day line of credit approval program.
SBB provides all of the Bank's commercial loan products including lines of
credit, letters of credit, term loans and mortgages on owner-occupied real
estate. The Bank is also a Small Business Administration ("SBA") preferred
lender authorized to offer all SBA loan guaranty products and is also active in
several loan programs sponsored by the Connecticut Development Authority. At
September 30, 2002 and December 31, 2001, the SBB portfolio was approximately
$307.7 million and $333.0 million, respectively. The decline of 7.6% reflects
the reduced level of business activity as a result of the economic environment.
Originations totaled $36.5 million and $94.9 million for the third quarter and
first nine months of 2002, respectively, as compared to $30.4 million and $98.4
million during the same respective periods in 2001.
Center Capital Corporation ("Center Capital"), an equipment financing subsidiary
of the Bank 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 manufacturers, dealers and distributors with whom they
have business relationships. The portfolio has grown since acquisition from
$243.7 million to $320.7 million at December 31, 2001, an increase of 31.6%.
During the first nine months of 2002, this growth continued as the portfolio
grew to $390.8 million at period end, an increase of 21.9% from the prior year
end. Center Capital originated $58.5 million in loans during the third quarter
of 2002, compared to $48.7 million during the same period a year ago. Total
originations for the first nine months of 2002 and 2001 were $167.7 million and
$107.5 million, respectively. The Center Capital acquisition, completed in March
2001, impacts the comparison of 2002 and 2001 origination totals.
In August 2002, Webster completed the acquisition of the asset-based lending
division, including loans, staff and facilities, of IBJ Whitehall Business
Credit Corporation, a subsidiary of the Industrial Bank of Japan Trust Company.
The business now operates as a subsidiary of Webster Bank under the name,
Whitehall Business Credit Corporation ("Whitehall"), with its main office in New
York City and additional offices in Braintree, MA and Atlanta, GA. At the time
of acquisition, $451.1 million of outstanding loans and $59.5 million of
outstanding letters of credit were acquired. These loans are generally secured
by accounts receivable of the borrower and in some cases also includes
additional collateral such as inventory and property and equipment. During the
third quarter of 2002, as a subsidiary of the Bank, Whitehall originated $45
million of loans. At September 30, 2002, total loans administered by Whitehall
and the asset-based loans of the Bank were $562.0 million. Whitehall originates
as agent, loans for its portfolio and sells participations to other financial
institutions. In this capacity, it generally establishes depository
relationships with the borrower in the form of cash management accounts. At
September 30, 2002, the total of these deposits was $31.4 million. Whitehall
also participates in loans originated by other financial institutions. There
were approximately $299.4 million of loans in Whitehall's portfolio at September
20, 2002, which meet the definition of the SNCP.
Commercial Real Estate
- ----------------------
Webster Bank originates construction, construction-to-permanent, and permanent
commercial real estate ("CRE") loans primarily in its Connecticut market and
also throughout the New England region. At September 30, 2002 and December 31,
2001, outstanding commercial real estate loans totaled $1.0 billion and $975.0
million, respectively. Included in these loans are owner-occupied loans of
$460.0 million and $489.4 million at September 30, 2002 and December 31, 2001,
respectively. The Bank's strategy is to originate loans with income producing
real estate as collateral. The Bank develops relationships with regional
developers and participates in loans with selected banks. Webster originated
$256.6 million of commercial real estate loans during the first nine months of
2002, an increase of $84.7 million, or 49.3%, from the same period a year
earlier.
Consumer
- --------
At September 30, 2002 and December 31, 2001, consumer loans totaled $1.6 billion
and $1.1 billion, respectively. Consumer loan volume increased significantly in
2001 and, at December 31, consumer loans totaled $1.1 billion and represented
15.9% of the total loan portfolio. This growth continued during the first nine
months of 2002, as consumer loans grew to $1.6 billion, or 19.1% of the loan
portfolio at September 30, 2002. The growth occurred in home equity credit lines
and is attributable to the lower interest rate environment and the expansion of
lending into states contiguous to Connecticut and other targeted states through
a network of brokers. Originations during the first nine months of 2002 totaled
$716.5 million, an increase of $223.7 million or 45.4% from the same period a
year earlier. Consumer loan originations for the full year 2001 totaled $868.3
million.
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
- ---------------------
Webster, directly or through the Bank, maintains an investment portfolio that is
primarily structured to provide a source of liquidity for funding needs,
generate interest income and to provide a means to balance interest rate risk.
At September 30, 2002, investment portfolio totaled $4.1 billion, with $4.0
billion and $60.4 million held by the Bank and Webster Financial Corporation
unconsolidated (the "Parent Company"), respectively. At December 31, 2001, the
investment portfolio totaled $4.0 billion, with $3.9 billion and $83.2 million
held by the Bank and Parent Company, respectively. At both September 30, 2002
and December 31, 2001, the Bank's investment portfolio consisted primarily of
mortgage-backed securities, while the Parent Company's portfolio consisted
primarily of equities, mutual funds and corporate securities. See Note 2 of
Notes to Consolidated Interim Financial Statements contained elsewhere herein
for details on the components of the portfolio.
The portfolios are managed by the Bank's Treasury Group in accordance with
regulatory guidelines and established corporate investment policies. These
guidelines and policies include limitations on aspects such as investment
grade/ratings, concentrations and investment type to help manage risk associated
with investing in securities.
DEPOSIT ACTIVITIES
- ------------------
Total deposits increased $287.0 million, or 4.1%, at September 30, 2002 from
December 31, 2001. The increase occurred entirely in the lower cost,
non-maturity deposits, as demand deposits, NOW accounts, regular savings and
money market deposits increased $494.1 million, or 11.9%, while certificates of
deposits decreased $207.1 million, or 7.1%. These changes reflect the success of
Webster's strategic plan, which calls for increasing lower cost, non-maturity
deposits as a percentage of total deposits. This percentage increased to 63.0%
at September 30, 2002 from 58.6% at December 31, 2001, and 51.6% at December 31,
2000.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- ------------------------------------------
Interest-rate risk is the sensitivity of the market value of interest-sensitive
assets and liabilities and the sensitivity of earnings to changes in interest
rates over short-term and long-term time horizons. Webster's Asset/Liability
Management Committee manages interest-rate risk to maximize net income and net
market value over time in changing interest-rate environments, within limits set
by the Board of Directors. Management measures interest-rate risk using
simulation analyses to measure earnings and equity at risk. Earnings at risk is
defined as the change in earnings from a base scenario due to changes in
interest rates. Equity at risk is defined as the change in the net market value
of assets and liabilities due to changes in interest rates. Market value is
measured as the net present value of future cash flows. Simulation analysis
incorporates assumptions about balance sheet changes such as asset and liability
growth, loan and deposit pricing and changes to the mix of assets and
liabilities. Key assumptions relate to the behavior of interest rates and
spreads, prepayment speeds and the run-off of deposits. From such simulations,
interest-rate risk is quantified and appropriate strategies are formulated and
implemented.
Interest-rate risk simulation analyses cannot precisely measure the impact that
higher or lower rate environments will have on net interest income or market
value. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes, changes in cash flow patterns
and market conditions, as well as changes in management's strategies. These
simulated estimates assume that management does not take any action to mitigate
any negative effects from changing interest rates. Management believes that
Webster's interest-rate risk position at September 30, 2002 represents a
reasonable level of risk.
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
The following table summarizes the estimated change in the market value of
Webster's assets, liabilities and off-balance sheet contracts and the change in
its equity at risk at September 30, 2002 and December 31, 2001, 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
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
Assets $ 13,273,573 13,128,125 122,720 (228,894)
Liabilities, capital securities
and preferred stock 12,232,292 12,362,554 290,438 (236,929)
Off balance sheet items -- 18,303 12,573 (12,111)
Net dollar impact (155,145) (4,076)
Net change as percent of Tier I Capital (18.6)% (0.5)
DECEMBER 31, 2001
Assets $ 11,857,382 11,614,903 233,981 (286,658)
Liabilities, capital securities
and preferred stock 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)
At September 30, 2002 and December 31, 2001, the book value of assets exceeded
the market value because the equity at risk model assigns no value to goodwill
and other intangible assets, which totaled $297.1 million and $320.1 million,
respectively.
As noted in the table above, the market value of equity has changed
substantially from year end December. The flattening of the yield curve between
December 31, 2001 and September 30, 2002 has increased the market value of
mortgage assets, but has also had the impact of shortening the average duration
of these assets due to faster prepayment speeds. In addition, during 2002,
Webster's balance sheet has transitioned to a more commercial and consumer
bank-like mix. The Company now has relatively fewer fixed-rate, long duration
assets funded by more fixed-rate, long duration liabilities, mainly in the form
of core deposits. Consequently in a falling interest-rate environment, Webster's
assets now gain less in market value than its liabilities lose in market value,
and vice versa in a rising interest-rate environment.
The following table summarizes the estimated impact on Webster's net income as
of September 30, 2002 and December 31, 2001 for the subsequent twelve month
period, if interest rates instantaneously increase or decrease by 100 basis
points.
Estimated Net Income Impact
- -------------------------------------------------------------------------------
(Dollars in thousands) -100 BP +100 BP
- -------------------------------------------------------------------------------
SEPTEMBER 30, 2002
Net dollar change $(12,500) 5,900
Net change as percent of base (8.2)% 3.8
DECEMBER 31, 2001
Net dollar change $ (2,300) 600
Net change as percent of base (1.5)% 0.4
31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Webster's net income sensitivity has increased during 2002 for much the same
reason as market value sensitivity has increased. Webster will benefit more in a
rising interest-rate environment now than in the past due to its higher
concentration of floating-rate commercial and consumer loans, and larger core
deposit funding base. While we expect interest rates to fall or stay low in the
short-term, the longer-term expectation is for a general rise in interest rates
as the economy rebounds. Webster is positioned to benefit from this expectation
and ready to respond to changing conditions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Webster is required to maintain sufficient liquidity to ensure its safe and
sound operation. Liquidity management allows it to meet its 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 as
collateral to secure funding, and by maintaining the ability to attract new
deposits. Webster's goal is to develop a strong base of core deposits to support
its growing balance sheet.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Webster has a detailed liquidity contingency plan, which is designed
to respond to liquidity concerns in a prompt and comprehensive manner. It is
designed to provide early detection of potential problems and details specific
actions required to address liquidity risks.
At September 30, 2002 and December 31, 2001, Webster had FHLB advances
outstanding of $2.4 billion and $2.5 billion, respectively. Webster is a member
of the FHLB system and had additional borrowing capacity from the FHLB of
approximately $460.2 million at September 30, 2002. In addition, Webster had
approximately $1.8 billion of unpledged securities at September 30, 2002 that,
if necessary, could have been used to increase borrowing capacity at the FHLB or
to collateralize other borrowings such as repurchase agreements.
The main sources of liquidity at the holding company level are dividends from
the Bank, investment income and net proceeds from capital offerings and
borrowings. The main uses of liquidity are purchases of investment securities,
the payment of dividends to common stockholders, repurchases of Webster's common
stock, and the payment of interest on borrowings and capital securities. There
are certain regulatory restrictions on the payment of dividends by the Bank to
Webster. At September 30, 2002, the Bank had $98.8 million of retained earnings
available for dividend to the holding company. Webster also maintains $100.0
million in available revolving lines of credit with correspondent banks.
On September 14, 2001, Webster announced a stock buyback program to repurchase
up to 2.5 million shares, or approximately 5 percent of its 49.4 million shares
of outstanding common stock, as of September 1, 2001, to purchase shares in the
open market and via unsolicited negotiated transactions, including block
purchases, over a one year period. As of September 14, 2002, Webster has
repurchased all of the 2.5 million shares of its common stock under this buyback
program, including 2,175,404 shares repurchased during the first nine months of
2002 at a cost of $78.5 million with an average purchase price of $36.09. The
total cost of the 2,469,589 shares repurchased during the program was $87.3
million with an average per share cost of approximately $35.35.
On July 23, 2002, Webster announced an additional stock buyback program of 2.4
million shares, or approximately 5 percent of its 48.0 million shares of
outstanding common stock as of the announcement date. Through September 30,
2002, Webster had repurchased 700,722 shares of its common stock under the
buyback program. The total cost of the shares repurchased under this buyback
program during the third quarter was $24.9 million with an average cost of
approximately $35.58.
32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Applicable Office of Thrift Supervision ("OTS") regulations require the Bank, as
a federal savings bank, satisfy certain minimum capital requirements, including
a core 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 September 30, 2002, the Bank was in full compliance with
all applicable capital requirements and exceeded the capital requirements for a
"well capitalized" institution. The following table provides information on
Webster Bank's capital ratios as of September 30, 2002 and December 31, 2001.
- ------------------------------------------------------------------------------------------------------------------------
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
Bank's equity (to total assets) $ 1,153,054 8.75%
Non-includable subsidiaries (2,100)
Goodwill and other intangibles (255,034)
Disallowed excess servicing (403)
Unrealized gain on certain AFS securities (62,603)
- ------------------------------------------------------------------------------------------------------------------------
TANGIBLE CAPITAL (TO ADJUSTED TOTAL ASSETS) 832,914 6.51 $ 256,036 2.00% No Requirement
Qualifying intangibles 182
- ------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL (TO ADJUSTED TOTAL ASSETS) 833,096 6.51 512,071 4.00% $ 640,089 5.00%
TIER 1 RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) 833,096 9.68 344,312 4.00 516,468 6.00
Allowable allowance for loan losses 107,413
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 940,509 10.93% $ 688,625 8.00% $ 860,781 10.00%
DECEMBER 31, 2001
Tangible capital (to adjusted total assets) $ 827,874 7.28% $ 227,563 2.00% No Requirement
Tier 1 capital (to adjusted total assets) 829,890 7.29 455,206 4.00 $ 569,007 5.00%
Tier 1 capital (to risk-weighted assets) 829,890 11.83 280,542 4.00 420,813 6.00
Total capital (to risk-weighted assets) 917,619 13.08 561,084 8.00 701,355 10.00
ASSET QUALITY
- -------------
LOAN PORTFOLIO REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY
Webster devotes significant attention to maintaining asset quality through
prudent underwriting standards, active monitoring of loans and aggressive
management of nonperforming assets. The allowance for loan losses is maintained
at a level estimated by management to provide adequately for probable losses
inherent in the current loan portfolio. Potential losses are estimated based
upon a quarterly review of the loan portfolio, 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 Webster's nonperforming loans and classified
loans, including an analysis of the collateral for these loans.
Management considers the adequacy of the allowance for loan losses to be a
critical accounting policy. As such, the adequacy of the allowance is subject to
judgement in its determination. Actual loan losses could differ materially from
management's estimate if actual loss factors and conditions differ significantly
from the assumptions utilized. These factors and conditions include the general
economic conditions within Connecticut and nationally, trends with 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 at September 30, 2002, actual results in
future periods may prove different and these differences could be significant.
33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Refer to the Allowance for Loan Losses Methodology section within Management's
Discussion and Analysis of Webster's 2001 Annual Report on Form 10-K for
additional information on the allowance for loan loss methodology.
NONPERFORMING ASSETS
The amount of nonperforming assets increased to $72.2 million at September 30,
2002 from $62.5 million at December 31, 2001 and as a percentage of total assets
was 0.54% at September 30, 2002 compared with 0.53% at December 31, 2001.
Nonperforming loans increased $11.0 million, while foreclosed properties
decreased $1.3 million since year end. The increase in nonperforming loans
occurred in commercial loans, principally in the Specialized Lending portfolio.
This increase was the result of five lending relationships with combined
balances of $24.0 million that were added to nonaccrual status in the third
quarter of 2002, offset by $5.3 million in loans that were paid-off. There was
also a $4.8 million decrease in nonperforming residential, commercial real
estate and consumer loans since December 31, 2001.
The five loans totaling $24 million in the Specialized portfolio were deemed to
be nonperforming as a result of the recently completed Shared National Credit
review. Comprising the total were two wireless credits totaling $7.6 million,
two cable credits totaling $9.8 million and one wireless related manufacturing
credit totaling $6.6 million. There was no change in our loan classification of
these five loans during the quarter as a result of the review, as each was
previously classified as substandard. All five loans are secured and fully
performing contractually as to principal and interest payments. All future
payments of principal and interest will be applied to reduce the principal
amount of loans outstanding. Aggressive remedial action has been undertaken to
resolve the two cable loans. Management currently expects the planned provision
for the fourth quarter of $5.0 million should be sufficient to absorb any charge
off.
The following table details nonperforming assets:
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
NONPERFORMING LOANS:
Commercial:
Business banking $19,000 20,574
Specialized lending 27,231 8,947
Equipment financing 5,559 7,333
- -------------------------------------------------------------------------------
Total commercial 51,790 36,854
Commercial real estate 10,124 11,062
Residential 5,521 7,677
Consumer 1,062 1,823
- -------------------------------------------------------------------------------
Total nonperforming loans 68,497 57,416
- -------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS:
Commercial 3,007 2,534
Residential 686 1,956
Consumer 12 548
- -------------------------------------------------------------------------------
Total other real estate and repossessed assets 3,705 5,038
- -------------------------------------------------------------------------------
Total nonperforming assets $72,202 62,454
- -------------------------------------------------------------------------------
The allowance for loan losses at September 30, 2002 was $116.1 million and
represented 170% of nonperforming loans and 1.40% of total loans. At December
31, 2001, the allowance was $97.3 million and represented 169% of nonperforming
loans and 1.40% of total loans.
34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PAST DUE LOANS
The following table sets forth information as to loans past due 30-89 days.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------
Principal Percent of loans Principal Percent of loans
(Dollars in thousands) Balances outstanding Balances outstanding
- ----------------------------------------------------------------------------------------
PAST DUE 30-89 DAYS:
Residential $14,865 .18% $18,359 0.26%
Commercial 16,154 .20 39,259 0.56
Consumer 5,128 .06 5,260 0.08
- ----------------------------------------------------------------------------------------
Total $36,147 .44% $62,878 0.90%
- ----------------------------------------------------------------------------------------
The overall decrease in loans past due 30-89 days of $26.7 million at September
30, 2002 from December 31, 2001 is primarily due to a reduction of $19.5 million
in commercial real estate loans. Three commercial real estate loan relationships
that totaled $17.2 million were current at September 30, 2002, but past due at
December 31, 2001.
TROUBLED DEBT RESTRUCTURINGS
At September 30, 2002 and December 31, 2001, the Bank had total accruing
troubled debt restructurings of approximately $3.0 million and $5.2 million,
respectively. A troubled debt restructuring occurs when for economic or legal
reasons related to debtor's financial difficulties a financial institution
grants a concession to the debtor that it would not otherwise consider. Interest
income recognized for the three and nine months ended September 30, 2002 under
the restructured terms totaled $56,495 and $223,079 respectively, as compared to
$102,242 and $392,953 that would have been booked under their original terms.
Interest income recognized for the three and nine months ended September 30,
2001 totaled $109,000 and $288,000 respectively, as compared to $192,000 and
$504,000 that would have been booked had the loans been under their original
terms. At September 30, 2002, the $3.0 million of debt restructurings were
performing in accordance with their restructured terms and not included in
nonperforming loans.
POTENTIAL PROBLEM LOANS
The following table summarizes Webster's classified loans (substandard, doubtful
and loss), including nonperforming loans at September 30, 2002 and December 31,
2001.
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
- -------------------------------------------------------------------------------
Substandard:
Accruing $102,436 88,397
Nonaccruing 62,170 47,846
- -------------------------------------------------------------------------------
Total substandard 164,606 136,243
- -------------------------------------------------------------------------------
Doubtful:
Accruing 3 66
Nonaccruing 3,724 4,464
- -------------------------------------------------------------------------------
Total doubtful 3,727 4,530
- -------------------------------------------------------------------------------
Loss -- --
- -------------------------------------------------------------------------------
Total $168,333 140,773
- -------------------------------------------------------------------------------
Classified as a percent of loans 2.0% 2.0
- -------------------------------------------------------------------------------
35
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
The prolonged weakness in the business sector of the economy has continued to
impact the level of classified loans. These loans increased $27.7 million since
December 31, 2001. The increase was primarily due to the acquisition of the
asset-based lending portfolio in the third quarter of 2002, which included $16.6
million in loans rated substandard. Classified loans in Business Banking, which
includes Middle Market, Small Business and Equipment Financing increased $1.6
million to $74.5 million from December 31, 2001. The Specialized Lending
portfolio's classified loans at the end of the third quarter were $62.5 million,
an increase of $9.0 million from year end. Webster believes that early
identification and management of problem loans serves to minimize future losses,
therefore it employs a rigorous portfolio review and management process, which
identifies deteriorating credit risk and proactively manages problem loans.
The total of nonperforming loans included in classified loans at September 30,
2002 was $66.0 million up $13.7 million from year end. The remaining classified
loans of $102.4 million continued to perform in accordance with their
contractual terms and accrue interest. Due to their classification as
substandard or doubtful, these currently performing loans are considered by
management to be potential problem loans, and may in the future become
nonperforming loans.
RESULTS OF OPERATIONS
- ---------------------
A COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND
2001.
GENERAL
Net income for the three months ended September 30, 2002, was $40.4 million or
$.84 per diluted share compared to $35.0 million or $.70 per diluted share for
the same period ended a year earlier. Net income for the nine months ended
September 30, 2002 was $113.3 million or $2.31 per diluted share compared to
$96.5 million or $1.94 per diluted share for the same period in the previous
year.
The increase in net income for the current quarter and nine months was driven by
growth in revenues, which rose approximately 9.0% for the period. Most of the
revenue increase came as a result of growth in net interest income due to the
benefits of a favorable interest rate environment, significant increase in
low-cost core deposits and loan growth.
During the second and third quarter periods, the Company implemented the
provisions of SFAS Nos. 142 and 147, respectively, retroactive to January 1,
2002 that decreased intangible amortization expense for the 2002 three and nine
month periods as compared to the same periods one year earlier. Refer to Note 13
of Notes to Consolidated Interim Financial Statements within this report for
information concerning the impact on earnings.
During the second quarter, the Company completed a review of the carrying value
of all its goodwill and other intangible assets in compliance with the
requirements of SFAS No. 142 and determined that a portion of goodwill related
to the acquisition of Duff & Phelps LLC was impaired. Accordingly, a one-time
transitional charge of $7.3 million, net of taxes, or $0.15 per diluted share,
was recorded retroactive to January 1, 2002.
Included in the net income for the nine months ending September 30, 2001 are a
$2.4 million expense, net of taxes, for the cumulative effect of a change in the
method of accounting relating to the implementation of SFAS No. 133 and an
extraordinary expense of $1.2 million, net of taxes, which represents costs
incurred for the early extinguishment of FHLB debt. Combined these two items
have the effect of reducing diluted per share earnings $0.07.
36
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income for the third quarter of 2002 increased $9.0 million, or
9.7%, over the same prior year period and for the nine month period increased
$29.9 million, or 11.0%, compared to the same period a year earlier. This
improvement can be attributed to the growth in earning assets together with a
significant increase in low-cost core deposits. Also contributing to the growth
in net interest income for the nine month period was the benefits of a lower
interest rate environment and the favorable impact on the net interest margin.
The net interest margin for the current quarter is 3.52 % compared to 3.54% a
year ago and for the nine month periods was 3.55% up from 3.43% for the same
period last year.
The decline in interest income and interest expense is attributable to a lower
interest rate environment in 2002 as compared to the prior year. Throughout
2001, the Board of Governors of the Federal Reserve Bank reduced interest rates
in order to stimulate economic growth. For the first nine months of 2002, the
prime interest rate averaged 4.75% compared to 7.51% during the corresponding
period a year ago. This had a significant impact on the yields on earning assets
and the cost of interest-bearing liabilities.
With a continued low interest rate environment, the Bank will experience
downward pressure on asset yields due to the repricing and prepayment of higher
yielding residential mortgages and mortgage related securities. Proceeds will be
reinvested at significantly lower yields.
INTEREST INCOME
Total interest income for the third quarter of 2002 decreased $14.6 million, or
7.7%, from the third quarter of the prior year. The decline is primarily due to
a decrease in the yield realized on interest-earning assets, which decreased by
113 basis points, a large factor in the overall reduction resulted from a 132
basis point decline in the loan portfolio yield. The yield on loans declined as
a result of the low interest rate environment during 2001 and 2002, which caused
an accelerated level of mortgage prepayments and a corresponding reinvestment
into lower yielding assets. The impact on interest income of lower yields on
interest-earning assets was partially offset by an increase in the volume
increase in average earnings assets of approximately $1.1 billion.
Total interest income for the first nine months of 2002 decreased $61.2 million,
or 10.6%, from the same period a year ago. The yield on interest-earning assets
decreased by 122 basis points, resulting in a lower level of interest income.
Again, the yield on loans was the primary factor declining 144 basis points from
the same period a year earlier. Partially offsetting the effect of lower rates
was the volume increase in average interest-earning assets of $821.5 million.
INTEREST EXPENSE
Total interest expense for the third quarter of 2002 decreased $23.6 million, or
24.8%, from the third quarter of 2001. The decrease was primarily due to a 115
basis point decrease in the overall cost of interest-bearing liabilities. The
cost of deposits and borrowings decreased 110 and 139 basis points,
respectively. The low interest rate environment was the prime factor in the
decline in interest expense, resulting as existing balances are repriced at
lower rates and new volumes were added at a much lower rate than maturing
deposits and borrowings.
Total interest expense for the first nine months of 2002 decreased $91.1
million, or 29.6%, from the same period a year earlier. The decline was
primarily due to a decrease in the overall cost of interest-bearing liabilities
of 134 basis points to 2.62%. Average interest-bearing liabilities for the
period increased $678.6 million. The short duration of the time deposits and
borrowed funds allowed Webster to lower its funding cost in a low interest rate
environment.
37
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned and paid by Webster.
THREE MONTHS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------- ------------------------------------------
Fully Tax- Fully Tax-
Average Equivalent Average Equivalent
(Dollars in thousands) Balance Interest (b) Yield Balance Interest (b) Yield
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $ 7,827,113 118,492 6.01% $ 6,932,448 127,994 7.33%
Securities and short-term investments 3,961,172 55,807 5.77(a) 3,742,996 60,883 6.57(a)
----------- --------- ----------- ----------
Total interest-earning assets 11,788,285 174,299 5.93 10,675,444 188,877 7.06
--------- ----------
Noninterest-earning assets 857,424 878,582
----------- -----------
TOTAL ASSETS $12,645,709 $11,554,026
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,310,763 36,169 1.96 $ 6,951,678 53,627 3.06
Borrowings 4,057,647 35,240 3.40 3,385,331 41,385 4.79
----------- --------- ----------- ----------
Total interest-bearing liabilities 11,368,410 71,409 2.48 10,337,009 95,012 3.63
Noninterest-bearing liabilities 76,724 81,153
----------- -----------
TOTAL LIABILITIES 11,445,134 10,418,162
Capital securities and preferred stock of
subsidiary corporation 144,041 159,577
Shareholders' equity 1,056,534 976,287
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,645,709 $11,554,026
=========== ===========
Less: Fully-taxable equivalent adjustments (300) (314)
--------- ----------
Net interest income 102,590 93,551
========= ==== ========== ====
Interest-rate spread 3.45% 3.43%
==== ====
Net interest margin 3.52% 3.54%
==== ====
(a) For purposes of this computation, unrealized gains of $93.4 million and
$35.5 million for 2002 and 2001, respectively, are excluded from the
average balance for rate calculations.
(b) On a fully tax-equivalent basis.
38
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------------
Fully Tax- Fully Tax-
Average Equivalent Average Equivalent
(Dollars in thousands) Balance Interest (b) Yield Balance Interest (b) Yield
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $ 7,377,986 344,014 6.20% $ 6,978,408 401,330 7.64%
Securities and short-term investments 4,046,727 175,346 5.87(a) 3,624,762 179,114 6.62(a)
----------- -------- ----------- ---------
Total interest-earning assets 11,424,713 519,360 6.08 10,603,170 580,444 7.30
---------
Noninterest-earning assets 853,673 905,852
----------- -----------
TOTAL ASSETS $12,278,386 $11,509,022
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,185,822 112,787 2.10 $ 6,914,972 170,765 3.30
Borrowings 3,818,572 104,034 3.60 3,410,818 137,161 5.31
----------- -------- ----------- ---------
Total interest-bearing liabilities 11,004,394 216,821 2.62 10,325,790 307,926 3.96
Noninterest-bearing liabilities 78,722 84,035
----------- -----------
TOTAL LIABILITIES 11,083,116 10,409,825
Capital securities and preferred stock of
subsidiary corporation 153,132 161,775
Shareholders' equity 1,042,138 937,422
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,278,386 $11,509,022
=========== ===========
Less: Fully-taxable equivalent adjustments (901) (812)
-------- ---------
Net interest income 301,638 271,706
======== ==== ========= ====
Interest-rate spread 3.46% 3.34%
==== ====
Net interest margin 3.55% 3.43%
==== ====
(a) For purposes of this computation, unrealized gains of $62.3 million and
$18.3 million for 2002 and 2001, respectively, are excluded from the
average balance for rate calculations.
(b) On a fully tax-equivalent basis.
39
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Net interest income 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 changes attributable to changes in volume (changes in volume
multiplied by prior rate), changes attributable to changes in rates (changes in
rates multiplied by prior volume) and the total 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.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 V. 2001 2002 V. 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
(In thousands) Rate Volume Total Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans $(24,636) 15,134 (9,502) (79,083) 21,767 (57,316)
Securities and short-term investments (8,280) 3,204 (5,076) (22,525) 18,757 (3,768)
- -----------------------------------------------------------------------------------------------------------------------------------
Total (32,916) 18,338 (14,578) (101,608) 40,524 (61,084)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (20,068) 2,610 (17,458) (64,444) 6,466 (57,978)
Borrowings (13,208) 7,063 (6,145) (47,844) 14,717 (33,127)
- -----------------------------------------------------------------------------------------------------------------------------------
Total (33,276) 9,673 (23,603) (112,288) 21,183 (91,105)
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $ 360 8,665 9,025 10,680 19,341 30,021
- -----------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $5.0 million and $13.0 million, respectively,
for the three and nine months ended September 30, 2002 compared to $4.0 million
and $10.4 million for the same periods in 2001. Management performs a quarterly
review of the loan portfolio and based on this review determines the level of
provision necessary to maintain an adequate loan loss allowance. Several factors
influenced the increase in the provision, primarily growth in the loan
portfolio, the rise in net charge-offs, the elevated level of nonaccrual loans,
and the reduced level of economic activity. For further information see the
"Loan Portfolio Review and Allowance for Loan Loss Methodology" included in the
"Financial Condition - Asset Quality" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations within this report. At
September 30, 2002 and December 31, 2001, the allowance for loan losses totaled
$116.1 million and $97.3 million, or 1.40% and 1.40% of total loans, and
represented 170% and 169% of nonperforming loans, respectively.
NONINTEREST INCOME
Total noninterest income for third quarter of 2002 increased $5.6 million, or
13.9%, from the same quarter a year ago. The increase was primarily due to
increases in securities gains of $2.3 million, financial advisory revenue of
$2.1 million, deposit fees of $1.7 million and loan and loan servicing fees of
$1.0 million. These increases were partially offset by decreases in trust and
investment services of $1.2 million and other revenues of $932,000.
Total noninterest income for the first nine months of 2002 increased $5.1
million or 4.2%, from the same period a year earlier. The increase was primarily
due to increases in loan and loan servicing fees of $2.2 million, deposit fees
of $2.8 million, financial advisory services of $2.1 million and insurance
revenue of $3.8 million. These increases were partially offset by declines trust
and investments services of $1.8 million and other income of $4.7 million. The
full period impact of the acquisition of Center Capital in March 2001 and the
acquisition of the assets of IBJ Whitehall Business Credit Corporation in August
2002, contributed to the higher level of loan fee income for the current period.
The increase in insurance revenue was partly due to the acquisitions of Wolf
Zackin and Benefits Plans Design insurance agencies in April 2001.
40
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
The lack of meaningful revenue growth in trust and investment services and
financial advisory services is primarily due to the decline in stock market
values and retail investor purchase activity and the lack of activity in the
merger and acquisition market. The trend in revenues from these areas will
continue until improvement occurs in the level of economic activity.
On October 23, 2002, Webster announced that it had acquired Flemming, Perry &
Cox, Inc., a financial planning and investment services firm that will become
part of Webster Financial Advisors. This acquisition will become part of
Trust and Investment Services and will contribute to noninterest income in this
area in future periods.
NONINTEREST EXPENSE
Total noninterest expense for the third quarter of 2002 increased $6.9 million,
or 9.0%, over the same quarter a year ago. Adjusted for the impact of SFAS Nos.
142 and 147 in 2002, which no longer requires the amortization of goodwill as an
expense, the growth in noninterest expense was $10.8 million. Most of this
increase occurred in compensation and benefits and acquisition expense.
Compensation and benefits rose $7.5 million, or 20.9%, due to merit increases,
higher staff levels in growth businesses together with increased cost of medical
and pension plans. The increase in acquisition expense is due to costs of $1.3
million that were incurred during the quarter period for the acquisition of
asset-based loans and staff of IBJ Whitehall Business Credit Corporation, which
closed on August 2, 2002.
Total noninterest expense for the first nine months of 2002 increased $7.4
million, or 3.2%, over the same period a year ago. Adjusted for the goodwill
amortization, noninterest expense growth was $18.7 million. The majority of the
increase occurred as a result of increases in compensation and benefits of $17.1
million, acquisition expense of $2.0 million and other operating expenses of
$2.1 million. The rise in compensation and benefits can be attributed to merit
increases, increase in staff and full impact of acquisitions of Center Capital
in March 2001, two insurance agencies in April 2001 and the asset-based loans
and staff from Whitehall in August 2002. The growth in other expense resulted
from increased check processing and statement rendering costs. These increases
were partially offset by branch reconfiguration expenses of $3.7 million
recognized in the first quarter of 2001.
On July 24, 2002, Webster announced effective July 1, 2002, it will begin to
expense the cost of employee stock option using SFAS No. 123 "Accounting for
Stock-Based Compensation". Under the provisions of SFAS No. 123, Webster had
previously elected to use APB No. 25 to account for employee stock-based
compensation. By electing to use the provisions of SFAS No. 123, compensation
expense will be recorded for employee stock option grants using the fair value
method and amortized over the vesting period commencing with grants made during
2002. For the current year three and nine month periods, compensation expense
for option grants was $30,900 and $542,000, respectively. Under current
guidance, the estimated impact of using SFAS No. 123 will be to reduce diluted
earnings per share by $0.01 in 2002. Refer to Note 15 of Notes to Consolidated
Financial Statements included in Webster's 2001 Annual Report on Form 10-K for
more information on the effect of electing to use SFAS No. 123 to account for
employee stock-based compensation.
INCOME TAXES
Tax expense for the three and nine month periods ended September 30, 2002 are
higher than the prior year periods primarily due to a higher level of income
before taxes. The effective tax rates for the three months ended September 30,
2002 and 2001 were approximately 32.1% and 33.7%, and for the nine months were
31.7% and 34.0%, respectively. State income tax continues to be minimized due to
the operation of a Passive Investment Company in compliance with Connecticut
Statute.
FORWARD LOOKING STATEMENTS
- --------------------------
This 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
41
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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. Some of these and other factors are discussed in
Webster's annual and quarterly reports previously filed with the Securities and
Exchange Commission. Such developments could have an adverse impact on Webster's
financial position and results of operations
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears under Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", on pages 30 through 32 under the caption
"Asset/Liability Management and Market Risk".
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains a system of internal controls and procedures
designed to provide reasonable assurance as to the reliability of our
published financial statements and other disclosures included in this
report. The Company's management, including the Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in
Rule 13a-14(c) of the Securities ad Exchange Act of 1934, as amended)
within 90 days prior to the filing date of this report. Based upon that
evaluation, Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in timely alerting
them to any material information relating to the Company and its
subsidiaries required to be included in the Company's Exchange Act
filings.
(b) Changes in Internal Controls
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of the evaluation performed by the
Company's Chief Executive Officer and Chief Financial Officer.
42
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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PART II - OTHER INFORMATION
Part II - Other Information
Item 1. Legal Proceedings - Not applicable.
Item 2 Changes in Securities and Use of Proceeds - Not applicable
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3 Defaults upon Senior Securities - Not applicable
Item 4 Submission of Matters to a Vote of Security Holders - Not applicable
Item 5 Other Information - Not applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Written Statement of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Current report on Form 8-K filed with the Securities and Exchange
Commission on July 23, 2002.
43
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: November 14, 2002 By: /s/ William J. Healy
------------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
44
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CERTIFICATION
I, James C. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Webster Financial
Corporation and Subsidiaries.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ James C. Smith
- --------------------------
James C. Smith
Chairman and Chief Executive Officer
45
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CERTIFICATION
I, William J. Healy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Webster Financial
Corporation and Subsidiaries.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William J. Healy
- -----------------------
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
46