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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended DECEMBER 31, 2002.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________.
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2476
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of Webster Financial Corporation as of June 28, 2002 was
$1,786,911,568.
The number of shares of common stock outstanding, as of March 4, 2003:
45,613,072.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 24, 2003.
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WEBSTER FINANCIAL CORPORATION
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Page
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Item 1. Business.....................................................................................................3
General.....................................................................................................3
Acquisitions................................................................................................3
Lending Activities..........................................................................................4
Insurance Services.........................................................................................11
Trust and Investment Services..............................................................................11
Financial Advisory Services................................................................................11
Investment Activities......................................................................................12
Sources of Funds...........................................................................................12
Subsidiaries...............................................................................................13
Employees..................................................................................................14
Market Area and Competition................................................................................14
Supervision and Regulation.................................................................................15
Taxation...................................................................................................16
Item 2. Properties..................................................................................................17
Item 3. Legal Proceedings...........................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.........................................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................18
Other Events...............................................................................................18
Item 6. Selected Financial Data.....................................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations.........................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................36
Item 8. Financial Statements and Supplementary Data.................................................................36
Index to Consolidated Financial Statements and Notes.......................................................36
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........................79
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................................79
Item 11. Executive Compensation......................................................................................80
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................80
Item 13. Certain Relationships and Related Transactions..............................................................80
Item 14. Controls and Procedures.....................................................................................81
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................81
Signatures...........................................................................................................85
Certifications.......................................................................................................86
Exhibits.............................................................................................................88
2
FORWARD LOOKING STATEMENTS
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This Annual Report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products services and prices. Such developments, or any combination thereof,
could have an adverse impact on Webster's financial position and results of
operations.
PART I
ITEM 1. BUSINESS
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GENERAL
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Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank (the "Bank"), Webster Insurance, Inc. ("Webster
Insurance"), Webster D&P Holdings, Inc. ("Duff & Phelps"), and Fleming, Perry &
Cox ("Fleming"), delivers financial services to individuals, families and
businesses located primarily in Connecticut and delivers equipment financing,
mortgage origination and financial advisory services to individuals and
companies located primarily in the Northeast and throughout the United States.
The Bank provides business and consumer banking, asset-based lending, mortgage
lending, trust, investment and insurance services through 111 banking offices,
219 ATMs and its Internet website (www.websteronline.com). Founded in 1935,
Webster Bank converted from a federal mutual to a federal stock institution in
1986.
Webster, on a consolidated basis, at December 31, 2002 and 2001 had total assets
of $13.5 billion and $11.9 billion, total securities of $4.1 billion and $4.0
billion and net loans receivable of $7.8 billion and $6.7 billion, respectively.
At December 31, 2002 and 2001, total deposits were $7.6 billion and $7.1
billion, respectively. At both December 31, 2002 and 2001, shareholders' equity
was $1.0 billion. During 2002, Webster repurchased 3,960,690 common shares at a
total cost of $138.5 million.
At December 31, 2002, the assets of Webster, on an unconsolidated basis ("Parent
Company"), consisted primarily of its investments in subsidiaries of $1.2
billion, investment securities of $63.7 million, cash and short-term investments
of $13.0 million, other direct investments of $17.1 million and loans receivable
of $4.0 million. Primary sources of income to Webster, on an unconsolidated
basis, are dividend payments received from the Bank and interest from and gains
on the sale of investment securities. Primary expenses are interest expense on
borrowings and capital securities and allocated operating expenses. See Notes 20
and 23 of Notes to Consolidated Financial Statements included elsewhere within
this report for additional information.
Deposits in the Bank are federally insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and at December 31, 2002 approximately 80% of the Bank's deposits
were subject to BIF assessment rates and 20% were subject to Savings Association
Insurance Fund ("SAIF") assessment rates. See the "Supervision and Regulation"
section under this Item for additional information.
Webster, as a holding company, and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision
("OTS"), as its primary federal regulator. The Bank is also subject to
regulation, examination and supervision by the FDIC as to certain matters.
Webster's executive offices are located at Webster Plaza, Waterbury, Connecticut
06702. The telephone number is (203) 578-2476.
ACQUISITIONS
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The following acquisitions were completed by Webster during 2002 and their
results of operations are included in the Consolidated Financial Statements for
periods subsequent to the date of acquisition.
FLEMING, PERRY & COX
In October 2002, Webster acquired Fleming, a financial planning and investment
services firm, to operate in partnership with Webster Financial Advisors. Based
in Norwalk, Connecticut, Fleming serves high net worth clients in the
Connecticut and surrounding states. Fleming offers financial planning,
investment management, risk management and tax and estate planning services.
Fleming operates as a direct subsidiary of Webster. The acquisition of Fleming
is another step by Webster in building a financial planning-based relationship
management group.
3
WHITEHALL BUSINESS CREDIT CORPORATION
In August 2002, Webster Bank acquired loans and certain assets from the
asset-based lending division of IBJ Whitehall Business Credit Corporation, a
subsidiary of The Industrial Bank of Japan Trust Company. These assets were
contributed to Whitehall Business Credit Corporation ("Whitehall"), which
operates as a subsidiary of the Bank with its main office in New York, New York
and additional offices in Braintree, Massachusetts and Atlanta, Georgia. Webster
acquired $451.1 million of outstanding loans and $59.5 million of letters of
credit. The acquisition of these assets and the formation of Whitehall further
develop Webster as a diversified service provider and strengthens its expanding
commercial lending products and services. At the time of the acquisition, the
Bank already had a successful Hartford, Connecticut asset-based lending
division.
For additional information on these and 2001 acquisitions, see Note 2 of Notes
to Consolidated Financial Statements included elsewhere within this report.
LENDING ACTIVITIES
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GENERAL
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total loans receivable were $7.9
billion and $6.8 billion at December 31, 2002 and 2001, respectively. The Bank
offers commercial and residential permanent and construction mortgage loans,
commercial and industrial loans, equipment financing, asset-based loans and
various types of consumer loans including home equity lines of credit, home
equity loans and other types of small business and consumer loans. At December
31, 2002 and 2001, residential loans represented 43% and 50% of Webster's loan
portfolio, respectively.
RESIDENTIAL MORTGAGE LOANS AND MORTGAGE BANKING ACTIVITY
Webster is dedicated to providing a full compliment of residential mortgage loan
products that meet the financial needs of its customers. While its primary
lending markets are Connecticut and the northeastern United States, Webster's
markets also include all states except Alaska and Hawaii. Webster offers its
customers a full range of products including conventional conforming and jumbo
fixed rate loans, conforming and jumbo adjustable rate loans, Federal Housing
Authority ("FHA"), Veterans Administration ("VA") and state agency mortgage
loans through Connecticut Housing Finance Authority ("CHFA"). Various programs
are offered to support Webster's Community Reinvestment Act goals at the state
level. Types of properties consist of one-to-four family residences, owner and
non-owner occupied, second homes, construction, permanent and improved single
family building lots. Additionally, Webster provides certain customers with an
option to modify their existing loan in order to enhance portfolio retention
strategies. Webster's distribution channels for these loans include its network
of branches, referrals, loan officers, call center, as well as third party
licensed mortgage brokers in targeted areas of the United States through its
National Wholesale Lending Group. Established in 2001 as part of Webster Bank,
the National Wholesale Lending Group enhances the level of mortgage banking
activity through the development of third party originations throughout the
United States. In 2002, it originated $2.6 billion in total residential
mortgages compared to $1.3 billion in 2001.
The Bank originates both fixed rate and adjustable rate residential mortgage
loans. At December 31, 2002, approximately $1.1 billion, or 31%, of Webster's
total residential mortgage loans held in portfolio were adjustable rate loans.
Webster offers adjustable rate mortgage loans at initial interest rates
discounted from the fully-indexed rate. Adjustable rate loans originated during
2002 and 2001, when fully-indexed, will generally be 2.75% above the constant
maturity one-year U.S. Treasury yield index. At December 31, 2002, approximately
$2.3 billion, or 69% of Webster's total residential mortgage loans had a fixed
rate. Approximately 85% of the residential mortgage portfolio is secured by
properties located in Connecticut.
At December 31, 2002, Webster had $11.3 million of mortgage servicing rights,
net, included in other assets, which had a market value of approximately $19.5
million. These servicing rights, are carried at the lower of cost or market
determined on an individual pool basis. The pools are tested for impairment
quarterly with any adjustment to the valuation allowance included in noninterest
income. Webster services approximately $1.4 billion of residential mortgage
loans for others. See Note 10 of Notes to Consolidated Financial Statements
included elsewhere within this report for additional information.
NATIONAL WHOLESALE LENDING
Webster continued to expand its National Wholesale Lending platform in 2002 and
tripled its prior year production results by originating $1.7 billion of
approved residential one-to-four family loans. These loans were originated
primarily by approved licensed mortgage brokers throughout the U.S. and
underwritten, closed and funded by the Bank. The majority of these loans were
sold into the secondary market as mortgage-backed securities. The increase in
residential loan volume was a direct result of Webster's national expansion
effort combined with a favorable interest rate environment. At December 31,
2002, Webster had $400.0 million of residential mortgage loans held for sale.
In 2002, National Wholesale Lending opened four new regional offices in Atlanta,
Georgia; Chicago, Illinois; Phoenix, Arizona and Seattle, Washington. These
offices collectively produced $768 million of closed loans in their first year
of operation, representing 45% of the total 2002 wholesale production. These
offices provide Webster with a local presence in these markets, helping attract
loan originations from these local brokers.
4
Additionally, the National Wholesale Lending Group began offering consumer loan
products in the form of home equity lines and second mortgages, producing $106.7
million in closed loan origination volume in 2002. With the maturity of these
offices and new product offerings in 2003, the wholesale platform expects
continued growth in origination volumes if interest rates remain in this
favorable interest rate environment.
Webster Bank underwrites residential mortgages in accordance with industry
standards and complies with the underwriting guidelines established for various
Federal (Fannie Mae, Freddie Mac, FHA, and VA loans) and State programs.
Specific private investor requirements may necessitate additional guidelines.
Underwriting of personal mortgages involves evaluation of the credit worthiness
of the borrower(s) and collateral through the use of independent credit
reporting agencies, analysis of personal financial information (application
data, financial statements, tax return filings), using electronic statistical
analysis and judgmental rules and obtaining and evaluating an independent
assessment of collateral value. Underwriting practices at Webster Bank
consistently follow generally accepted income standards and loan to value ratios
to allow for sale of the mortgages in the secondary market.
COMMERCIAL LENDING
The commercial loan portfolio grew 32% to $1,798.9 million at December 31, 2002
from $1,367.6 million a year earlier. Within the various lending units, loan
officers are responsible for following the underwriting guidelines set by Bank
and managing customer relationships in accordance with Bank policy. When a
lending opportunity arises, the loan officer is responsible for determining the
desirability of engaging in business with the borrower and in general, the
underwriting process should reveal the credit worthiness of the borrower and
protect the Bank's best interest. Credit underwriting requests are reviewed by
lending unit management with appropriate lending authority, and are then
presented to Credit Administration for final approval.
While every loan request entails different informational requirements, minimum
requirements have been established to properly underwrite a loan in order to
provide consistency to the underwriting and renewal process. Consistency is also
enhanced through a standard underwriting format and approval process, which
requires increasing authority as exposure or risks increase. Appropriate
analysis is performed for each credit action including, but not limited to,
analysis of financial performance (past and projected), the borrower's ability
to service debt at current and proposed levels, industry evaluation, evaluation
of guarantor financial condition (as applicable), and analysis of collateral
valuation. Credit analysis is enhanced by the use of a scoring model on loans up
to $250,000, which is used predominately in the Small Business Lending Unit.
Loan officers are held fully responsible for monitoring their loan portfolios.
These responsibilities include initial and continual risk rating of loans,
adherence to covenants, completeness and existence of documentation, maintenance
of the loan system, maintaining customer contact and updating the credit file
with substantive credit analysis. A quarterly review of the portfolio is
conducted by each officer to assign a risk rating grade to the loans and
identify potential impaired or nonaccrual loans. The assigned grades are
reviewed by both internal loan review and by the divisional credit policy
officer. In addition, the loan officer is responsible for reviewing the loan
annually to ensure that it continues to meet the quality standards of the Bank.
MIDDLE MARKET
The Middle Market Division provides a full array of financial services to a
diversified group of companies with revenues greater than $10 million, primarily
privately held and located within the State of Connecticut and nearby regions.
Reflective of the general downturn in the economy, lower utilization of existing
credit facilities and adherence to credit standards, total loans administered by
the Middle Market Division decreased to $538.9 million from $576.3 million
outstanding at the prior year end. Included in loans administered by the Middle
Market Division were $371.8 million and $356.6 million of commercial loans and
$167.1 million and $219.7 million of commercial real estate loans at December
31, 2002 and 2001, respectively. Typical loan facilities include lines of credit
for working capital, term loans to finance purchases of equipment and commercial
real estate loans for owner-occupied buildings. Unit and relationship managers
within the Middle Market Division average over 20 years of experience in the
Connecticut market.
In an effort to offer the broadest range of banking products to our customer
base, the Middle Market Division facilitates access to other specialists within
the Bank. These specialists include Webster Financial Advisors, Center Capital
Corporation, Webster Insurance and a team of cash management professionals
offering customized solutions and competitive products. Investment banking
services may be provided in close collaboration with Duff & Phelps, a subsidiary
of Webster. During 2002, the Middle Market Division funded loans of $112.4
million against commitments of $232.8 million, compared to funding of $102.2
million and commitments of $166.7 million a year earlier.
ASSET-BASED LENDING
In August 2002, Webster completed the purchase of certain loans and other assets
of IBJ Whitehall Business Credit Corporation, a subsidiary of The Industrial
Bank of Japan Trust Company. As part of the transaction, Webster retained
approximately 50 experienced asset-based lenders and operations staff. Organized
as a subsidiary of Webster Bank, Whitehall Business Credit Corporation
("Whitehall") has its offices in New York, New York; Braintree, Massachusetts
and Atlanta, Georgia. In the acquisition transaction, $451.1 million of
outstanding loans and $59.5 million of outstanding letters of credit were
acquired. This acquisition further deepened Webster's commitment to asset-based
lending. At the time of the acquisition, Webster already had a successful
Hartford, Connecticut asset-based lending division with $108.9 million in
outstanding loans at December 31, 2002.
5
Asset-based loans are generally secured by accounts receivable and inventories
of the borrower and, in some cases, also include additional collateral such as
property and equipment. At December 31, 2002 and 2001, total asset-based loans
were $465.4 million and $135.4 million, respectively. Approximately, 57% of the
commitments and 47% of the outstandings were to borrowers in the Northeast.
The Asset-Based Lending Division originates as agent, loans for its portfolio
and sells participations to other financial institutions. In addition, it
purchases participations from other banks and financial entities. In its
capacity as agent, it generally establishes depository relationships with the
borrower in the form of cash management accounts. At December 31, 2002, the
total of these deposits was $35.0 million. Asset-based loans funded in 2002 were
$78.8 million with commitments of $170.3 million.
SPECIALIZED LENDING
Webster participates in the syndicated loan market through a diversified
portfolio of loans, which represent transactions with large national borrowers
whose businesses command significant market share. These loans generally consist
of participations in revolving lines of credit or term loans with maturities up
to 7 years. Corporate utilization of the syndicated market has grown
dramatically in the last 10 years as a means of providing large credit
facilities to companies through consortiums of banks and other financial service
companies. Webster initially entered this market as a means of providing
geographic and industry diversification to the Bank's commercial loan portfolio.
It has staffed this function with highly knowledgeable individuals with
extensive experience in credit and leveraged lending at major banks and
insurance companies.
In addition to the underwriting criteria identified in Commercial Lending above,
concentration levels for each borrower in the Specialized Lending portfolio
generally will not exceed $10 million. The Bank's Chief Credit Policy Officer
and the head of Commercial Lending must approve exceptions to these limits. All
loans are evaluated in accordance with the Risk Assessment Policy of the Bank,
with external ratings (S&P and Moody's) used as additional guides. Loans in the
portfolio are actively monitored including quarterly credit reviews, analysis of
current financial statements and the comparison of results to other companies in
the same industry. Additionally, industries and sectors are also reviewed on a
regular basis to identify opportunities or developments that may impact the
portfolio.
During 2002, the Bank reduced its exposure to certain industries and sectors
through a combination of redirected cash flows and sales of loans. As part of
that strategy, during the fourth quarter, approximately $35 million of
telecommunications (wireless and other telecom) and cable loans were sold or
transferred to held for sale. Of this total, approximately $25 million had been
classified as nonperforming loans by the Shared National Credit ("SNC") Program
review during the third quarter of 2002. See "Asset Quality" and "Allowance for
Loan Losses" sections contained elsewhere within this report for additional
information.
At December 31, 2002 and 2001, the Specialized Lending Division administered
$299.8 million and $363.9 million of funded loans against commitments of $500.5
million and $568.1 million, respectively. Total funded loans represented
approximately 3.8% and 5.3% of total loans at December 31, 2002 and 2001,
respectively.
A summary of leveraged loans, by industry, administered by the Specialized
Lending Division follows:
Principal Balances Outstanding at December 31,
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INDUSTRY/SECTOR (In thousands) 2002 2001
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Manufacturing $ 69,265 105,171
Advertising and publishing 46,885 46,171
Cable 39,820 58,364
Wireless communications 37,305 58,246
Other telecommunications (a) 27,943 35,858
Radio and TV broadcasting 16,700 21,161
Energy 9,396 --
Prescription medication distribution 9,192 --
Competitive local exchange carriers 8,863 16,275
All other 34,407 22,669
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Total $ 299,776 363,915
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(a) Includes towers and integrated communication providers.
Additionally, the portfolio contained $84.9 million and $46.4 million of funded
Collateralized Loan Obligations against commitments of $91.7 million and $52.0
million at December 31, 2002 and 2001, respectively. With the exception of one
unrated $8 million loan, these loans carry an investment grade rating by at
least one of the independent rating agencies.
In addition to the loans administered by the Specialized Lending Division, the
Bank had $384.3 million in loans subject to review by the SNC Program against
commitments of $1.1 billion at December 31, 2002. These loans are located
primarily in the Northeast region and are funded through the Middle Market,
Commercial Real Estate and Asset-Based Lending Divisions. In most cases, there
is a direct calling relationship with the borrower.
6
SMALL BUSINESS BANKING
Small Business Banking ("SBB") provides a full array of commercial loan and
deposit products to small businesses and their principals through the Bank's
branches located throughout Connecticut. The SBB target market for 2002 was
expanded to reach businesses with annual revenue of up to $10 million -
providing commercial loan products with relationship exposures of up to $2
million. This market segment represents a significant percentage of commercial
businesses located within the boundaries of Connecticut. SBB, through a
dedicated group of business bankers as well as through the Bank's branch
network, provides a full range of financial products and services to its
existing customer base as well as potential new customers. It also plays a major
role in supporting the Bank's Community Reinvestment Act goals by providing
credit facilities to a wide range of small businesses, including many local
not-for-profit organizations. A Fair Isaac-based credit scoring model is
utilized, in whole or in part, in loan approvals of up to $250,000 and SBB
offers a $100,000 same-day unsecured line of credit product. SBB provides a
comprehensive set of commercial loan products including lines of credit, letters
of credit, term loans, and commercial mortgage loans. In 2002, it implemented an
automated "early warning" system to aid in the identification of potential
portfolio or customer-level credit quality issues. Through recent expansion
efforts and focused training, SBB serves as a referral source for other Bank
products including cash management, insurance, international products and
investments. The Bank also offers Small Business Administration ("SBA")
guaranteed loans under its Preferred Lender Program status. As of September 30,
2002 (the fiscal year end for the SBA), Webster Bank ranked third among SBA
lenders with 64 loans totaling $9.4 million. Customers may also take advantage
of several loan programs provided through the Connecticut Development Authority.
SBB administered a portfolio of approximately $326.3 million at December 31,
2002, a 2% decrease from $333.0 million the prior year end. Included in its
portfolio are $157.0 million of commercial loans and $169.3 million of
commercial real estate loans. Webster is a leading Connecticut-based bank for
providing loans of up to $1 million to small businesses in the state. Loans
originated during 2002 and 2001 were $85.7 million and $77.7 million,
respectively.
An objective of SBB's strategic plan is to focus on deposit growth as part of
the overall customer relationship. The Bank has developed a variety of
innovative deposit products and marketing programs that are designed to meet
depositors' needs and attract both short-term and long-term deposits. At
December 31, 2002, total small business deposit balances totaled $864.0 million
up from $729.0 million a year earlier, an increase of 19%.
EQUIPMENT FINANCING
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 equipment manufacturers, dealers and distributors with
whom it has relationships. Center Capital has grown its portfolio to $420.0
million at December 31, 2002 from $320.7 million at December 31, 2001, an
increase of 31%. For 2002, Center Capital originated $234.8 million in equipment
financing transactions.
Center Capital markets its products nationally through a network of dedicated
equipment financing sales executives who are grouped by customer type or
collateral-specific business. During 2002, financing initiatives encompassed
five distinct industry/equipment niches, each operating as a division within
Center Capital; Construction and Transportation Equipment Financing,
Environmental Equipment Financing, Machine Tool Equipment Financing,
Professional Practices Equipment Financing, and Aviation Equipment Financing
(which was added in the second quarter of 2002).
Within each division, Center Capital seeks to finance equipment and structure
terms such that the collateral remains protected throughout the term of the
transaction. It has no residual value risk on the equipment it finances. In
instances where Center Capital is forced to repossess its collateral, the value
of the repossessed equipment may approximate or exceed the defaulted contract's
remaining balance. All credit underwriting, approval, servicing and collections
are performed centrally at its headquarters in Farmington, Connecticut.
COMMERCIAL REAL ESTATE LENDING
The Commercial Real Estate Division provides variable rate and fixed rate
financing alternatives for the purpose of acquiring, developing, constructing,
improving or refinancing commercial real estate where the property is the
primary collateral securing the loan and the income which is produced from the
property and its tenants is the primary repayment source. Typically the Bank
lends investment quality real estate, including apartments, anchored retail,
industrial and office properties. Loan types include construction, construction
mini-perm and permanent loans, and loan amounts range from $2 million to $15
million and are diversified by property type and geographic location. The
lending group consists of a team of professionals with a high level of expertise
and experience. The majority of the lenders have more than 15 years of national
lending experience in both construction and permanent lending with major banks
and insurance companies.
Commercial Real Estate ("CRE") loans increased 6% to $1,029.3 million at
December 31, 2002 from $975.0 million a year earlier. Included in the $1,029.3
million of outstanding CRE loans were $167.1 million administered by the Middle
Market Division and $169.3 million by the Small Business Division. They are
primarily owner-occupied commercial real estate loans to commercial customers.
The remaining $692.9 million of loans were administered by the division. During
2002, the division funded loans of $231.0 million against commitments of $365.0
million, compared to funding of $135.0 million against commitments of $214.0
million the previous year.
7
Over the last several years, the Bank has cultivated relationships with highly
qualified regional and national developers in order to diversify the portfolio
geographically as well as to seek repetitive business and cross sell
opportunities. The Bank controls risk by utilizing personnel familiar with the
demographics of the area during the credit review process. As a result, it is
able to obtain its desired geographical diversification, while maintaining
knowledge of the specific areas when making its credit decisions.
Included in the total CRE portfolio were commercial construction loans of $116.3
million and $82.8 million at December 31, 2002 and 2001, respectively. The
division also makes acquisition, development and construction loans to
residential builders. The collateral securing these loans is improved land,
contract homes and a limited number of speculative homes in subdivision. At
December 31, 2002, there were $66.1 million of such loans in the portfolio.
A breakdown of the CRE loan portfolio by property type is as follows:
At December 31, 2002
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PROPERTY TYPE (Dollars in thousands) Amount Percent
- -------------------------------------------------------------------------------------------------------------------
Industrial $ 229,661 22.3%
Office 213,756 20.8
Retail 102,991 10.0
Multi-family 79,334 7.7
Mixed-use 76,522 7.4
Residential Development 66,104 6.4
Healthcare 57,903 5.6
Other 203,061 19.8
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Total $ 1,029,332 100.0%
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CONSUMER LENDING
Webster Bank is dedicated to providing a convenient and competitive selection of
consumer loan products to its customers. It concentrates on providing its
customers a range of products including home equity loans and equity lines of
credit as well as second mortgages and direct installment lending programs.
There are no credit card loans in the consumer loan portfolio. The loan
distribution channels consist of the branch network, loan officers, call center,
as well as third party licensed mortgage brokers. Webster's National Wholesale
Lending Group began offering home equity loans, through its broker network in
regional offices located in Phoenix, Arizona; Atlanta, Georgia; Chicago,
Illinois and Seattle, Washington during 2002. Additionally, consumer loan
products may be offered periodically through direct mail programs. The Bank also
provides the convenience of the Internet for equity loan applications that are
available in most states. Consumer loan products are underwritten in accordance
with accepted industry guidelines including, but not limited to, the evaluation
of the credit worthiness of the borrower(s) and collateral. Webster utilizes
independent credit reporting agencies and the Fair Isaac scoring model and the
analysis of personal financial information to determine the credit worthiness of
potential borrowers. Also, Webster obtains and evaluates an independent
appraisal of collateral value to determine the adequacy of the collateral.
Consumer loan volume increased significantly in 2002 and, at December 31,
consumer loans totaled $1.7 billion and represented 21% of the total loan
portfolio, compared to $1.1 billion or 16%, a year earlier. This growth is
attributable to the popularity of home equity products in this low interest rate
environment and the expansion of lending through a network of brokers in its
regional offices and in contiguous states.
CREDIT RISK MANAGEMENT
Webster Bank manages and controls risk in the loan portfolio through adherence
to consistent standards. Webster has written credit policies which establish
underwriting standards, place limits on exposure and set other limits or
standards as deemed necessary and prudent. Exceptions to the underwriting
policies arise periodically and to insure proper identification and disclosure,
Webster has established additional approval requirements and a tracking
requirement for all qualified exceptions. In addition, regular reports are made
to senior management and the Board of Directors regarding the credit quality of
the loan portfolio.
Credit Administration, which is independent of the loan production areas,
oversees the loan approval process, ensures adherence to credit policies and
monitors efforts to reduce nonperforming and classified assets.
Webster also has a Loan Review Department, which is independent of the loan
production areas and Credit Administration, that performs ongoing independent
reviews of the risk management process, adequacy of loan documentation and
assigned loan risk ratings. The results of its reviews are reported directly to
the Audit Committee of the Board of Directors.
Webster also has an Internal Audit function, which periodically reviews
Webster's business units to ensure compliance with corporate policies. The
results of these audits are reported directly to the Audit Committee of the
Board of Directors.
8
SELECTED LOAN MATURITY SCHEDULE
-------------------------------
The following table sets forth the contractual maturity and interest-rate
sensitivity of residential and commercial construction mortgage loans and
commercial loans at December 31, 2002. The contractual maturities below are
gross expected receipts from borrowers and do not reflect deferred costs and
discounts.
CONTRACTUAL MATURITY
- -------------------------------------------------------------------------------------------------------------------
One Year More than One More Than
(In thousands) or Less to Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------
Contractual Maturity
Construction loans:
Residential mortgage $ 140,712 -- -- 140,712
Commercial mortgage 32,166 54,530 29,606 116,302
Commercial loans 253,735 1,208,915 337,265 1,799,915
- -------------------------------------------------------------------------------------------------------------------
Total $ 426,613 1,263,445 366,871 2,056,929
- -------------------------------------------------------------------------------------------------------------------
Interest-Rate Sensitivity
Fixed rate $ 150,807 459,794 50,036 660,637
Variable rate 275,806 803,651 316,835 1,396,292
- -------------------------------------------------------------------------------------------------------------------
Total $ 426,613 1,263,445 366,871 2,056,929
- -------------------------------------------------------------------------------------------------------------------
9
The following table sets forth the composition of the Bank's loan portfolio in
amounts and percentages at the dates shown.
At December 31,
2002 2001 2000
-----------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,134,109 40.2% $ 3,058,662 45.5% $ 3,760,792 55.3%
Construction 142,387 1.8 223,583 3.3 302,776 4.4
Multi-family units 109,711 1.4 104,038 1.5 65,482 1.0
- ------------------------------------------------------------------------------------------------------------
Total 3,386,207 43.4 3,386,283 50.3 4,129,050 60.7
- ------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,378,936 17.7 1,046,874 15.6 1,207,398 17.8
Equipment financing 419,962 5.4 320,704 4.7 -- --
- ------------------------------------------------------------------------------------------------------------
Total 1,798,898 23.1 1,367,578 20.3 1,207,398 17.8
- ------------------------------------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 913,030 11.7 892,145 13.3 784,817 11.5
Commercial construction 116,302 1.5 82,831 1.2 72,216 1.1
- ------------------------------------------------------------------------------------------------------------
Total 1,029,332 13.2 974,976 14.5 857,033 12.6
- ------------------------------------------------------------------------------------------------------------
Consumer loans
Home equity credit loans 1,661,864 21.3 1,038,350 15.5 609,293 8.9
Other consumer 36,338 0.5 56,113 0.8 89,514 1.3
- ------------------------------------------------------------------------------------------------------------
Total 1,698,202 21.8 1,094,463 16.3 698,807 10.2
- ------------------------------------------------------------------------------------------------------------
Total loans (a) 7,912,639 101.5 6,823,300 101.4 6,892,288 101.3
Less: allowance for loan losses (116,804) (1.5) (97,307) (1.4) (90,809) (1.3)
- ------------------------------------------------------------------------------------------------------------
Loans, net $ 7,795,835 100.0% $ 6,725,993 100.0% $ 6,801,479 100.0%
- ------------------------------------------------------------------------------------------------------------
At December 31,
1999 1998
----------------------------------------------
(Dollars in thousands) Amount % Amount %
- -------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,537,038 58.8% $ 3,669,804 66.8%
Construction 302,310 5.0 200,417 3.6
Multi-family units 52,573 0.9 689 --
- -------------------------------------------------------------------------------
Total 3,891,921 64.7 3,870,910 70.4
- -------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 915,035 15.2 548,734 10.0
Equipment financing -- -- -- --
- -------------------------------------------------------------------------------
Total 915,035 15.2 548,734 10.0
- -------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 695,520 11.5 548,487 10.0
Commercial construction 45,648 0.8 67,717 1.2
- -------------------------------------------------------------------------------
Total 741,168 12.3 616,204 11.2
- -------------------------------------------------------------------------------
Consumer loans
Home equity credit loans 492,684 8.2 458,981 8.3
Other consumer 47,064 0.8 68,081 1.2
- -------------------------------------------------------------------------------
Total 539,748 9.0 527,062 9.5
- -------------------------------------------------------------------------------
Total loans (a) 6,087,872 101.2 5,562,910 101.1
Less: allowance for loan losses (72,658) (1.2) (65,201) (1.1)
- -------------------------------------------------------------------------------
Loans, net $ 6,015,214 100.0% $ 5,497,709 100.0%
- -------------------------------------------------------------------------------
(a) Net of deferred costs and discounts.
10
INSURANCE SERVICES
- ------------------
Through its wholly-owned subsidiary, Webster Insurance, Webster offers a full
range of insurance products to both businesses and individuals. A regional
insurance brokerage agency with three operating divisions: business and
professional insurance, financial services and individual and family insurance.
Insurance products and services include: commercial and personal property and
casualty insurance; life, health, disability and long-term care insurance for
individuals and businesses; annuities and investment products; risk management
services and pension and 401(k) plan administration. Webster Insurance is the
largest insurance agency based in Connecticut and is headquartered in
Wallingford with offices in several other Connecticut communities, including
Westport, Waterford and Vernon. Revenues for the year 2002 were $27.1 million,
an increase of $5.3 million, or 24%, over the prior year.
In January 2003, Webster announced the acquisition of The Mathog & Moniello
Companies, an East Haven, Connecticut-based property and casualty agency and one
of the largest workers compensation agencies in New England. Mathog & Moniello
specializes in providing risk management products and services to self-insured
businesses and groups. The agency has approximately $11.0 million in annual
revenues. With this acquisition, Webster Insurance now ranks among the nation's
top ten bank-owned insurance agencies as measured by annual revenues.
TRUST AND INVESTMENT SERVICES
- -----------------------------
The Bank offers trust and investment services through its wholly-owned
subsidiaries Webster Trust Company, N.A. ("Webster Trust") and Webster
Investment Services, Inc. ("WIS"). For the year ended December 31, 2002, revenue
from both subsidiaries was $15.9 million, compared to $18.3 million in the
previous year. This decrease was due to the decline in value in the stock market
and the shift in investor sentiment to more short-term liquid investments.
Webster Trust provides investment management and a comprehensive range of trust,
custody, estate and administrative services to high-net-worth individuals, small
to medium size companies and not-for-profit organizations (endowments and
foundations). At December 31, 2002 and 2001, there were approximately $1.1
billion and $1.1 billion of trust assets held, of which $797.0 million and
$796.3 million were under management, respectively. These assets are not
included in the Consolidated Financial Statements, since the Bank does not own
them.
Through WIS, the Bank offers securities services including brokerage and
investment advice and is a registered investment advisor. WIS has over 100
registered representatives offering customers an expansive array of investment
products including stocks and bonds, mutual funds, managed accounts and
annuities. In 2002 and 2001, $260 million and $310 million of such products were
sold, respectively.
Webster Financial Advisors ("WFA") was established to provide consumers with a
team of professionals who offer a full range of financial services for
high-net-worth individuals and institutions. WFA offers clients a comprehensive
package of products to meet all their financial needs. Services include
investment management, trust and estate planning, retirement wealth management,
tax planning and sophisticated credit and banking solutions. WFA also offers
institutional services to Connecticut businesses and not-for-profit
organizations. Based in Waterbury, it also has offices in several Connecticut
communities, including Hartford, New Haven and Stamford.
In October 2002, Webster acquired Fleming, Perry and Cox, a financial planning
and investment service firm, to be part of Webster Financial Advisors. Based in
Norwalk, Connecticut, Fleming offers financial planning, investment management,
risk management and tax and estate planning services.
During 2002, Trust and Investment Services were combined into a primary line of
business. This business line which includes WFA, Webster Trust, WIS, Fleming and
Private Banking provides comprehensive wealth management services for
individuals and institutions.
FINANCIAL ADVISORY SERVICES
- ---------------------------
Duff & Phelps provides expertise in middle-market mergers and acquisitions,
private placements, fairness opinions, valuations, ESOP and ERISA advisory
services and special financial advisory services to public and private companies
located primarily throughout the United States. Total financial advisory
services revenues for the year 2002 and 2001 were $19.3 million and $15.5
million, respectively.
During 2002, Duff & Phelps focused its efforts on valuation work rather than
mergers and acquisition which are more transactional in nature. The goal is to
establish a larger base of stable recurring fee revenue. A group of the
valuation experts within the firm have focused on SFAS No. 141 and SFAS No. 142
consulting engagements.
11
INVESTMENT ACTIVITIES
- ---------------------
Webster, either directly or through the Bank, maintains an investment portfolio
that is primarily structured to provide a source of liquidity for operating
needs, to generate interest income and to provide a means to balance
interest-rate sensitivity. The investment portfolio may be classified into three
major categories consisting of: available for sale, held to maturity and trading
securities. On January 1, 2001, as permitted by the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Webster reclassified all held
to maturity securities to available for sale. At December 31, 2002, the combined
investment portfolios of Webster and the Bank totaled $4.1 billion, with $4.0
billion and $63.7 million held by the Bank and Parent Company, respectively. At
December 31, 2001, the combined investment portfolios of the Bank and Parent
Company totaled $4.0 billion, with $3.9 billion and $83.2 million held by the
Bank and Parent Company, respectively. At December 31, 2002 and 2001, the Bank's
portfolio consisted primarily of mortgage-backed securities. At December 31,
2002 and 2001, the Parent Company's portfolio was classified as available for
sale and consisted primarily of equity and corporate trust preferred securities.
See Note 4 of Notes to Consolidated Financial Statements contained elsewhere
within this report for security maturity data, as well as other additional
information.
The Bank may acquire, hold and transact various types of investment securities
in accordance with applicable federal regulations, state statutes and within the
guidelines of its internal investment policy. The type of investments that the
Bank may invest in include: interest-bearing deposits of federally insured
banks, federal funds, U.S. government treasury and agency securities, including
mortgage-backed securities ("MBS") and collateralized mortgage obligations
("CMOs"), private issue MBSs and CMOs, municipal securities, corporate debt,
commercial paper, banker's acceptances, trust preferred securities, mutual funds
and equity securities subject to restrictions applicable to federally chartered
institutions. Webster's asset/liability management objectives also influence
investment activities at both the Parent Company and Bank. While there may be no
statutory limit on certain categories of investments, the OTS may establish an
individual limit on such investments, if the concentration in such investments
presents a safety and soundness concern.
The Bank has the ability to use the investment portfolio as well as
interest-rate financial instruments, within internal policy guidelines, to hedge
and manage interest-rate risk as part of its asset/liability strategy. See Note
15 of Notes to Consolidated Financial Statements contained elsewhere within this
report.
The securities portfolios of Parent Company and the Bank are managed by the
Bank's Treasury Group in accordance with regulatory guidelines and established
internal corporate investment policies. These policies and guidelines include
limitations on aspects such as investment grade, concentrations and investment
type to help manage risk associated with investing in securities.
SOURCES OF FUNDS
- ----------------
Cash flows from deposits, loan and mortgage-backed security repayments,
securities sales proceeds and maturities, borrowings and earnings are the
primary sources of the Bank's funds available for use in its lending and
investment activities and in meeting its operational needs. While scheduled loan
and security repayments are a relatively stable source of funds, deposit flows
and loan and investment security prepayments are influenced by prevailing
interest rates and local economic conditions. The Bank's borrowings primarily
include Federal Home Loan Bank ("FHLB") advances and repurchase agreement
borrowings. See Notes 12 and 13 of Notes to Consolidated Financial Statements
contained elsewhere within this report for further borrowing information.
The Bank attempts to control the flow of funds in its deposit accounts according
to its need for funds and the cost of alternative sources of funding. A Retail
Pricing Committee meets regularly to determine pricing and marketing
initiatives. Webster influences the flow of funds primarily by the pricing of
deposits, which is affected to a large extent by competitive factors in its
market area and asset/liability management strategies.
The main sources of liquidity at the Parent Company are dividends from the Bank,
interest and dividends on securities and net proceeds from borrowings and
capital offerings. The main outflows of funds are dividend payments to common
shareholders and interest expense on capital securities, senior notes and other
borrowings.
DEPOSIT ACTIVITIES
The Bank continues to develop a variety of deposit programs designed to meet
customer's financial needs. A key strategic goal is to retain existing core
deposit balances while attracting new customers to grow both short and long term
deposits. During the third quarter, in an effort to attract new deposits, a High
Performance Checking account program was introduced that offers a full line of
accounts with varying features including both "free checking" without interest
as well as several interest-bearing accounts. Savings accounts include both
statement and passbook accounts as well as money market account and premium rate
money market accounts. In addition, a variety of certificate of deposits that
include both short and long-term maturity as well as options such as six month
deferred interest payments and "bump-up" rate options are offered to consumers.
The Bank continues to offer special IRA products, which include savings
accounts, certificate of deposits and rollover for individuals who receive lump
sum distributions. Checking and savings products offer a variety of features
including ATM and check card use, direct deposit, ACH payments, combined
statements, automated telephone banking services, Internet-based banking, bank
by mail as well as overdraft protection via a line of credit or transfer from
another deposit account.
12
The Bank receives retail and commercial deposits through its main office and 110
other banking offices throughout Connecticut. Deposit customers can access their
account in a variety of ways including branch banking, ATMs, web banking,
telephone banking or the Internet. Effective advertising, good service and
competitive pricing policies are strategies that attract and retain deposits. In
addition, the Bank also receives commercial deposits in the same manner and
offers a variety of commercial accounts to meet business customers' financial
needs.
Although not an integral part of its deposit gathering strategies, from time to
time, brokered deposits are used as a means of funds generation. As with any
other funding source, the Bank considers its needs, relative cost and
availability in determining the suitability of brokered deposits. At December
31, 2002, outstanding brokered deposits totaled $12.9 million.
Customer services also include 219 ATM facilities with membership in NYCE and
PLUS networks and provide 24-hour access to linked accounts. The Internet
banking service allows, among other things, customers the ability to open an
account, transfer money between accounts, review statements, check balances and
pay bills through the use of a personal computer. The telephone banking service
provides automated customer access to account information 24 hours per day,
seven days per week, and to service representatives at certain established
hours. Customers can transfer account balances, process stop payments and
address changes, place check reorders, open deposit accounts, inquire about
account transactions and request general information about the Bank's products
and services. The Bank's services provide for automatic loan payment features
from its accounts as well as for direct deposit of Social Security, payroll, and
other retirement benefits. See Note 11 of Notes to Consolidated Financial
Statements contained elsewhere within this report for additional deposit
information.
BORROWINGS
The Bank is a member of the Federal Home Loan Bank ("FHLB") system which
functions in a reserve credit capacity for regulated, federally insured
depository institutions and certain other home financing institutions. Members
of the system are required to own capital stock in the FHLB and are authorized
to apply for advances on the security of their FHLB stock and certain home
mortgages and other assets (principally securities, which are obligations of, or
guaranteed by, the United States Government or its agencies) provided certain
creditworthiness standards have been met. Under its current credit policies, the
FHLB limits advances based on a member's assets, total borrowings and net worth.
The Bank utilizes long-term and short-term FHLB advances as a source of funding
to meet liquidity and planning needs when the cost of these funds are favorable
as compared to alternate funding sources. At December 31, 2002 and 2001, FHLB
advances totaled $2.2 billion and $2.5 billion and represented 49% and 72%,
respectively, of total outstanding borrowed funds.
Additional funding sources are available through securities sold under agreement
to repurchase, purchased federal funds and lines of credit with correspondent
banks. Outstanding borrowings through securities sold under agreement to
repurchase totaled $1.5 billion and $571.7 million at December 31, 2002 and
2001, respectively and represented 32% and 16% of total borrowed funds,
respectively. Other borrowings were $839.0 million and $430.5 million at
December 31, 2002 and 2001 and represented 19% and 12%, respectively, of total
borrowed funds. See Notes 12 and 13 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further borrowing
information.
In January 2003, Webster Bank completed an offering of $200.0 million of
subordinated notes. The notes have an interest rate of 5.875% and mature on
January 15, 2013. The offering enables Webster to increase its total risk-based
capital ratio and fund strategic growth initiatives. See Note 24 of Notes to
Consolidated Financial Statements contained elsewhere within this report.
In November 2000, Webster Bank completed a registered offering of $126.0 million
of 8.72% Senior Notes due 2007 (the "Senior Notes"). The net proceeds from the
notes were used for general corporate purposes. The Senior Notes are not
redeemable prior to the maturity date of November 30, 2007.
Additional funding is also provided by capital securities of subsidiary trusts.
During 1997, Webster and a purchased entity formed statutory business trusts,
which issued $150.0 million of trust securities and invested the proceeds in an
equivalent amount of subordinated debt of Webster. The trust securities, which
carry rates ranging from 9.36% to 10%, mature in 2027. During 2002, Webster
repurchased $28.7 million of the capital securities and, at December 31, 2002,
the remaining outstanding balance totaled $121.3 million.
SUBSIDIARIES
- ------------
Below is a brief description of certain other subsidiaries of Webster and the
Bank.
The Bank's investment in Webster Mortgage Investment Corporation ("WMIC"), a
passive investment subsidiary, totaled $3.8 billion and $2.5 billion at December
31, 2002 and 2001, respectively. The primary function of this subsidiary is to
provide servicing on passive investments, which include loans secured by real
estate. During 2002, $2.1 billion of residential, commercial real estate and
home equity loans were sold or transferred to WMIC from the Bank. This passive
investment company derives state income tax benefits for the Bank.
13
The Bank's investment in Webster Preferred Capital Corporation, a real estate
investment trust ("REIT"), totaled $621.4 million and $918.8 million at December
31, 2002 and 2001, respectively. The Bank owns 100% of the REIT's common stock,
while the preferred stock is held by third-party investors. The REIT's strategy
is to acquire, hold and manage real estate mortgage assets. During 2002, the
Bank received a $300.0 million return of capital dividend from the REIT, as
these excess funds were not needed for the daily operation of the subsidiary. No
loans were sold or transferred to the REIT from the Bank during 2002.
Retail Banking
Retail banking services are chiefly provided by Webster's subsidiaries, Webster
Bank and Webster Insurance. Webster Insurance offers a full range of insurance
products to both businesses and individuals through its three operating
divisions: business and professional insurance, financial services and
individual and family insurance. The Bank or its subsidiaries provide business
and consumer banking, asset-based lending, mortgage lending, trust, investment
and insurance services through 111 banking offices and investment offices
including trust and investment services, 219 ATMs and the Internet. Among the
Bank's retail banking activities are the following significant subsidiaries.
Commercial Lending
Webster Bank provides additional commercial lending capabilities through its
subsidiaries, Center Capital and Whitehall. Center Capital is an equipment
financing concern which provides funding to end users of equipment in five
distinct industry niches. Whitehall is an asset-based lender whose loans are
generally secured by accounts receivable and inventories of the borrower.
Trust and Investment Services
Webster provides comprehensive wealth management services for individuals and
institutions through Bank subsidiaries Webster Trust, Webster Investment
Services and Fleming, Perry and Cox.
EMPLOYEES
- ---------
At December 31, 2002, Webster had 2,708 employees (including 280 part-time
employees), none of whom were represented by a collective bargaining group.
Webster maintains a comprehensive employee benefit program providing, among
other benefits, group medical and dental insurance, life insurance, disability
insurance, a pension plan, an employee 401(k) investment plan and an employee
stock purchase plan. Management considers Webster's relations with its employees
to be good. See Note 18 of Notes to Consolidated Financial Statements contained
elsewhere within this report for additional information on certain benefit
programs.
MARKET AREA AND COMPETITION
- ---------------------------
At December 31, 2002, Webster had 111 branch offices, which includes: 31 banking
offices, including its main office, in New Haven County; 49 banking offices in
Hartford County; 16 banking offices in Fairfield County; 8 banking offices in
Litchfield County; 4 banking offices in Middlesex County; 2 banking offices in
Tolland County and 1 banking office in New London County. The Bank's market area
has a diversified economy with the workforce employed primarily in
manufacturing, financial services, healthcare, industrial and technology
companies.
The Bank faces substantial competition for deposits and loans throughout its
market areas. The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations, automated services and office hours. Competition for
deposits comes primarily from other savings institutions, commercial banks,
credit unions, mutual funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees, the
quality and range of lending services and personalized service. Competition for
origination of first mortgage loans comes primarily from other savings
institutions, mortgage banking firms, mortgage brokers, commercial banks and
insurance companies. The Bank faces competition for deposits and loans, both
retail and commercial, throughout its market area not only from local
institutions but also from out-of-state financial institutions which have opened
loan production offices or which solicit each business in its market area.
Webster Financial Advisors has offices in Hartford, New Haven, Stamford and
Waterbury, Connecticut. Webster Investment Service's administrative, operations
and compliance departments are headquartered in Bristol, Connecticut with sales
offices located throughout Webster's branch network. Webster Insurance is
headquartered in Wallingford, Connecticut with offices in Harrison, New York;
East Haven, Vernon, Westport, West Hartford and Waterford, Connecticut. Duff &
Phelps is headquartered in Chicago, Illinois with offices in Los Angeles,
California; New York, New York and Seattle, Washington. Center Capital is
headquartered in Farmington, Connecticut with offices in Blue Bell,
Pennsylvania; Schaumburg, Illinois; Westboro, Massachusetts; Bedford, Texas and
Brookfield, Connecticut. Whitehall is headquartered in New York, New York with
offices in Braintree, Massachusetts and Atlanta, Georgia. The National Wholesale
Lending Group maintains offices in Atlanta, Georgia; Chicago, Illinois; Phoenix,
Arizona and Seattle, Washington.
14
SUPERVISION AND REGULATION
- --------------------------
Webster, as a savings and loan holding company, and Webster Bank, as a federally
chartered savings bank, are subject to extensive regulation, supervision, and
examination by the OTS as their primary federal regulator. The Bank also is
subject to regulation, supervision, and examination by the FDIC and as to
certain matters by the Board of Governors of the Federal Reserve System. Webster
Trust, as a national bank engaged in trust activities, is subject to extensive
regulation, supervision and examination by the Office of the Comptroller of the
Currency ("OCC"). Webster Investment Services, Inc. ("WIS") is registered as a
broker-dealer and investment advisor and is subject to extensive regulation,
supervision, and examination by the Securities and Exchange Commission ("SEC").
WIS also is a member of the National Association of Securities Dealers, Inc.
("NASD"), and is subject to its regulation. Fleming, Perry and Cox ("Fleming")
also is registered as an investment advisor and is a member of the NASD, and it
is subject to extensive regulation, supervision and examination by the SEC and
to regulation by the NASD. WIS is authorized to engage as a broker-dealer and
the Bank as an underwriter of municipal securities, and as such they are subject
to regulation by the Municipal Securities Rulemaking Board. Webster Insurance is
a licensed insurance agency with offices in the state of Connecticut and is
subject to registration and supervision by the State of Connecticut Department
of Insurance.
The Bank is subject to substantial regulatory restrictions on its ability to pay
dividends to the Parent Company. Under OTS capital distribution regulations, the
Bank may pay dividends to Webster without prior regulatory approval so long as
it meets its applicable regulatory capital requirements before and after payment
of the dividends and its total dividends do not exceed its net income to date
over the calendar year plus retained net income over the preceding two years.
The OTS has discretion to prohibit any otherwise permissible capital
distributions on general safety and soundness grounds, and must be given 30 days
advance notice of all capital distributions, during which time it may object to
any proposed distribution. At December 31, 2002, the Bank had the ability to pay
dividends of $96.3 million to Webster without the prior approval of the OTS.
Under the Gramm-Leach-Bliley Act, all financial institutions, including Webster,
the Bank, Webster Trust, and their subsidiaries, are required to establish
policies and procedures to restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request and to protect customer data
from unauthorized access. Webster has developed such policies and procedures for
itself and its subsidiaries, including the Bank and Webster Trust, and believes
it is in compliance with all privacy provisions of the Gramm-Leach-Bliley Act.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, adopted as Title III of the USA PATRIOT Act, all financial
institutions, including Webster, the Bank, and Webster Trust, are required to
take certain measures to identify their customers, prevent money laundering,
monitor customer transactions and report suspicious activity to U.S. law
enforcement agencies. Financial institutions also are required to respond to
requests for information from federal banking regulatory authorities and law
enforcement agencies, and information-sharing among financial institutions is
encouraged by an exemption for complying financial institutions from the privacy
provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial
institutions that hold correspondent accounts for foreign banks or provide
private banking services to foreign individuals are required to take measures to
avoid dealing with certain foreign individuals or entities, including foreign
banks with profiles that raise money laundering concerns, and dealings with
"shell banks," defined as a foreign bank with no physical presence in any
country, are barred altogether. The Secretary of the Treasury has adopted
regulations to implement several of these provisions. All financial institutions
also are required to establish internal anti-money laundering programs. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank and
Webster Trust, which applies to Webster. Webster, the Bank, and Webster Trust
have in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and
they engage in very few transactions of any kind with foreign financial
institutions or foreign persons.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
("Act"). The stated goals of the Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
The Act is the most far-reaching U.S. securities legislation enacted in some
time. It generally applies to all companies, both U.S. and non-U.S., that file
or are required to file periodic reports with the SEC under the Securities
Exchange Act of 1934 ("Exchange Act"). Given the extensive SEC role in
implementing rules relating to many of the Act's new requirements, the final
scope of these requirements remains to be determined.
The Act includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. The Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
15
The Act addresses, among other matters:
o audit committees for all reporting companies;
o certification of financial statements by the chief executive officer and
the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
o a prohibition on insider trading during pension plan black out periods;
o disclosure of off-balance sheet transactions;
o expedited filing requirements for Forms 4's;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o "real time" filing of periodic reports;
o the formation of a public accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities laws.
The Act contains provisions which became effective upon enactment on July 30,
2002 and provisions which will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.
AVAILABILITY OF SEC FILINGS
Webster's financial reports can be accessed free of charge through its website
(www.wbst.com or www.websteronline.com) within 24 hours of filing with the SEC.
The SEC maintains an Internet site (www.sec.gov) in which all forms filed
electronically may be accessed. Webster's financial reports are also available
upon written request to the Company.
TAXATION
- --------
FEDERAL
Except for Duff & Phelps, LLC, and the Bank's REIT subsidiary, Webster and its
subsidiaries file a consolidated calendar year U.S. Corporation Income Tax
Return in accordance with the provisions of the Internal Revenue Code and U.S.
Treasury Regulations. Duff & Phelps, LLC, and the Bank's REIT subsidiary are
required to file separate federal tax returns.
Webster's federal income tax returns have been examined by the Internal Revenue
Service ("IRS"), and the respective statute of limitation periods have expired,
for all tax years through 1998. During 2001, the IRS completed its examination
of the REIT's 1997 and 1998 tax returns, resulting in no adjustment. During
2002, the IRS completed its examination of Webster's consolidated 1997 and 1998
tax returns, resulting in no significant adjustments. Also during 2002, the IRS
commenced an examination of Webster's consolidated 1999, 2000 and 2001 tax
returns.
STATE/LOCAL
With the Bank's 2001 acquisition of Center Capital, its 2002 acquisition of
Whitehall and the continued expansion of its National Wholesale Lending
activities, the Company has become subject to various forms of state and local
taxation throughout the United States. Prior to 2002, Webster was subject to
minimal state taxation, principally in Connecticut.
In Connecticut, legislation enacted in 1998 provided for the formation of a
Passive Investment Company ("PIC") by a financial service company ("FSC"). The
legislation, effective in 1999, allows for the exemption of a PIC, and a
qualified FSC's receipt of dividend income from a PIC, from the Connecticut
Corporation Business Tax. The Bank, a qualified FSC, formed a PIC subsidiary
(Webster Mortgage Investment Corporation) that began operation during 1999.
For additional information related to Webster's income taxes, see Note 8 of
Notes to Consolidated Financial Statements contained elsewhere within this
report.
16
ITEM 2. PROPERTIES
- ------------------
At December 31, 2002, Webster had 111 branch offices, which includes: 31 banking
offices, including its main office, in New Haven County; 49 banking offices in
Hartford County; 16 banking offices in Fairfield County; 8 banking offices in
Litchfield County; 4 banking offices in Middlesex County; 2 banking offices in
Tolland County and 1 banking office in New London County. Of these, 54 offices
are owned and 57 offices are leased. Lease expiration dates range from 1 to 85
years with renewal options of 3 to 35 years. Additionally, the Bank maintains
four trust offices: one in Fairfield County, one in Hartford County and two in
New Haven County.
Webster also maintains offices through the following subsidiaries. Webster
Insurance has offices in Harrison, New York; East Haven, Vernon, Wallingford,
Waterford, Westport and West Hartford, Connecticut. Duff & Phelps has offices in
Chicago, Illinois; Los Angeles, California; New York, New York and Seattle,
Washington. Center Capital has offices in Blue Bell, Pennsylvania; Schaumburg,
Illinois; Westboro, Massachusetts; Bedford, Texas; Brookfield, Connecticut and
is headquartered in Farmington, Connecticut. Whitehall is headquartered in New
York, New York with offices in Braintree, Massachusetts and Atlanta, Georgia.
The National Wholesale Lending Group maintains offices in Atlanta, Georgia;
Chicago, Illinois; Phoenix, Arizona and Seattle, Washington.
The total net book value of properties and furniture and fixtures owned and used
for banking and trust offices at December 31, 2002 was $84.7 million. The
following table provides detail for the total net book value amount.
(In thousands) At December 31, 2002
- -------------------------------------------------------------------------------
Land & improvements, net $ 11,646
Buildings & improvements, net 38,005
Leasehold improvements, net 5,732
Furniture & equipment, net 29,300
- -------------------------------------------------------------------------------
Total $ 84,683
- -------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incident to the registrant's business, to which the Company is a
party or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
During the fourth quarter of 2002, no matters were submitted to a vote of our
security holders.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
MARKET INFORMATION
On October 17, 2002, the common shares of Webster began trading on the New York
Stock Exchange under the symbol "WBS". Prior to October 17, 2002, the shares
traded on the Nasdaq National Market System under the symbol "WBST".
The following table sets forth the quarterly high, low and dividends declared
per share of common stock for the years ended December 31, 2002 and 2001,
respectively. On March 17, 2003, the closing market price of Webster common
stock was $35.52. Webster increased its quarterly dividend in the second quarter
of 2001 to $.17 per share and to $.19 per share in the second quarter of 2002.
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK (PER SHARE)
Market Price Dividends
2002 High Low Declared
- -------------------------------------------------------------------------------------------------------------------
First quarter $ 37.45 $ 31.18 $ 0.17
Second quarter 39.96 36.77 0.19
Third quarter 38.89 31.95 0.19
Fourth quarter 35.46 30.65 0.19
Market Price Dividends
2001 High Low Declared
- -------------------------------------------------------------------------------------------------------------------
First quarter $ 30.31 $ 26.44 $ 0.16
Second quarter 33.74 27.75 0.17
Third quarter 37.06 28.16 0.17
Fourth quarter 34.08 29.23 0.17
HOLDERS
Webster had approximately 11,000 shareholders of common stock at March 4, 2003.
The number of shareholders of record was determined by Webster's stock transfer
agent, American Stock Transfer and Trust Company.
DIVIDENDS
Payment of dividends from the Bank to Webster is subject to certain regulatory
and other restrictions. Payment of dividends by Webster on its stock is subject
to various restrictions, none of which is expected to limit any dividend policy
that the Board of Directors may in the future decide to adopt. Under Delaware
law, Webster may pay dividends out of its surplus or, in the event there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If the capital of the corporation has
diminished by depreciation in the value of its property or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, no dividends may be paid out of net
profits until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets has been repaired. See "Supervision and Regulation" section contained
elsewhere within this report for additional information on dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The information is incorporated by reference to the Company's definitive proxy
statement for its annual meeting of shareholders to be held on April 24, 2003.
OTHER EVENTS
The annual meeting of shareholders of Webster will be held on Thursday, April
24, 2003.
18
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
December 31,
----------------------------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
Total assets $ 13,468,004 11,857,382 11,249,508 9,931,744 9,836,029
Loans, net 7,795,835 6,725,993 6,801,479 6,015,214 5,497,709
Securities 4,124,997 3,999,133 3,405,080 3,066,901 3,662,829
Goodwill and intangible assets 297,359 320,051 326,142 138,829 83,227
Deposits 7,606,122 7,066,471 6,981,128 6,232,696 6,347,644
FHLB advances and other borrowings 4,455,669 3,533,364 3,030,225 2,788,445 2,575,608
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts 121,255 150,000 150,000 150,000 150,000
Preferred stock of subsidiary corporation 9,577 9,577 49,577 49,577 49,577
Shareholders' equity 1,035,458 1,006,467 890,374 635,667 626,454
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
Net interest income $ 405,728 367,479 326,516 303,513 282,611
Provision for loan losses 29,000 14,400 11,800 9,000 8,103
Noninterest income 185,572 162,098 128,821 92,630 82,638
Noninterest expenses:
Acquisition-related expenses 1,965 -- -- 9,500 20,993
Branch reconfiguration -- 3,703 -- -- --
Other noninterest expenses 326,358 305,229 267,130 234,961 208,440
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 328,323 308,932 267,130 244,461 229,433
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
method 233,977 206,245 176,407 142,682 127,713
Income taxes 73,965 69,430 58,116 47,332 49,694
- ---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 160,012 136,815 118,291 95,350 78,019
Extraordinary item - early extinguishment of
debt (net of taxes) -- (1,209) -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (7,280) (2,418) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 152,732 133,188 118,291 95,350 78,019
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net income per share - Basic $ 3.21 2.71 2.58 2.14 1.72
Net income per share - Diluted 3.16 2.68 2.55 2.10 1.69
Dividends declared per common share 0.74 0.67 0.62 0.47 0.44
Book value per common share 22.69 20.48 18.19 14.09 14.02
Tangible book value per common share 16.18 13.97 11.53 11.02 12.16
Diluted weighted-average shares 48,392 49,743 46,428 45,393 46,118
KEY PERFORMANCE RATIOS
Return on average assets 1.22% 1.15 1.11 0.98 0.77
Return on average shareholders' equity 14.72 13.88 16.72 15.33 12.82
Net interest margin 3.50 3.48 3.29 3.32 2.97
Interest-rate spread 3.43 3.38 3.17 3.19 2.83
Fee revenue as a percentage of total revenue 28.56 29.19 26.13 22.55 18.84
Average shareholders' equity to average assets 8.27 8.32 6.65 6.38 6.04
Dividend payout ratio 23.42 25.00 24.31 22.38 26.04
ASSET QUALITY RATIOS
Allowance for loan losses/total loans 1.48% 1.43 1.32 1.19 1.17
Net charge-offs/average loans 0.18 0.14 0.07 0.09 0.32
Nonperforming loans/total loans 0.55 0.84 0.60 0.64 0.57
Nonperforming asset/total assets 0.37 0.53 0.39 0.44 0.38
19
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------------------
Selected quarterly data for 2002 and 2001 follows:
First* Second* Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
2002:
- -----
Interest income $ 171,093 173,367 173,999 173,575
Interest expense 74,610 70,802 71,409 69,485
- -------------------------------------------------------------------------------------------------------------------
Net interest income 96,483 102,565 102,590 104,090
Provision for loan losses 4,000 4,000 5,000 16,000
Gains on sale of investment securities, net 3,405 1,126 4,912 13,934
Fee revenue 38,078 38,489 41,195 44,433
Noninterest expenses 76,199 78,843 84,129 89,152
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting method 57,767 59,337 59,568 57,305
Income taxes 18,152 18,765 19,144 17,904
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 39,615 40,572 40,424 39,401
Cumulative effect of change in method of accounting
(net of taxes) (7,280) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 32,355 40,572 40,424 39,401
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ .66 .83 .85 .86
- -------------------------------------------------------------------------------------------------------------------
Diluted .65 .82 .84 .85
- -------------------------------------------------------------------------------------------------------------------
* The first and second quarters of 2002 were restated upon the adoption of SFAS
No. 123 on July 1, 2002 and SFAS No. 147 on September 30, 2002, as required
by the Statements.
2001:
- -----
Interest income $ 196,612 194,457 188,628 177,538
Interest expense 108,901 104,013 95,012 81,830
- -------------------------------------------------------------------------------------------------------------------
Net interest income 87,711 90,444 93,616 95,708
Provision for loan losses 3,200 3,200 4,000 4,000
Gains on sale of investment securities, net 4,249 1,794 2,566 2,012
Fee revenue 35,237 40,309 37,925 38,006
Noninterest expenses 78,220 76,304 77,266 77,142
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting method 45,777 53,043 52,841 54,584
Income taxes 15,167 18,539 17,810 17,914
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 30,610 34,504 35,031 36,670
Extraordinary item - early extinguishment of debt
(net of taxes) (1,209) -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (2,418) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 26,983 34,504 35,031 36,670
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ .55 .70 .71 .75
- -------------------------------------------------------------------------------------------------------------------
Diluted .54 .69 .70 .74
- -------------------------------------------------------------------------------------------------------------------
The first quarter of 2001 included in noninterest expense a nonrecurring charge
of $3.7 million for branch reconfiguration expenses.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Webster Financial Corporation and the notes thereto
(collectively, the "Financial Statements").
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments, are as follows:
ALLOWANCE FOR LOAN LOSSES
Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment. The Company's allowance for loan losses provides for
probable losses based upon evaluations of known and inherent risks in the loan
portfolio. Management uses historical information to assess the adequacy of the
allowance for loan losses as well as the prevailing business environment; as it
is affected by changing economic conditions and various external factors, which
may impact the portfolio in ways currently unforeseen. The allowance is
increased by provisions for loan losses and by recoveries of loans previously
charged-off and reduced by loans charged-off. For a full discussion of the
Company's methodology of assessing the adequacy of the allowance for loan
losses, see the "Asset Quality" section elsewhere within this Management's
Discussion and Analysis of Financial Condition and Results of Operation.
INCOME TAXES
The Company accounts for income taxes by deferring income taxes based on
estimated future tax effects of differences between the tax and book basis of
assets and liabilities considering the provisions of enacted tax laws. These
differences result in deferred tax assets and liabilities, which are included in
the Company's consolidated balance sheets. The Company must also assess the
likelihood that any deferred tax assets will be recovered from future taxable
income and establish a valuation allowance for those assets determined to not
likely be recoverable. Management judgment is required in determining the amount
and timing of recognition of the resulting deferred tax assets and liabilities.
The actual realization of the assets could differ materially from that
recognized if actual factors and conditions differ from those used by
management. These factors and conditions include federal and state tax laws and
regulations and future level of Webster's taxable income.
VALUATION OF GOODWILL/INTANGIBLE ASSETS AND ANALYSIS FOR IMPAIRMENT
Webster, in part, has increased its market share through acquisitions accounted
for under the business combinations method of accounting, as well as from the
purchase of financial institution's branches and selected assets (not entire
institution). For acquisitions under the purchase method and the acquisition of
financial institution branches, the Company is required to record assets
acquired and liabilities assumed at their fair value which is an estimate
determined by the use of internal or other valuation techniques. These valuation
estimates result in goodwill and other intangible assets. Goodwill is subject to
ongoing periodic impairment tests and is evaluated using various fair value
techniques including multiples of price/equity and price/earnings ratios. For a
discussion of impairment testing methodology, see Note 9 of Notes to
Consolidated Financial Statements included elsewhere within this report.
PENSION AND OTHER POST RETIREMENT BENEFITS
The determination of the Company's obligation and expense for pension and other
post-retirement benefits is dependent upon certain assumptions used by actuaries
in calculating such amounts. Key assumptions used in the actuarial valuations
include the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation and health care costs. Actual results could
differ from the assumptions and market driven rates may fluctuate. Significant
differences in actual experience or significant changes in the assumptions may
materially affect the future pension and other post-retirement obligations and
expense.
21
The following table shows the major categories of average assets and average
liabilities together with their respective fully taxable-equivalent interest
income or expense and the average yield or cost, for the three years ended
December 31, 2002.
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
Average Average Average Average
(Dollars in thousands) Balance Interest Yields Balance Interest Yields
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, net (a) $ 7,451,356 454,672(b) 6.10% $ 6,896,580 515,465(b) 7.47%
Loans held for sale 177,942 9,730 5.47 72,901 4,465 6.12
Securities and short-term investments 4,047,754 228,857 5.75(c) 3,667,917 238,423 6.56(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 11,677,052 693,259 5.97(c) 10,637,398 758,353 7.15(c)
Other assets 870,900 896,052
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,547,952 $ 11,533,450
- ---------------------------------------------------------------------------------------------------------------------------------
Savings and escrow $ 1,629,558 20,591 1.26% $ 1,505,110 26,699 1.77%
Money market savings, NOW and DDA 2,825,081 28,930 1.02 2,217,320 29,861 1.35
Time deposits 2,810,220 96,641 3.44 3,207,112 159,775 4.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 7,264,859 146,162 2.01 6,929,542 216,335 3.12
FHLB advances 2,337,688 102,789 4.40 2,011,440 112,784 5.61
Repurchase agreements and other borrowings 1,555,552 26,195 1.68 1,258,247 49,475 3.93
Senior notes 126,000 11,160 8.86 126,000 11,162 8.86
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,284,099 286,306 2.54 10,325,229 389,756 3.77
Other liabilities 76,914 87,530
Capital securities and minority interest 149,666 161,221
Shareholders' equity 1,037,273 959,470
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,547,952 406,953 $ 11,533,450 368,597
- ---------------------------------------------------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (1,225) (1,118)
------- -------
Net interest income 405,728 367,479
Interest rate spread 3.43%(c) 3.38%(c)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.50%(c) 3.48%(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ------------------------------------------------------------------------------------------
2000
Average Average
(Dollars in thousands) Balance Interest Yields
- ------------------------------------------------------------------------------------------
Loans, net (a) $ 6,530,404 517,791(b) 7.93%
Loans held for sale 11,255 538 4.78
Securities and short-term investments 3,298,959 220,961 6.51(c)
- ------------------------------------------------------------------------------------------
Total interest-earning assets 9,840,618 739,290 7.44(c)
Other assets 799,597
- ------------------------------------------------------------------------------------------
Total assets $ 10,640,215
- ------------------------------------------------------------------------------------------
Savings and escrow $ 1,509,414 31,036 2.06%
Money market savings, NOW and DDA 1,821,948 19,894 1.09
Time deposits 3,308,228 173,364 5.24
- ------------------------------------------------------------------------------------------
Total deposits 6,639,590 224,294 3.38
FHLB advances 2,047,743 128,447 6.27
Repurchase agreements and other borrowings 935,629 56,744 6.06
Senior notes 31,142 2,910 9.34
- ------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,654,104 412,395 4.27
Other liabilities 78,870
Capital securities and minority interest 199,577
Shareholders' equity 707,664
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,640,215 326,895
- ------------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (379)
-------
Net interest income 326,516
Interest rate spread 3.17%(c)
- ------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.29%(c)
- ------------------------------------------------------------------------------------------
(a) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(b) Includes amortization of net deferred loan costs (net of fees) and premiums
(net of discounts) of: $3.7 million, $1.7 million, and $1.5 million in 2002,
2001 and 2000, respectively.
(c) Unrealized gains (losses) on available-for-sale securities are excluded from
the average yield calculations. Unrealized gains (losses) averaged $68.5
million, $33.9 million and ($96.5 million) for 2002, 2001 and 2000,
respectively.
22
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF 2002 AND 2001 YEARS
For the year 2002, net income was $152.7 million, or $3.16 per diluted common
share, an increase of $19.5 million, or 14.7%, compared to net income of $133.2
million or $2.68 per share for the previous year. The improvement was the result
of increased net interest income and noninterest income that more than offset
increases in the provision for loan losses and noninterest expenses. Net
interest income rose to $405.7 million for 2002, an increase of $38.2 million,
or 10.4%. The net interest margin rose to 3.50% during 2002 from 3.48% the prior
year. Noninterest income reached $185.6 million, an increase of $23.5 million,
or 14.5%, when compared to $162.1 million the previous period. Noninterest
expenses increased $19.4 million, or 6.3%, from the previous year. The provision
for loan losses increased $14.6 million to $29.0 million for 2002 due to the
fourth quarter sale and writedown of classified telecommunication and cable
credits.
Included in the net income for the 2002 year was a $7.3 million (net of taxes)
writedown related to the cumulative effective of a change in method of
accounting for the implementation of SFAS No. 142, "Goodwill and Other
Intangible Assets". Included in the net income for the 2001 year was a $2.4
million (net of taxes) expense related to 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) that represents costs
incurred for early extinguishment of debt for the prepayment of borrowings from
the Federal Home Loan Bank.
NET INTEREST INCOME
Net interest income totaled $405.7 million for the year ended December 31, 2002,
an increase of $38.2 million or 10.4%. This resulted mainly from an increase in
average outstanding earning assets during the year and from an increase in the
net interest margin (on a fully taxable-equivalent basis) to 3.50% for 2002 from
3.48% during the prior year. See the rate/volume table below for further
information.
The decline in interest rates during 2002 resulted in a favorable environment
for Webster. As rates dropped and mortgage and other assets prepaid at
increasing levels, and the proceeds were reinvested at lower yields. However,
maturing and repricing liabilities were replaced at even lower costs. As can be
seen from the rate/volume table that follows, 19% of the increase in net
interest income is due to changes in interest rates, with liability costs
dropping faster than asset yields. The remaining increase is due to the volume
growth in earning assets funded by the growth in low-cost core deposits. See
"Asset/Liability Management and Market Risk" section within Management's
Discussion and Analysis for additional information.
The growth of $1.0 billion in average outstanding earning assets during 2002
slightly outpaced the growth in average interest-bearing liabilities of $958.9
million. The 8.8% growth in earning assets versus 2001 accounted for 81% of the
increase in net interest income.
Net interest income also can be understood in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have impacted interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume) and (iii) the net change. The
change attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Years ended December 31, Years ended December 31,
2002 V. 2001 2001 V. 2000
- --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) due to Increase (Decrease) due to
(In thousands) Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans, net and loans held for sale $(101,598) 46,070 (55,528) (31,130) 32,731 1,601
Securities and short-term investments (32,306) 22,740 (9,566) 1,203 16,259 17,462
- --------------------------------------------------------------------------------------------------------------------------------
Total (133,904) 68,810 (65,094) (29,927) 48,990 19,063
- --------------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (80,190) 10,017 (70,173) (17,580) 9,621 (7,959)
FHLB advances and other
borrowings (61,425) 28,148 (33,277) (36,656) 21,976 (14,680)
- --------------------------------------------------------------------------------------------------------------------------------
Total (141,615) 38,165 (103,450) (54,236) 31,597 (22,639)
- --------------------------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $ 7,711 30,645 38,356 24,309 17,393 41,702
- --------------------------------------------------------------------------------------------------------------------------------
23
INTEREST INCOME
Total interest income decreased $65.2 million, or 8.6%, to $692.0 million for
the year 2002 as compared to $757.2 million the previous year. The decline in
the yield on earning assets was the primary cause of decreased interest income.
This was due to the lower interest rate environment in 2002 when compared with
2001.
The yield earned on earning assets declined during 2002 to 5.97% from 7.15%
during the year earlier. In addition to the larger volume of mortgage and other
fixed rate loan prepayments during the current year, declines in interest rates
impacted the returns on adjustable rate loans, which accounted for approximately
48% of total loans at December 31, 2002.
Earning assets rose during 2002, partially offsetting the reduced yield. Earning
assets averaged $11.7 billion during the year, up from $10.6 billion during
2001. Growth occurred primarily in the available for sale securities portfolio
and in commercial and consumer loans.
INTEREST EXPENSE
Interest expense declined $103.5 million, or 26.5%, to $286.3 million for 2002
as compared to $389.8 million the previous year. The decline in expense was
primarily due to the decrease in cost of funds, partially offset by increased
volume. Due to the short maturity structure of Webster's funding sources,
Webster was able to take advantage of falling interest rates throughout 2002.
Almost one-half, or 43%, of the benefit of declining interest rates was realized
in the wholesale borrowing area. The cost of repurchase agreements and other
borrowings and FHLB advances also decreased during 2002 by 225 and 121 basis
points, respectively. The deposit area accounted for 57% of the rate decline
benefit. Savings, checking and certificate of deposit offering rates were
decreased as general market interest rates declined throughout the year.
The average balance of interest-bearing liabilities increased $958.9 million for
2002 compared to 2001. Approximately two-thirds of the increase occurred in
borrowings, which had a relative lower cost. The remainder of the increase
occurred in lower costing core deposits, savings, money market and interest
checking accounts.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $29.0 million for the year ended
December 31, 2002 from $14.4 million a year earlier, an increase of $14.6
million or 101.4%. Management performs a quarterly review of the loan portfolio
to determine the adequacy of the allowance for loan losses. See the "Allowance
for Loan Losses Methodology" section later in this Management's Discussion and
Analysis for further details.
Based upon these reviews, it was determined that the provision for loan losses
should be increased over the second half of 2002. Factors that influenced this
increase included the following:
o During the fourth quarter 2002, Webster took action to eliminate its
exposure to classified telecommunications and cable loans by sale or by
transfer to held for sale. This resulted in an additional fourth quarter
charge to the provision of $12.4 million.
o The Bank's strategic plan is to change the mix of the loan portfolio and
increase the proportion of commercial and consumer loans and decrease
residential mortgage loans. Commercial and consumer lending carry
inherently more risk than residential lending.
o Net charge-offs increased to $13.4 million during 2002 from $9.8 million
the previous year, an increase of $3.6 million or 37.5%. The 2002 net
charge-offs were concentrated in the commercial lending area, which
accounted for $12.0 million, or 89%, of the total. The $13.4 million of
2002 net charge-offs does not include the $12.4 million of writedowns
related to the telecommunication loans transferred to held for sale.
At December 31, 2002, the allowance for loan losses totaled $116.8 million or
1.48% of total loans. A year earlier, the allowance totaled $97.3 million or
1.43% of total loans.
NONINTEREST INCOME
The following table presents the composition of noninterest income for the years
ended December 31, 2002 and 2001.
- ----------------------------------------------------------------------------------------------------------
Increase (decrease)
(Dollars in thousands) 2002 2001 Amount %
- ----------------------------------------------------------------------------------------------------------
Deposit service charges $ 61,610 56,061 5,549 9.9%
Loan service fees 18,531 16,262 2,269 14.0
Insurance revenue 27,073 21,751 5,322 24.5
Trust and investment services 15,918 18,346 (2,428) (13.2)
Financial advisory services 19,277 15,525 3,752 24.2
Gains on sale of loans and loan servicing, net 5,808 2,771 3,037 109.6
Increase in CSV of life insurance 9,042 9,164 (122) (1.3)
Other income 4,936 11,597 (6,661) (57.4)
- ----------------------------------------------------------------------------------------------------------
Fee revenue 162,195 151,477 10,718 7.1
Gain on sale of securities, net 23,377 10,621 12,756 120.1
- ----------------------------------------------------------------------------------------------------------
Total noninterest income $185,572 162,098 23,474 14.5%
- ----------------------------------------------------------------------------------------------------------
24
The increase in noninterest income is primarily due to increased securities
gains for the year of $12.8 million. The increase in security gains was in
response to the favorable environment for the securities sold and other
opportunities available. Deposit service fees increased mainly due to fees
associated with usage of Webster checking products, including the introduction
of High Performance Checking. Loan fees increased chiefly due to prepayment
penalties, as borrowers sought to refinance their outstanding loans as a result
of declining rates. The acquisition of Whitehall in August 2002 contributed to
loan service fee income of $18.5 million in 2002 from $16.3 million in 2001.
Insurance revenue continued to show growth in 2002 with an increase of $5.3
million. This is due principally to increased premiums for property and casualty
insurance post September 11, 2001 as well as successful sales efforts by Webster
Insurance staff. The acquisition of Wolff Zackin and Benefits Plans Design
insurance agencies in April 2001 has also helped to enhance the increases in
insurance revenue. The decline in trust and investment services is the result of
declines in stock values and retail investor purchase activity. Fee revenue is
based off the value of assets under management. The increased financial advisory
services revenue primarily resulted from the increase in valuation services
related to client's implementation of SFAS No. 142 during 2002. A significant
portion of the decrease in other noninterest income for 2002 was the receipt of
a nonrecurring $3.1 million Bank Owned Life Insurance ("BOLI") benefit payment
in 2001.
NONINTEREST EXPENSES
The following table presents the composition of noninterest expenses for the
years ended December 31, 2002 and 2001.
- ------------------------------------------------------------------------------------------------------------
Increase (decrease)
(Dollars in thousands) 2002 2001 Amount %
- ------------------------------------------------------------------------------------------------------------
Compensation and benefits $171,042 142,899 28,143 19.7%
Occupancy 26,606 25,643 963 3.8
Furniture and equipment 29,167 27,878 1,289 4.6
Goodwill and intangible amortization 16,017 31,227 (15,210) (48.7)
Marketing 10,522 8,728 1,794 20.6
Professional services 11,404 8,516 2,888 33.9
Acquisition-related 1,965 -- 1,965 --
Capital securities 13,525 14,462 (937) (6.5)
Dividends on preferred stock of subsidiary corporation 863 985 (122) (12.4)
Branch reconfiguration -- 3,703 (3,703) (100.0)
Other expenses 47,212 44,891 2,321 5.2
- ------------------------------------------------------------------------------------------------------------
Total noninterest expenses $328,323 308,932 19,391 6.3%
- ------------------------------------------------------------------------------------------------------------
The increase in compensation and benefits of $28.1 million over the prior year
is the result of $21.1 million in salaries due to merit increases for full-time
employees, and increases in staffing due to the expansion of the business. This
includes increased temporary help and higher commissions due to increased volume
in our mortgage lending business. The current year reflects the full year impact
of 2001 acquisitions as well as the year 2002 addition of Whitehall. Benefits
expense comprised $7.0 million of the increase and is related to higher group
insurance, pension expense and payroll taxes. The decrease in goodwill and
intangible amortization is the result of the adoption of SFAS Nos. 142 and 147
which no longer requires amortization of goodwill as an expense. See Note 9 of
Notes to Consolidated Financial Statements contained elsewhere in this report
for further information. The impact on 2002 was approximately $15.4 million. In
2002, $2.0 million of acquisition-related expense resulted from the Whitehall
purchase.
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 preferred method under 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, compensation and benefits expense
includes $759,000 of stock option expense. This amount will grow as the
application of SFAS No. 123 becomes fully phased in. See Note 1 of Notes to
Consolidated Financial Statements for information on the full impact of
expensing stock options.
INCOME TAXES
Income tax expense for 2002 increased to $74.0 million from $69.4 million in
2001. The increase is primarily due to the increase in income before taxes for
the reasons discussed above. In addition to the above income tax expense, tax
benefits of $596,000 were recorded related to the extraordinary item in 2001, as
well as tax benefits of $3.9 million and $1.2 million related to the cumulative
effect of change in method of accounting in 2002 and 2001, respectively. The
effective tax rates for 2002 and 2001 were 32% and 34%, respectively. Had the
requirements of SFAS Nos. 142 and 147 been applied to 2001, the effective tax
rate would have decreased from 34% to 32%.
COMPARISON OF 2001 AND 2000 YEARS
NET INTEREST INCOME
Net interest income totaled $367.5 million for the year ended December 31, 2001,
an increase of $41.0 million or 12.5%. The factors causing this change were an
increase in the net interest margin (on a fully taxable-equivalent basis) to
3.48% for 2001 from 3.29%
25
during the prior year and an increase in average earning assets during the year.
See the rate/volume table that is contained elsewhere within this report.
The decline in interest rates during 2001, combined with a steepening of the
yield curve, resulted in a favorable environment for Webster. As interest rates
dropped and mortgage and mortgage related securities assets prepaid at
increasing levels, yields dropped as these assets were replaced with ones
earning lower yields. However, maturing and repricing liabilities, deposits and
borrowings, were replaced at even lower costs due to the steepness of the yield
curve. As can be seen from the rate/volume table that precedes this section, 58%
of the increase in net interest income is due to the decline in interest rates,
with liability costs dropping much faster than asset yields.
The growth of $796.8 million in average earning assets during 2001 outpaced the
growth in average interest-bearing liabilities of $671.1 million. The 8.4%
increase in earning assets versus 2000, occurring primarily in investments and
in commercial and consumer loans, accounted for 42% of the increase in net
interest income.
INTEREST INCOME
Total interest income increased $18.3 million, or 2.5%, to $757.2 million for
the year 2001 as compared to $738.9 million during the previous year. As
discussed above, the increase was due entirely to increased volume of earning
assets during 2001 as compared to the previous year. Although loans and mortgage
related securities prepaid at increased volumes during 2001 due to the declining
interest rate environment, Webster was able to increase assets through the
acquisition of Mechanics in 2000 and Center Capital in 2001 as well as through
the increase in consumer loans. The increased consumer loans were primarily home
equity lines of credit, the majority of which were originated within the Bank's
primary market area.
The yield earned on earning assets declined during 2001 to 7.15% from 7.44%
during the year earlier. The decline was entirely within the loan category as
the yield on loans declined 46 basis points, while the yield on securities and
short-term investments increased by 5 basis points. In addition to the larger
volume of mortgage and other fixed rate loan prepayments during the current
year, as discussed above, declines in interest rates impacted the returns on
adjustable rate loans, which accounted for approximately 52% of total loans at
December 31, 2001.
INTEREST EXPENSE
Interest expense declined $22.6 million, or 5.5%, to $389.8 million for fiscal
year 2001 as compared to $412.4 million the previous year. The decline was
entirely due to the decrease in the cost of funds. Due to the short maturity
structure of the wholesale borrowing portfolio, Webster was able to take
advantage of falling rates throughout 2001. Two-thirds of the benefit of
declining rates was realized in the wholesale borrowing area. The deposit area
accounted for one-third of the rate decline benefit. Savings, checking and
certificate of deposit offering rates were decreased as general market interest
rates declined throughout the year.
The average balance of interest-bearing liabilities increased $671.1 million for
2001 compared to 2000. The Mechanics acquisition accounted for a portion of the
volume increase as the balances were outstanding for all of 2001, as opposed to
only half a year in 2000. Approximately half of the increase occurred in
repurchase agreements and other borrowings due to their relative lower cost. The
remainder of the increase occurred in money market and checking accounts.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $14.4 million for the year ended
December 31, 2001 from $11.8 million the year earlier, an increase of $2.6
million or 22.0%. Management performs a quarterly review of the loan portfolio
to determine the adequacy of the allowance for loan losses. See the "Allowance
for Loan Losses Methodology" section later in this Management's Discussion and
Analysis for further details.
Based upon these reviews, it was determined that the provision for loan losses
should be increased over the second half of 2001. Several factors that
influenced this increase included the following:
o The Bank's strategic plan is to change the mix of the loan portfolio and
increase the proportion of commercial and consumer loans and decrease
residential mortgage loans. Commercial and consumer lending carry
inherently more risk than residential lending.
o Net charge-offs increased to $9.7 million during 2001 from $4.6 million the
previous year, an increase of $5.1 million or 110.7%. The 2001 net
charge-offs were concentrated in the commercial lending area, which
accounted for $7.7 million, or 79.1%, of the total.
o Nonaccrual loans increased to $57.4 million, or 0.84% of total loans, at
December 31, 2001, from $41.0 million, or 0.60%, a year earlier.
o The general economic slowdown has raised concerns about employment
stability and economic health in Connecticut and the country.
At December 31, 2001, the allowance for loan losses totaled $97.3 million or
1.43% of total loans. A year earlier, the allowance totaled $90.8 million or
1.32% of total loans.
NONINTEREST INCOME
The most significant factor in the increase in noninterest income was the
acquisitions completed during 2000 and 2001. The June 2000 Mechanics
acquisition, as well as the purchase of branches from FleetBoston and Chase
Manhattan during the year, added to deposit fees. The Center Capital acquisition
during 2001 added to loan fee income. The continued expansion of Webster
Insurance, with the
26
purchase of the Louis Levine Agency, Inc., ("Levine") in 2000 and Wolff Zackin,
Benefit Plans and Musante in 2001, added to insurance revenue. Duff & Phelps was
acquired in November 2000 and added income from financial advisory services.
Webster's plan has been to expand its sources of noninterest income through the
acquisition of fee-based businesses and become less reliant on net interest
income.
NONINTEREST EXPENSES
Noninterest expenses increased $41.8 million or 15.6%. Again, acquisitions in
2000 and 2001 played the most significant role in the increase. Adjusting both
years for the effect of purchase acquisitions, noninterest expenses would have
increased less than 2%. Included in noninterest expense for 2001 was a $3.7
million nonrecurring expense for branch reconfiguration, which represented the
cost of the closing of 10 branches during the first quarter of 2001.
INCOME TAXES
Income tax expense for 2001 increased to $69.4 million from $58.1 million in
2000. The increase is primarily due to the increase in income before taxes for
the reasons discussed above. In addition to the above income tax expense, tax
benefits totaling $1.8 million were recorded in 2001 related to the
extraordinary item and the cumulative effect of change in method of accounting.
The effective tax rates for 2001 and 2000 were 34% and 33%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity management allows Webster to meet cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable, cost effective funding to support growth in the
balance sheet. Liquidity comes from a variety of sources such as the cash flow
from operating activities including principal and interest payments on loans and
investments, unpledged securities which can be sold or utilized to secure
funding and by the ability to attract new deposits. Webster's goal is to
maintain a strong, increasing base of core deposits to support its growing
balance sheet.
The main sources of liquidity are payments of principal and interest from its
loan and securities portfolio and the ability to use its loan and securities
portfolios as collateral for secured borrowings. The Bank is a member of the
FHLB system. At December 31, 2002, outstanding FHLB advances totaled $2.2
billion and the Bank had additional borrowing capacity from the FHLB of $669.7
million. Investment securities were not pledged as collateral for FHLB advances
at December 31, 2002. Had securities been used for collateral, additional
borrowing capacity would be approximately $2.1 billion. The Bank also has the
ability to borrow funds through repurchase agreements, using the securities
portfolio as collateral. At December 31, 2002, outstanding repurchase agreements
totaled $1.5 billion. FHLB advances, repurchase agreements and other borrowings
increased $922.3 million from the prior year end, primarily to fund the increase
in loans.
Other factors affecting liquidity include loan origination volumes, loan
prepayment rates, maturity structure of existing loans, core deposit growth
levels, time deposit maturity structure and retention, credit ratings,
investment portfolio cash flows, the composition, characteristics and
diversification of wholesale funding sources, and the market value of investment
securities that can be used to collateralize FHLB advances and repurchase
agreements. The Bank's liquidity position is influenced by general interest rate
levels, economic conditions and competition. For example, as interest rates
decline, payments of principal from the loan and mortgage-backed securities
portfolio accelerate, as borrowers are more willing to prepay. Additionally, the
market value of the securities portfolio generally increases as rates decline,
thereby increasing the amount of collateral available for funding purposes.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Liquidity policy ratios are designed to measure the liquidity from
several different perspectives: maturity concentration, diversification, and
liquidity reserve. Actual ratios are measured against policy limits. In addition
to funding under normal market conditions, there is a contingency funding plan
which is designed for dealing with liquidity under a crisis so that measures can
be implemented in an orderly and timely manner.
Webster's main sources of liquidity at the Parent Company level are dividends
from the Bank, investment income and net proceeds from borrowings and capital
offerings. The main uses of liquidity are purchases of available for sale
securities, the payment of dividends to common stockholders, repurchases of
Webster's common stock, and the payment of interest to holders of Senior Notes
and capital securities. There are certain restrictions on the payment of
dividends by the Bank to Webster. See Note 14 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further information on
dividend restrictions. Webster also maintains $75.0 million in revolving lines
of credit with correspondent banks as a source of additional liquidity.
During 2002 and 2001, Webster repurchased a total of 3,960,690 and 374,756
shares, respectively, of its common stock utilizing funds of approximately
$138.5 million and $11.2 million respectively. The repurchased shares were the
result of an announcement during the 2001 third quarter of a Stock Repurchase
Program to acquire 2.5 million shares of its common stock. Webster announced an
additional Stock Repurchase Program during the third quarter of 2002 to buyback
an additional 2.4 million shares. See Note 14 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further information
concerning stock repurchases.
On January 14, 2003, the Bank completed an offering of $200 million of
subordinated notes. The notes have an interest rate of 5.875% and will mature on
January 15, 2013. The notes constitute new funding and will supplement the
Bank's existing capital, including regulatory capital.
27
The Bank is required by regulations adopted by the OTS to maintain minimum
levels of liquidity sufficient to ensure safe and sound operations. Adequate
liquidity, as assessed by the OTS, may vary from institution to institution
depending on such factors as the institution's overall asset/liability
structure, market conditions, competition and the nature of the institution's
deposit and loan customers. Management believes it exceeds all regulatory and
operational liquidity requirements at December 31, 2002.
Applicable OTS regulations require the Bank, as a federal savings bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement and risk-based capital requirements. As an OTS regulated savings
institution, the Bank is also subject to a minimum tangible capital requirement.
At December 31, 2002, the Bank was in full compliance with all applicable
capital requirements and met the FDIC requirements for a "well capitalized"
institution. See Note 14 of Notes to Consolidated Financial Statements contained
elsewhere within this report for further information concerning capital.
The following tables summarize Webster's contractual obligations and commercial
commitments as of December 31, 2002.
Payments Due by Period
------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS: Less than
(In thousands) Total one year 1-3 years 3-5 years After 5 years
- -------------------------------------------------------------------------------------------------------------------
FHLB advances $2,163,130 381,655 980,279 754,301 46,895
Senior notes 126,000 -- -- 126,000 --
Other borrowed funds 2,166,640 1,931,640 235,000 -- --
Operating leases 77,815 13,497 21,945 13,915 28,458
- -------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $4,533,585 2,326,792 1,237,224 894,216 75,353
- -------------------------------------------------------------------------------------------------------------------
Amount of Commitment Expirations Per Period
--------------------------------------------------------------------------
COMMERCIAL COMMITMENTS: Total amounts Less than
(In thousands) committed one year 1-3 years 3-5 years After 5 years
- -------------------------------------------------------------------------------------------------------------------
Lines of credit $1,425,267 315,428 727,983 326,641 55,215
Standby letters of credit 127,794 113,576 2,675 11,365 178
Other commercial commitments 117,832 105,116 8,177 4,453 86
- -------------------------------------------------------------------------------------------------------------------
Total commercial commitments $1,670,893 534,120 738,835 342,459 55,479
- -------------------------------------------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- ------------------------------------------
Market risk consists of interest rate risk, foreign currency risk, commodity
price risk and equity price risk. Webster's primary market risk is interest rate
risk. Interest rate risk can be defined as (1) the sensitivity of the economic
value of Webster's assets less the economic value of its liabilities and
off-balance sheet contracts ("equity at risk") and (2) the sensitivity of
Webster's earnings to changes in interest rates ("earnings at risk"). Both types
of risk measure a change in value for given changes in interest rates.
Equity at risk analyzes sensitivity in the present value of cash flows over the
expected life of the Bank's existing assets, liabilities and off-balance sheet
contracts. It is a measure of the long-term interest rate risk to future
earnings streams embedded in the Bank's current balance sheet.
The Bank utilizes asset/liability models to measure equity and earnings at risk.
Key assumptions underlying the present value of cash flows include the behavior
of interest rates and spreads, asset prepayment speeds and attrition rates on
deposits. Cashflow projections from the model are continually compared to market
expectations for similar collateral type and adjusted based on Webster
experience with its own portfolio. The model's valuation results are compared to
observable market prices for similar instruments whenever possible. The Bank
studies the behavior of its deposit and loan customers using historical time
series analysis to model future customer behavior under varying interest rate
environments.
Earnings at risk analyzes sensitivity in net income over a twelve-month horizon.
It uses the same assumptions as equity at risk on the existing balance sheet,
but also includes balance sheet growth assumptions over the next twelve months.
It is a measure of short-term interest rate risk to reported earnings of the
Bank.
Webster believes that an effective asset/liability management process must
balance the risks and rewards from both long and short-term interest rate risks
in determining management strategy and action. To facilitate and manage this
process, Webster has an Asset/Liability Committee ("ALCO"). The primary goal of
Webster's ALCO is to manage interest rate risk to maximize net economic value
and net income over time in changing interest rate environments subject to Board
of Director approved limits. The Board approves limits for both equity and
earnings at risk for parallel shocks in interest rates of plus and minus 100 and
200 basis points.
28
Webster also typically analyzes rate shocks of 300 basis points as well as ad
hoc scenarios for specific economic scenarios. With today's overnight interest
rate at 1.25%, downward parallel rate shocks of more than 100 basis points are
unrealistic and therefore not currently analyzed. Equity and earnings at risk
are quantified using simulation software from one of the leading firms in the
field of Asset/Liability modeling. From such simulations, interest rate risk is
quantified and appropriate strategies are formulated and implemented.
The simulation process uses multiple interest rate paths generated by an
arbitrage-free trinomial lattice term structure model. The Base Case rate
scenario, against which all others are compared, uses the month-end LIBOR/Swap
yield curve as a starting point to derive forward rates for future months. Using
interest rate swap option volatilities as inputs, the model creates multiple
rate paths for this scenario with forward rates as the mean. In shock scenarios,
the starting yield curve is shocked up or down in a parallel fashion. Future
rate paths are then constructed in a similar manner to the Base Case.
Cash flows for all instruments are created for each scenario and each rate path
using product specific prepayment models and account specific system data for
properties such as maturity date, amortization type, coupon rate and repricing
date. Webster enhances its Asset/Liability simulation software with a mortgage
prepayment model and a Collateralized Mortgage Obligation database. Instruments
with explicit options (i.e., caps, floors, puts and calls) and implicit options
(i.e., prepayment and early withdrawal ability) require such a rate and cashflow
modeling approach to more accurately quantify value and risk. On the asset side,
Webster's risk is impacted the most by a large amount of mortgage loans and
mortgage-backed securities, which can typically prepay at any time without
penalty and may have embedded caps and floors. On the liability side, Webster
has a large concentration of customers with indeterminate maturity deposits who
have options to add or withdraw funds from their accounts at any time. The Bank
also has the option to change the rate paid on these deposits at any time.
Webster has four main tools for managing interest rate risk: (1) the size and
duration of the investment portfolio, (2) the size and duration of the wholesale
funding portfolio, (3) off balance sheet interest rate contracts and (4) the
pricing and structure of its loans and deposits. ALCO meets at least monthly to
make decisions on the investment and funding portfolios based on the economic
outlook, the Committee's interest rate expectations, the Bank's risk position
and other factors. ALCO delegates pricing and product design responsibilities to
individuals and sub-committees, but monitors and influences their actions on a
regular basis.
Webster can use various interest rate contracts, including futures and options,
interest rate swaps and interest rate caps and floors to manage interest rate
risk by reducing net exposures. As of December 31, 2002, Webster was paying the
floating rate side of $900 million in interest rate swaps of varying maturities.
These swaps were entered into during 2002 in order to convert fixed rate Federal
Home Loan Bank advances into floating rate liabilities. All of Webster's swaps
qualify for the short cut hedge accounting treatment under SFAS No. 133. These
interest rate contracts involve, to varying degrees, credit risk and interest
rate risk. Credit risk is the possibility that a loss may occur if a
counterparty to a transaction fails to perform according to the terms of the
contract. The notional amount of interest rate contracts is the amount upon
which interest and other payments are based. The notional amount is not
exchanged and therefore, the notional amounts should not be taken as a measure
of credit risk. See Notes 1 and 15 of Notes to Consolidated Financial Statements
contained elsewhere within this report for additional information.
Webster can also hold futures and options positions to minimize the price
volatility of certain assets held as trading securities. Changes in the market
value of these positions are recognized in the Consolidated Statements of Income
in the period for which the change occurred.
The following table summarizes the estimated economic value of Webster's assets,
liabilities and hedges at December 31, 2002 and 2001, and the projected change
to economic values if interest rates instantaneously increase or decrease by 100
basis points.
Estimated Estimated Economic Value
Book Economic Change
(Dollars in thousands) Value Value -100 BP +100 BP
- -------------------------------------------------------------------------------------------------------------------
2002
- ----
Assets $ 13,468,004 13,397,462 120,111 (224,521)
Liabilities 12,432,546 12,612,250 316,798 (262,972)
Off-balance sheet contracts -- (24,957) 16,461 (15,942)
---------------------
(Decrease) increase in net economic value (180,226) 22,509
Net change as % of Tier 1 Capital (22.1)% 2.8%
2001
- ----
Assets $ 11,857,382 11,614,903 233,981 (286,658)
Liabilities 10,850,915 10,786,867 241,037 (184,241)
---------------------
(Decrease) increase in net economic value (7,056) (102,417)
Net change as % of Tier 1 Capital (0.9)% (12.3)%
29
The book value of assets exceeded the estimated market value at December 31,
2002 and 2001 because the equity at risk model assigns no value to goodwill and
other intangible assets, which totaled $297.4 million and $320.1 million,
respectively. The above table includes interest-earning assets that are not
directly impacted by changes in interest rates. Assets include equity securities
of $180.7 million at December 31, 2002 and $169.9 million at December 31, 2001.
Equity securities include $150.0 million of FHLB stock $5.8 million of preferred
stock and $24.9 million in common stock at December 31, 2002. See Note 4 of
Notes to the Consolidated Financial Statements contained elsewhere within this
report for further information concerning investment securities. Values for
mortgage servicing rights have been included in the tables above as movements in
interest rates affect the valuation of the servicing rights.
The change in sensitivity between 2002 and 2001 is due to changes in the
interest rate environment and structural changes in the balance sheet. Interest
rates have fallen and the yield curve has flattened with short rates down 50
basis points and long rates down from 100 to 200 basis points from the prior
year end. This has shortened mortgage-related asset durations and lengthened
core deposit durations significantly. In addition, while long duration core
non-maturity deposit volumes have grown by approximately $775 million in the
past year, most of the asset growth has been concentrated in short duration
floating rate assets like home equity credit lines and asset based commercial
lending.
Duration is expressed in terms of years and is a measure of the price
sensitivity of financial instruments for small changes in interest rates. For
fixed rate instruments it can also be thought of as the weighted average
expected time to receive future cash flows. The longer the duration, the greater
the price sensitivity for changes in interest rates. Floating rate instruments
are considered to have a duration of one month and therefore have very little
price sensitivity due to changes in interest rates. Increases in interest rates
typically reduce the value of assets as future discounted cash flows are worth
less at higher discount rates. A liability's value decreases for the same reason
in a rising rate environment. A reduction in value of a liability is a benefit,
however, as this is an obligation of the Bank.
A duration gap between assets and liabilities near zero implies that the balance
sheet is matched and would exhibit no change in estimated economic value for a
small change in interest rates. A negative duration gap implies that assets are
shorter than liabilities and therefore, they have less economic price
sensitivity than liabilities and will reset their interest rates faster than
liabilities. Consequently, Webster's net estimated economic value would increase
when rates rise as the decreased value of liabilities would more than offset the
decreased value of assets. The opposite would occur when rates fall. Webster's
net income would also generally be expected to increase when rates rise and
decrease when rates fall. Webster's duration gap was a negative 1.0 at 2002 year
end.
The estimated change in Webster's net income for the subsequent twelve month
period beginning December 31, 2002 for an increase and decrease in interest rate
of 100 basis point was an increase of 7.1% and a decrease of 12.8%,
respectively. This estimate assumes interest rates instantaneously increase or
decrease parallel along the yield curve. At December 31, 2001, the estimated
changes were a decrease of 1.5% and an increase of 0.4%, respectively.
Webster expects interest rates to rise in second half of 2003 and is positioned
to benefit accordingly. This position has been achieved primarily through
shortening duration of the investment portfolio and strong growth in core
deposits.
These estimates assume that management does not take any action to mitigate any
positive or negative effects from changing interest rates. The economic values
and net income estimates are subject to factors that could cause actual results
to differ. Management believes that Webster's interest rate risk position at
December 31, 2002 represents a reasonable level of risk given the low
probability of a further significant decline in interest rates. Management, as
always, is prepared to act in the event that interest rates do fall.
FINANCIAL CONDITION
- -------------------
At December 31, 2002, total assets were $13.5 billion, an increase of $1.6
billion, or 13.6%, as compared to total assets of $11.9 billion at December 31,
2001. The increase in total assets for the current year period was primarily due
to an increase in loans of $1.1 billion. Total liabilities increased $1.6
billion for the current year period primarily due to increases in deposits and
borrowings of $539.7 million and $922.3 million, respectively. Total equity at
December 31, 2002 and 2001 was $1.0 billion.
Securities increased by $125.9 million, or 3.1%, to $4.1 billion at December 31,
2002. As mortgage securities prepaid at accelerated speeds due to the low
interest rate environment during 2002, Webster reinvested these funds into its
securities portfolio. These additional investments were primarily
mortgage-related securities, as their balance rose to $3.7 billion at December
31, 2002 from $3.6 billion, an increase of 2.6%.
Loans, net increased $1.1 billion, or 15.9%, to $7.8 billion at December 31,
2002. Webster made progress in achieving its strategic plan for the loan
portfolio. The plan called for an increase in the percentage of outstanding
commercial and consumer loans, while reducing the reliance on residential
mortgage loans. Residential mortgage loans decreased to 43.4% of net loans at
December 31, 2002 from 50.3% a year earlier. Commercial and consumer loans
increased to 36.3% and 21.8%, respectively, from 34.8% and 16.3%, respectively,
a year earlier. Loans held for sale totaled $405.2 million at December 31, 2002,
an increase of $261.3 million, or 182%, from a year earlier. As Webster's
wholesale lending volume increased substantially, so did the balance of loans
held for sale.
30
At December 31, 2002, Webster's net deferred tax asset approximated $15.0
million, and included a valuation allowance of approximately $10.5 million for
the full amount of the Connecticut state tax portion of its gross deferred tax
assets, due to uncertainties of realization. Management believes it is more
likely than not that Webster will realize its net deferred tax assets, based
upon its recent historical and anticipated future levels of pre-tax income.
There can be no absolute assurance, however, that Webster will generate any
specific level of future income.
Deposits increased $539.7 million, or 7.6%, to $7.6 billion at December 31,
2002. Deposits also reflected the success of Webster's strategic plan. The
increase occurred entirely in the lower cost, non-maturity deposits, as demand
deposits, NOW accounts, regular savings and money market deposits which
increased by $776.2 million, or 18.8% while higher cost certificates of deposit
decreased by $236.5 million, or 8.1%. Certificates of deposit decreased as a
percentage of total deposits to 35.4% at December 31, 2002 from 41.4% a year
earlier. As a result of the combined effects of the decrease in interest rates
during 2002 and the migration of deposits to lower cost, non-maturity deposits,
the weighted average interest rate dropped to 1.65% at December 31, 2002 from
2.40% a year earlier.
Total borrowings increased $922.3 million, or 26.1%, to $4.5 billion at December
31, 2002. Due to the current low interest rate environment, a portion of the
borrowings portfolio was swapped from fixed to floating to take advantage of the
current lower rates. During 2002, $883 million of FHLB advances outstanding at
December 31, 2001 matured and $100 million was called prior to maturity. New
borrowings consisted of $50 million of new 3 year advances, $200 million of 5
year advances and $300 million of 2 years advances. The swapping of these
transactions should reduce the volatility of borrowing costs over the short
term.
Total shareholders' equity at December 31, 2002 was $1.0 billion. The $29.0
million increase in equity is primarily due to net income of $152.7 million and
the change in unrealized gains on available for sale securities of $34.8
million, partially offset by cash dividends of $35.5 million and stock
repurchases of $138.5 million.
ASSET QUALITY
- -------------
Asset quality improved significantly in 2002 as nonperforming assets declined to
$50.0 million compared to $62.5 million at year end 2001. Classified loans
totaled $113.0 million at December 31, 2002, a decline of $27.8 million from
$140.8 million a year ago. These improvements were due primarily to the
elimination of Webster's exposure to classified telecommunications and cable
loans in 2002. As a result of the sale and writedown of these loans, management
increased the loan loss provision in the fourth quarter. The level of the
overall loan loss allowance has increased to 1.48% of total loans at year end
compared with 1.43% at December 31, 2001. Management believes the level of
allowance at December 31, 2002 is adequate for the level of risks in the
portfolio.
Nonperforming assets, classified assets, loan delinquency and credit losses are
considered by Webster to be key measures of asset quality. Asset quality is one
of the key factors in the determination of the level of the allowance for loan
losses. See "Allowance for Loan Losses" contained elsewhere within this section
for further information on the allowance.
NONPERFORMING ASSETS
Webster devotes significant attention to maintaining asset quality through
conservative underwriting standards, active servicing of loans and aggressively
managing nonperforming assets. Nonperforming assets, which include nonaccrual
loans and loans held for sale, loans past due 90 days or more and accruing and
foreclosed properties were $50.0 million and $62.5 million at December 31, 2002
and 2001, respectively. The aggregate amount of nonperforming assets decreased
as a percentage of total assets to 0.37% at December 31, 2002 from 0.53% at
December 31, 2001.
Nonperforming loans were $43.3 million at December 31, 2002, compared to $57.4
million at December 31, 2001. Nonperforming loans are defined as nonaccruing
loans and loans past due 90 or more days and accruing. The ratio of
nonperforming loans to total loans was 0.55% and 0.84% at December 31, 2002 and
2001, respectively. The allowance for loan losses at December 31, 2002 was
$116.8 million and represented 270.1% of nonperforming loans and 1.48% of total
loans. The allowance for loan losses at December 31, 2001 was $97.3 million and
represented 169.5% of nonperforming loans and 1.43% of total loans. Interest on
nonaccrual loans that would have been recorded as additional income for the
years ended December 31, 2002, 2001 and 2000 had the loans been current in
accordance with their original terms approximated $3.2 million, $3.9 million,
and $3.6 million, respectively. See Note 1 of Notes to Consolidated Financial
Statements contained elsewhere within this report for information concerning
Webster's nonaccrual loan policy.
31
The decrease in nonperforming loans of $14.1 million, or 24.7%, was due mainly
to five classified shared national telecommunications credits totaling $25.8
million, $14.2 million of which were nonperforming and two classified shared
national cable credits totaling $9.8 million, which were sold or transferred to
held for sale during the fourth quarter of 2002. A writedown of $12.4 million
was taken against the allowances for loan losses at the time of sale or
transfer.
The following table details Webster's nonperforming assets for the last five
years.
At December 31,
---------------------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Commercial:
Commercial banking $15,486 20,574 11,360 13,169 7,104
Specialized lending 3,399 8,947 5,168 -- --
Equipment financing 6,586 7,333 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total commercial 25,471 36,854 16,528 13,169 7,104
Commercial real estate 9,109 11,062 13,340 12,553 9,345
Residential 7,263 7,677 8,842 11,490 12,418
Consumer 894 1,823 2,324 1,182 1,852
- ------------------------------------------------------------------------------------------------------------------------
Total nonaccruing loans 42,737 57,416 41,034 38,394 30,719
- ------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans held for sale:
Commercial 3,706 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial 515 -- -- 698 1,209
- ------------------------------------------------------------------------------------------------------------------------
Foreclosed Properties:
Residential and consumer 509 2,504 2,284 2,698 1,715
Commercial 2,568 2,534 1,011 2,210 3,447
- ------------------------------------------------------------------------------------------------------------------------
Total foreclosed property 3,077 5,038 3,295 4,908 5,162
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $50,035 62,454 44,329 44,000 37,090
========================================================================================================================
It is Webster's policy that all loans 90 or more days past due are placed in
nonaccruing status. Occasionally, there are circumstances that cause loans to be
placed in the 90 days and accruing category, for example, loans that are
considered to be well secured and in the process of collection.
TROUBLED DEBT RESTRUCTURES
The following accruing loans are considered troubled debt restructurings
consistent with SFAS No. 15. A modification of terms constitutes a troubled debt
restructuring if the Bank, for reasons related to the debtor's financial
difficulties, grants a concession to the debtor that it would not otherwise
consider.
At December 31,
---------------------------------------------------------------------------
(In thousands) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Residential $ 826 1,262 1,588 1,273 4,649
Commercial real estate 18 3,767 3,842 4,033 --
Commercial -- -- -- 33 4,258
Consumer 78 204 32 564 2,089
- --------------------------------------------------------------------------------------------------------------
Total $ 922 5,233 5,462 5,903 10,996
==============================================================================================================
OTHER PAST DUE LOANS
The following table sets forth information as to the Bank's loans past due 30-89
days.
December 31,
-----------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Principal of loans Principal of loans Principal of loans Principal of loans Principal of loans
(Dollars in thousands) Balances outstanding Balances outstanding Balances outstanding Balances outstanding Balances outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
Residential $13,318 0.17% $18,359 0.27% $20,974 0.30% $20,499 0.34% $26,727 0.48%
Commercial 21,894 0.28 16,286 0.23 10,883 0.16 7,104 0.12 5,613 0.10
Commercial real estate 21,324 0.27 22,973 0.34 16,101 0.23 11,865 0.19 12,369 0.22
Consumer 6,757 0.08 5,260 0.08 6,135 0.09 4,746 0.08 6,873 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total $63,293 0.80% $62,878 0.92% $54,093 0.78% $44,214 0.73% $51,582 0.93%
====================================================================================================================================
32
CLASSIFIED LOANS
Under the loan classification system, problem loans are classified as
substandard, doubtful or loss (collectively classified loans), depending on the
presence of certain characteristics. A loan is considered substandard if, in the
opinion of management, there are potential deficiencies which could result in
the loan becoming inadequately protected by the current net worth and paying
capacity of the obligor or by the collateral pledged, if any. Substandard loans
include those characterized by the distinct possibility that the institution
could sustain some loss if the deficiencies are not corrected. Loans classified
as doubtful have all of the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses that are present make
collection or liquidation in full on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Loans classified as
loss are those considered uncollectible and of such little value that to
continue to report them as loans without the establishment of a specific loss
reserve is not warranted. The loan classification system is consistent with the
classification system prescribed by the OTS.
When loans are classified as either substandard or doubtful, a portion of the
allowance for loan losses in an amount deemed prudent by management is allocated
as either a specific reserve or a general reserve against such loans. Specific
reserves represent an allocation of the allowance against specific credits where
a deficiency in collateral value or cash flow exists. See Note 5 of Notes to
Consolidated Financial Statements included elsewhere within this report for
additional information, including the recognition of cash basis interest income.
All other substandard or doubtful loans receive an allocation of a general
reserve. General reserves represent a portion of the allowance for loan losses
which has been allocated to recognize the inherent risk associated with these
loans. When loans are classified as loss, a specific allowance for the loss is
established equal to 100% of the amount of the loan and a charge-off is
subsequently taken for such amount. An institution's determination as to the
classification of its loans and the amount of its allocated reserves is subject
to review by the OTS, which can require the establishment of additional reserves
if it is in disagreement with the institution.
The following table summarizes Webster's classified loans, including
nonperforming loans at December 31, 2002 and 2001.
Commercial
-----------------------
Commercial
(In thousands) Total Residential Banking* Specialized CRE** Consumer
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Substandard:
Accruing $ 70,245 1,171 50,347 18,727 -- --
Nonaccruing 38,994 7,155 31,082 -- -- 757
- -----------------------------------------------------------------------------------------------------------------------------
Total substandard 109,239 8,326 81,429 18,727 -- 757
Doubtful:
Nonaccruing 3,743 108 99 3,399 -- 137
Loss -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total classified loans $112,982 8,434 81,528 22,126 -- 894
=============================================================================================================================
Classified as a percent of loans 1.4% 0.2 5.8 5.8 -- 0.1
=============================================================================================================================
Commercial
-----------------------
Commercial
(In thousands) Total Residential Banking* Specialized CRE** Consumer
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
Substandard:
Accruing $ 88,397 1,872 41,751 44,482 -- 292
Nonaccruing 47,846 7,677 32,693 5,548 275 1,653
- -----------------------------------------------------------------------------------------------------------------------------
Total substandard 136,243 9,549 74,444 50,030 275 1,945
- -----------------------------------------------------------------------------------------------------------------------------
Doubtful:
Accruing 66 54 -- -- -- 12
Nonaccruing 4,464 -- 895 3,399 -- 170
- -----------------------------------------------------------------------------------------------------------------------------
Total doubtful 4,530 54 895 3,399 -- 182
- -----------------------------------------------------------------------------------------------------------------------------
Loss -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total classified loans $140,773 9,603 75,339 53,429 275 2,127
=============================================================================================================================
Classified as a percent of loans 2.1% 0.3 7.9 13.0 -- 0.2
=============================================================================================================================
* Includes Middle Market, Small Business Banking, Asset-Based Lending and
Equipment Financing.
** Does not include CRE loans administered by Middle Market and Small Business
Banking, which are included in Commercial Banking.
At December 31, 2002, there was a decrease of $27.8 million in classified loans
from the prior year end. This decrease occurred primarily in the Specialized
portfolio, in which classified loans declined $31.3 million. This decline was
due primarily to the fourth quarter telecommunication and cable loans activity
previously discussed. Improvements were also achieved in the Residential,
33
Consumer and CRE portfolios. The improvements were somewhat offset by an
increase in Classified Commercial Banking loans of $6.2 million. Classified
loans as a percent of total loans decreased to 1.4% from 2.1% the prior year.
Classified as a percentage of loans in the Specialized portfolio decreased to
5.8% at December 31, 2002 from 13.0% at December 31, 2001. Classified Commercial
Banking loans also decreased to 5.8% of the portfolio from 7.9% the prior year
although classified loan totals increased. The Classified loans table above does
not include loans held for sale. At December 31, 2002, there were $3.7 million
in commercial loans held for sale that were classified as substandard. At
December 31, 2001, there were no classified held for sale loans.
Because Webster believes that early identification and management of problem
loans serves to minimize future losses, it employs a rigorous portfolio review
and management process, which identifies deteriorating credit risk and
proactively manages problem loans. At December 31, 2002, $42.7 million of
nonperforming loans (excluding accruing troubled debt restructurings) were
included in the classified loan total. The remaining classified loans of $70.3
million continued to perform in accordance with their contractual terms and to
accrue interest. Under the definition of substandard above, these loans are
considered by management to be potential problem loans.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
METHODOLOGY
The allowance for loan losses is maintained at a level estimated by management
to provide adequately for probable losses inherent in the loan portfolio.
Probable losses are estimated based upon a quarterly review of the loan
portfolio, past loss experience, specific problem loans, economic conditions and
other pertinent factors which, in management's judgment, deserve current
recognition in estimating loan losses. In assessing the specific risks inherent
in the portfolio, management takes into consideration the risk of loss on
nonaccrual loans, classified loans and watch list loans including an analysis of
the collateral for such loans. The allowance for loan losses at December 31,
2002 and 2001 totaled $116.8 million and $97.3 million, respectively. Management
believes that the allowance for loan losses at December 31, 2002 is adequate to
cover expected losses inherent in the loan portfolio.
Management considers the adequacy of the allowance for loan losses a critical
accounting policy, consistent with the SEC's financial release concerning
critical accounting policies. As such, the adequacy of allowance for loan losses
is subject to judgment in its determination. Actual loan losses could differ
materially from management's calculation if actual loss factors and conditions
differ significantly from the assumptions utilized by management. These factors
and conditions include the general economic conditions within Connecticut and
nationally, trends within industries where the loan portfolio is concentrated,
real estate values, interest rates and the financial condition of individual
borrowers. While management believes the allowance for loan losses is adequate
as of December 31, 2002, actual results may prove different and these
differences could be significant.
Webster's methodology for assessing the appropriateness of the allowance
consists of several key elements. The loan portfolio is segmented into pools of
loans that are similar in type and risk characteristic. These homogeneous pools
are tracked over time and historic delinquency, nonaccrual and loss information
is collected and analyzed. In addition, problem loans are identified and
analyzed individually on a periodic basis to detect specific probable losses.
Webster collects industry delinquency, nonaccrual and loss data for the same
portfolio segments for comparison purposes.
Webster analyzes the data and estimates probable losses in the portfolio by
calculating formula allowances for homogeneous pools of loans and classified
loans and specific allowances for impaired loans. The formula allowance is
calculated by applying loss factors to the loan pools based on historic default
and loss rates, internal risk ratings, and other risk-based characteristics.
Changes in risk ratings, and other risk factors, from period to period for both
performing and nonperforming loans affect the calculation of the formula
allowance. Loss factors are based on Webster's loss experience, and may be
adjusted for significant factors that, in management's judgment, affect the
collectability of the portfolio as of the evaluation date. Webster's approach
fully allocates the allowance. At December 31, 2002 there were no unallocated
reserves. Webster considers the following when determining probable losses:
o Webster utilizes migration models, which track the dynamic business
characteristics inherent in the specific portfolios. The assumptions are
updated periodically to match changes in the business cycle.
o Pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs. Pooled loans are loans that are homogeneous in
nature, such as residential and consumer loans.
o The loan portfolios are characterized by historical statistics such as
default rates, cure rates, loss in event of default rates and internal
risk ratings.
o Webster statistically evaluates the impact of larger concentrations in the
commercial loan portfolio.
o Comparable industry charge-off statistics by line of business, broadly
defined as residential, consumer, home equity and second mortgages,
commercial real estate and commercial and industrial lending, are utilized
as factors in calculating loss estimates in the loan portfolios.
o Actual losses by portfolio segment are reviewed to validate estimated
future probable losses.
34
ALLOWANCE FOR LOAN LOSSES
At December 31, 2002, Webster's allowance for loan losses was $116.8 million, or
1.48% of the total loan portfolio, and 270% of total nonperforming loans. This
compares with an allowance of $97.3 million or 1.43% of the total loan
portfolio, and 169% of total nonperforming loans at December 31, 2001.
A writedown of $12.4 million to the allowance resulted from the sale or transfer
to held for sale of five classified shared national telecommunication credits
totaling $25.8 million. The $16.3 million addition to the allowance for acquired
loans resulted from the Whitehall asset-based loan acquisition.
Net charge-offs for 2002 totaled $13.4 million as compared to $9.8 million for
2001 reflecting an increase of $3.6 million. The increase was primarily the
result of commercial loan net charge-offs being $4.3 million higher for 2002.
Equipment Financing net charge-offs increased by $2.7 million to $3.2 million,
or 27% of commercial net charge offs. Specialized Lending net charge-off
increased by $1.6 million to $6.5 million or 54%.
As management performed its review of the loan portfolio and the loan loss
allowance, it considered various factors when determining the adequacy of the
allowance. This review included the specialized lending portfolio and the
additional risks inherent in this portfolio. Based upon this review, management
believes that the allowance for loan losses at December 31, 2002 is adequate to
cover probable losses in the loan portfolio.
A summary of the activity in the allowance for loan losses for the last five
years follows:
For the years ended December 31,
--------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 97,307 90,809 72,658 65,201 71,599
Allowances for acquired loans 16,338 1,851 10,980 3,647 --
Reclassification of allowance for segregated
asset losses -- -- -- -- 2,623
Writedown of loans transferred to held for sale (12,432) -- -- -- --
Provisions charged to operations 29,000 14,400 11,800 9,000 8,103
- -------------------------------------------------------------------------------------------------------------------------------
Subtotal 130,213 107,060 95,438 77,848 82,325
- -------------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Residential (882) (1,096) (1,583) (3,246) (13,662)
Commercial (13,775) (8,978) (3,781) (2,376) (2,644)
Commercial real estate (a) -- -- -- -- (1,400)
Consumer (1,093) (1,501) (1,452) (1,784) (3,556)
- -------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (15,750) (11,575) (6,816) (7,406) (21,262)
Recoveries:
Residential 191 333 372 838 1,081
Commercial 1,813 1,267 1,571 1,079 2,755
Commercial real estate (a) -- -- -- -- --
Consumer 337 222 244 299 302
- -------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (13,409) (9,753) (4,629) (5,190) (17,124)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 116,804 97,307 90,809 72,658 65,201
===============================================================================================================================
(a) All Small Business Banking loans, both commercial and commercial real
estate, are considered commercial for purposes of charge-offs and
recoveries.
The ratio of net charge-offs to average loans outstanding for the last five
years follows:
For the years ended December 31,
-----------------------------------------------------------
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------
Residential 0.02% 0.02 0.03 0.06 0.31
Commercial 0.75 0.58 0.21 0.21 0.43
Consumer 0.05 0.16 0.19 0.28 0.57
- --------------------------------------------------------------------------------
Total 0.18% 0.14 0.07 0.09 0.32
================================================================================
35
The following table presents an allocation of the allowance for loan losses at
the dates indicated and the related percentage of loans in each category to the
Bank's loan receivable portfolio.
At December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
(Dollars in thousands) Amount loans Amount loans Amount loans Amount loans Amount loans
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end
of period applicable to:
Residential mortgage $ 18,540 42.8% $ 17,614 49.6% $ 18,321 60.0% $ 25,196 63.9% $ 23,237 69.6%
Commercial loans 67,293 22.7 47,390 20.1 43,798 17.5 20,566 15.0 13,430 9.8
Commercial real estate 19,646 13.0 22,894 14.3 20,865 12.4 20,630 12.2 22,309 11.1
Consumer loans 11,325 21.5 9,409 16.0 7,825 10.1 6,266 8.9 6,225 9.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total $116,804 100.0% $ 97,307 100.0% $ 90,809 100.0% $ 72,658 100.0% $ 65,201 100.0%
====================================================================================================================================
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a banking institution are monetary in nature. As a result,
interest rates have a more significant impact on Webster's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under the caption "Asset/Liability
Management and Market Risk".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
Management's Report.....................................................37
Independent Auditors' Report............................................37
Consolidated Statements of Condition....................................38
Consolidated Statements of Income.......................................39
Consolidated Statements of Comprehensive Income.........................40
Consolidated Statements of Shareholders' Equity.........................41
Consolidated Statements of Cash Flows...................................43
Notes to Consolidated Financial Statements..............................45
36
MANAGEMENT'S REPORT
TO OUR SHAREHOLDERS:
The management of Webster is responsible for the integrity and objectivity of
the financial and operating information contained in this annual report,
including the Consolidated Financial Statements covered by the Independent
Auditors' Report. These statements were prepared in conformity with accounting
principles generally accepted in the United States of America and include
amounts that are based on the best estimates and judgment of management.
Webster has internal controls, which provide management with reasonable
assurance that transactions are recorded and executed in accordance with its
authorizations, that assets are properly safeguarded and accounted for, and that
financial records are maintained so as to permit preparation of financial
statements in accordance with generally accepted accounting principles. The
internal control components include formal procedures, an organizational
structure that segregates duties, and a comprehensive program of periodic audits
by the internal auditors. Webster has also instituted policies which require
employees to maintain the highest level of ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting solely of
independent outside directors, meets periodically with management, the internal
auditors and the independent auditors to review internal controls, audit results
and accounting principles and practices, and annually recommends to the Board of
Directors the selection of independent auditors.
/s/ James C. Smith /s/ William J. Healy
- -------------------------------------- -------------------------------
James C. Smith William J. Healy
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
WEBSTER FINANCIAL CORPORATION
WATERBURY, CONNECTICUT
We have audited the accompanying consolidated statements of condition of Webster
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Webster Financial
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, as of July 1, 2002, for stock-based compensation
awards made after January 1, 2002 on a prospective basis. Also, as discussed in
Note 1 to the consolidated financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, and Statement of Financial Accounting Standards No.
147, Accounting for Certain Acquisition of Financial Institutions.
/s/ KPMG LLP
January 22, 2003
Hartford, Connecticut
37
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At December 31,
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 266,463 218,908
Short-term investments 15,596 35,937
Securities: (Notes 4 and 13)
Trading, at fair value 5,752 --
Available for sale, at fair value 4,119,245 3,999,133
Loans held for sale 405,157 143,918
Loans, net (Notes 5 and 6) 7,795,835 6,725,993
Accrued interest receivable 54,601 54,288
Goodwill (Note 9) 236,478 222,699
Cash surrender value of life insurance 172,066 163,023
Premises and equipment, net (Note 7) 84,683 82,808
Intangible assets (Note 9) 60,881 97,352
Deferred tax asset, net (Note 8) 14,951 33,158
Prepaid expenses and other assets 236,296 80,165
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 13,468,004 11,857,382
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 11) $ 7,606,122 7,066,471
Securities sold under agreement to repurchase and
other borrowings (Note 13) 2,166,640 876,185
Federal Home Loan Bank advances (Note 12) 2,163,029 2,531,179
Senior notes (Note 13) 126,000 126,000
Accrued expenses and other liabilities 239,923 91,503
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 12,301,714 10,691,338
- --------------------------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities
of subsidiary trusts (Note 20) 121,255 150,000
Preferred stock of subsidiary corporation (Note 21) 9,577 9,577
Commitments and contingencies (Notes 5, 6 and 22) -- --
Shareholders' Equity: (Note 14)
Common stock, $.01 par value:
Authorized - 200,000,000 shares at December 31, 2002 and 2001; Issued -
49,506,970 shares at December 31, 2002
and 49,502,742 shares at December 31, 2001 495 495
Paid-in capital 415,067 415,194
Retained earnings 707,531 590,254
Less Treasury stock at cost, 3,880,973 shares at December 31,
2002 and 353,325 shares at December 31, 2001 (134,318) (10,141)
Unearned compensation (3,913) (3,998)
Less employee stock ownership plan shares purchased with debt -- (286)
Accumulated other comprehensive income (loss) 50,596 14,949
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,035,458 1,006,467
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,468,004 11,857,382
==========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
38
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans and loans held for sale $ 464,400 519,920 518,315
Securities and short-term investments 227,634 237,315 220,596
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 692,034 757,235 738,911
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 11) 146,162 216,335 224,294
Borrowings 140,144 173,421 188,101
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 286,306 389,756 412,395
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 405,728 367,479 326,516
Provision for loan losses (Note 6) 29,000 14,400 11,800
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 376,728 353,079 314,716
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Deposit service charges 61,610 56,061 49,201
Loan fees 18,531 16,262 10,858
Insurance revenue 27,073 21,751 14,360
Trust and investment services 15,918 18,346 18,184
Financial advisory services 19,277 15,525 1,290
Gain on sale of loans and loan servicing, net 5,808 2,771 3,956
Increase in cash surrender value of life insurance 9,042 9,164 8,555
Gain on sale of securities, net (Note 4) 23,377 10,621 8,445
Gain on sale of deposits -- -- 4,859
Other income 4,936 11,597 9,113
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest income 185,572 162,098 128,821
- ------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and benefits 171,042 142,899 122,257
Occupancy 26,606 25,643 24,774
Furniture and equipment 29,167 27,878 26,302
Goodwill and intangible amortization (Note 9) 16,017 31,227 22,400
Marketing 10,522 8,728 9,118
Professional services 11,404 8,516 7,399
Acquisition-related 1,965 -- --
Capital securities (Note 20) 13,525 14,462 14,323
Dividends on preferred stock of subsidiary corporation (Note 21) 863 985 4,151
Branch reconfiguration -- 3,703 --
Other expenses 47,212 44,891 36,406
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 328,323 308,932 267,130
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting method 233,977 206,245 176,407
Income taxes (Note 8) 73,965 69,430 58,116
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 160,012 136,815 118,291
Extraordinary item - early extinguishment of debt
(net of tax benefit of $596) (Note 17) -- (1,209) --
Cumulative effect of change in method of accounting (net of tax
benefit of $3,920 and $1,196, respectively) (Notes 9 and 15) (7,280) (2,418) --
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 152,732 133,188 118,291
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
39
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 152,732 133,188 118,291
BASIC EARNING PER SHARE:
Income before extraordinary item and
cumulative effect of change in accounting method $ 3.36 2.79 2.58
Extraordinary item - early extinguishment of debt -- (0.03) --
Cumulative effect of change in method of accounting (0.15) (0.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3.21 2.71 2.58
====================================================================================================================================
DILUTED EARNINGS PER SHARE:
Income before extraordinary item and cumulative
effect of change in accounting method $ 3.31 2.75 2.55
Extraordinary item - early extinguishment of debt -- (0.02) --
Cumulative effect of change in method of accounting (0.15) (0.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3.16 2.68 2.55
====================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 47,584 49,086 45,910
Diluted 48,392 49,743 46,428
====================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 152,732 133,188 118,291
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale
arising during year (net of income tax effect of $32,351,
$14,804 and $44,297, for 2002, 2001 and 2000, respectively) 48,628 23,570 67,973
Reclassification adjustment for net gains included in
net income (net of income tax effect of $9,194,
$3,529 and $3,315 for 2002, 2001 and 2000, respectively) (13,862) (6,850) (6,730)
Additional minimum pension liability (net of income tax
expense (benefit) of $474) 881 (881) --
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 35,647 15,839 61,243
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 188,379 149,027 179,534
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
40
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
(In thousands, except Common Paid-in Retained Treasury Compen- Purchased Income
per share data) Stock Capital Earnings Stock sation With Debt (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 452 301,336 400,413 (3,274) -- (1,127) (62,133) 635,667
Net income for 2000 -- -- 118,291 -- -- -- -- 118,291
Dividends paid:
$.62 per common share -- -- (28,645) -- -- -- -- (28,645)
Allocation of ESOP shares -- 814 -- -- -- 485 -- 1,299
Exercise of stock options 9 13,299 -- -- -- -- -- 13,308
Common stock repurchased -- -- -- (110,797) -- -- -- (110,797)
Consideration granted for
purchase acquisitions 34 104,274 -- 99,758 -- -- -- 204,066
Net unrealized gain on
securities available for
sale, net of taxes -- -- -- -- -- -- 61,243 61,243
Stock-based compensation -- (23) (35) 952 (1,640) -- -- (746)
Common stock retired for
purchase acquisitions -- (3,603) -- -- -- -- -- (3,603)
Other, net -- 237 54 -- -- -- -- 291
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642) (890) 890,374
- -----------------------------------------------------------------------------------------------------------------------------
Net income for 2001 -- -- 133,188 -- -- -- -- 133,188
Dividends paid:
$.67 per common share -- -- (33,003) -- -- -- -- (33,003)
Allocation of ESOP shares -- 440 -- -- -- 356 -- 796
Exercise of stock options -- (2,961) -- 10,583 -- -- -- 7,622
Common stock repurchased -- -- -- (11,223) -- -- -- (11,223)
Consideration granted for
purchase acquisitions -- 221 -- 1,181 -- -- -- 1,402
Net unrealized gain on
securities available for
sale, net of taxes -- -- -- -- -- -- 16,720 16,720
Stock-based compensation -- 1,160 -- 2,679 (2,358) -- -- 1,481
Additional minimum pension
liability, net of tax -- -- -- -- -- -- (881) (881)
Other, net -- -- (9) -- -- -- -- (9)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
41
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
(In thousands, except Common Paid-in Retained Treasury Compen- Purchased Income
per share data) Stock Capital Earnings Stock sation With Debt (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------
Net income for 2002 $ -- -- 152,732 -- -- -- -- 152,732
Dividends paid:
$.74 per common share -- -- (35,463) -- -- -- -- (35,463)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (1,630) -- 7,664 -- -- -- 6,034
Common stock repurchased -- -- -- (138,511) -- -- -- (138,511)
Consideration granted for
purchase acquisitions -- -- -- 2,765 -- -- -- 2,765
Net unrealized gain on
securities available for
sale, net of taxes -- -- -- -- -- -- 34,766 34,766
Stock-based compensation -- 922 8 3,905 85 -- -- 4,920
Additional minimum pension
liability adjustment,
net of tax -- -- -- -- -- -- 881 881
Other, net -- 10 -- -- -- -- -- 10
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 495 415,067 707,531 (134,318) (3,913) -- 50,596 1,035,458
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
42
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 152,732 133,188 118,291
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 29,000 14,400 11,800
Depreciation and amortization 24,423 21,567 26,800
Amortization (accretion) of securities premiums/discounts, net 2,959 (1,774) 471
Amortization (accretion) of loan premiums/discounts, net 1,015 694 (928)
Amortization of intangible assets 16,017 31,227 22,400
Cumulative effect of change in accounting method 11,200 3,614 --
Gains on sale of deposits -- -- (4,859)
Gains on sale of foreclosed properties, net (321) (1,094) (906)
Gains on sale of securities, net (23,056) (10,379) (10,045)
Gains on sale of loans and servicing, net (5,808) (2,771) (3,956)
(Gains) losses on trading securities, net (321) (242) 1,600
(Increase) decrease in trading securities (5,431) 248 49,346
Loans originated for sale (1,862,618) (1,009,808) (187,921)
Proceeds from sale of loans originated for sale 1,601,379 883,620 179,591
Decrease (increase) in interest receivable 547 15,445 (5,072)
Increase in prepaid expenses and other assets (167,365) (25,193) (15,391)
Increase (decrease) in interest payable 6,188 (18,944) 9,294
Increase (decrease) in accrued expenses and other liabilities, net 144,652 (31,421) 31,194
Increase in cash surrender value of life insurance (9,043) (9,164) (8,555)
Proceeds from surrender of life insurance contracts -- 19,008 --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (83,851) 12,221 213,154
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (2,911,662) (2,388,654) (1,294,590)
Principal collected on securities 1,645,594 765,936 293,263
Maturities of securities 4,397 58,193 13,872
Proceeds from sales of securities, available for sale 1,219,876 1,007,000 955,214
Decrease (increase) short-term investments, net 20,341 (34,148) 48,087
(Increase) decrease in loans, net (667,914) 300,706 (135,167)
Proceeds from sale of foreclosed properties 4,828 5,562 10,376
Purchases of premises and equipment, net (18,555) (6,747) (6,893)
Net cash (paid) received for acquisitions (430,770) (17,263) 221,625
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (1,133,865) (309,415) 105,787
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 539,651 85,343 (87,898)
Repayment of FHLB advances (16,026,045) (18,112,832) (3,290,442)
Proceeds from FHLB advances 15,657,895 18,263,937 3,629,171
Increase (decrease) in securities sold under agreement to repurchase
and other borrowings 1,290,455 91,223 (384,386)
Repayment of Senior Notes -- -- (40,000)
Redemption of Series A preferred stock of subsidiary corporation -- (40,000) --
Redemption of capital securities (28,745) -- --
Cash dividends to common shareholders (35,463) (33,003) (28,645)
Exercise of stock options 6,034 7,622 13,308
Common stock repurchased (138,511) (11,223) (110,797)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,265,271 251,067 (299,689)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 47,555 (46,127) 19,252
Cash and cash equivalents at beginning of year 218,908 265,035 245,783
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 266,463 218,908 265,035
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
43
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 80,419 70,070 49,230
Interest paid 280,091 408,699 405,502
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties 2,545 6,212 7,577
Reclassification of held to maturity securities to available for sale (fair value
of $248,215 at January 1, 2002) -- 261,747 --
- ---------------------------------------------------------------------------------------------------------------------
Assets acquired and liabilities assumed and assets sold and liabilities
extinguished were as follows:
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Fair value of noncash assets acquired $ 430,604 247,040 1,011,434
Fair value of liabilities assumed 608 251,842 1,232,409
Common stock issued 2,750 1,402 200,463
Fair value of net assets sold in sale transaction -- -- 45,591
Fair value of liabilities sold in sale transaction -- -- 35,795
- ---------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
44
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
A) BASIS OF FINANCIAL STATEMENT PRESENTATION
1) PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Webster and its
subsidiaries. The Consolidated Financial Statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") and all significant intercompany transactions have been
eliminated in consolidation.
2) USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the Consolidated Financial Statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the Consolidated 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.
B) CASH AND CASH EQUIVALENTS
For the purposes of the Statements of Cash Flows, cash on hand and in banks is
reflected as cash and cash equivalents.
C) SECURITIES
Securities are classified as available for sale, held to maturity or trading.
Management determines the appropriate classification of securities at the time
of purchase. Securities are classified as held to maturity when the Company has
the intent and ability to hold the securities to maturity. Held to maturity
securities are stated at amortized cost. Securities bought and held for the
purpose of selling in the near term are classified as trading and are carried at
fair value, with net unrealized gains and losses recognized currently in
noninterest income. Securities not classified as held to maturity or trading are
classified as available for sale and are stated at fair value. Unrealized gains
and losses, net of tax, on available for sale securities are included in
accumulated other comprehensive income (loss), net of income taxes, a separate
component of shareholders' equity. The reported value of held to maturity or
available for sale securities is adjusted for amortization of premiums or
accretion of discounts using a method that approximates the level yield method.
Such amortization and accretion is included in interest income from securities.
Non-marketable securities, such as FHLB stock, are carried at cost. Unrealized
losses on securities are charged to noninterest income when the decline in fair
value of a security is judged to be other than temporary. The specific
identification method is used to determine realized gains and losses on sales of
securities.
D) LOANS
Loans are stated at the principal amounts outstanding, net of deferred loan fees
and/or costs and an allowance for loan losses. Interest on loans is credited to
interest income as earned based on the interest rate applied to principal
amounts outstanding. Loans are placed on nonaccrual status when timely
collection of principal and interest in accordance with contractual terms is
doubtful. Loans are transferred to a nonaccrual basis generally when principal
or interest payments become 90 days delinquent, unless the loan is well secured
and in process of collection, or sooner when management concludes circumstances
indicate that borrowers may be unable to meet contractual principal or interest
payments.
Accrual of interest is discontinued if the loan is placed on nonaccrual status.
When a loan is transferred to nonaccrual status, unpaid accrued interest is
reversed and charged against interest income. If ultimate repayment of a
nonaccrual loan is expected, any payments received are applied in accordance
with contractual terms. If ultimate repayment is not expected or management
judges it to be prudent, any payment received on a nonaccrual loan is applied to
principal until ultimate repayment becomes expected. Loans are removed from
nonaccrual status when they become current as to principal and interest or
demonstrate a period of performance under contractual terms and, in the opinion
of management, are fully collectible as to principal and interest.
Commercial loans are considered impaired when it is probable that the borrower
will not repay the loan according to the original contractual terms of the loan
agreement. Impaired loans included in nonperforming loans generally are
nonaccrual commercial type loans, commercial loans past due 90 days or more and
still accruing interest, and all loans restructured in a troubled debt
restructuring subsequent to January 1, 1995.
Loan origination fees, net of certain direct origination costs and premiums and
discounts on loans purchased, are recognized in interest income over the lives
of the loans using a method approximating the interest method.
45
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
E) LOANS HELD FOR SALE
Loans held for sale are carried at lower of cost or fair value in the aggregate
as determined by outstanding commitments from investors or current market prices
for loans with no sale commitments. Net unrealized losses on loans held for
sale, if any, are recognized in a valuation allowance by charges to noninterest
income.
F) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in the loan portfolio. This allowance is increased by
provisions charged to operating expense and by recoveries on loans previously
charged-off, and reduced by charge-offs on loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Webster's allowance for loan
losses. Such agencies may require Webster to recognize additions to the
allowance for loan losses based on judgments different from those of management.
The allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent loans). The
Company considers estimated costs to sell on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
these costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
G) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS Nos. 137 and 138, effective January 1, 2001.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Changes in the fair value of the
derivatives are reported in either earnings or other comprehensive income
(loss), depending on the use of the derivative and whether or not it qualifies
for hedge accounting. Special hedge accounting treatment is permitted only if
specific criteria are met, including a requirement that the hedging relationship
be highly effective both at inception and on an ongoing basis. Accounting for
hedges varies based on the type of hedge - fair value or cash flow. Results of
effective hedges are recognized in current earnings for fair value hedges and in
other comprehensive income/loss for cash flow hedges. Ineffective portions of
hedges are recognized immediately in earnings and are not deferred. There may be
increased volatility in net income and other comprehensive income (loss) on an
ongoing basis as a result of accounting for derivative instruments in accordance
with SFAS No. 133, as amended.
H) SHORT-TERM INVESTMENTS
Short-term investments consist primarily of deposits in the Federal Home Loan
Bank ("FHLB") or other short-term investments. These deposits are carried at
cost, which approximates market value.
I) PREMISES AND EQUIPMENT AND DEPRECIATION
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation of premises and equipment is accumulated on a straight-line basis
over the estimated useful lives of the related assets. Estimated lives are 15 to
40 years for buildings and improvements and 3 to 20 years for furniture,
fixtures and equipment. Amortization of leasehold improvements is calculated on
a straight-line basis over the shorter of the useful life of the improvement or
the terms of the related leases.
Maintenance and repairs are charged to noninterest expense as incurred and
improvements are capitalized. The cost and accumulated depreciation relating to
premises and equipment retired or otherwise disposed of are eliminated and any
resulting gains and losses are credited or charged to income.
J) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated periodically for impairment. An assessment of
recoverability is performed prior to any writedown of an asset. If circumstances
suggest their value may be impaired, an expense would be charged in the current
period.
K) GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. Intangible assets represent purchased assets that
lack physical substance but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold
or exchanged either separately or in combination with a related contract, asset
or liability. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets". Under the provisions of SFAS No. 142, goodwill is
no longer amortized into expense over an estimated useful life, but rather is
tested at least annually for impairment.
46
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets with finite useful lives continue to be amortized over their
estimated useful lives but also continue to be subject to impairment testing.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight line
basis over periods ranging from twelve to twenty years from acquisition dates.
Goodwill was also subject to periodic reviews for events or changes in
circumstances that may indicate that the carrying amount was not recoverable,
and impairment was to be recognized if permanent loss was indicated.
L) CASH SURRENDER VALUE OF LIFE INSURANCE
The investment in life insurance represents the cash surrender value of life
insurance policies on officers of the Bank. Increases in the cash surrender
value are recorded as other noninterest income. Decreases are the result of
collection on the policies due to the death of an insured.
M)INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income taxes in
the period of enactment. A valuation allowance has been provided for that
portion of the deferred tax asset that management believes will not be realized.
The valuation allowance is adjusted, by a charge or credit to income tax
expense, as facts and circumstances warrant.
N) EMPLOYEE RETIREMENT BENEFIT PLANS
The Bank has a noncontributory pension plan covering substantially all
employees. Costs related to this plan, based upon actuarial computations of
current and future benefits for employees, are charged to noninterest expense
and are funded in accordance with the requirements of the Employee Retirement
Income Security Act ("ERISA").
O) STOCK-BASED COMPENSATION
At December 31, 2002, Webster had a fixed stock-based employee and non-employee
director compensation plan, which is described more fully in Note 18 of Notes to
the Consolidated Financial Statements. Prior to January 1, 2002, Webster
accounted for stock-based compensation related to its option plans under the
recognition and measurement provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Therefore, no stock-based employee compensation expense related
to option grants is reflected in noninterest expense for 2001 and prior years as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. During 2002,
effective January 1, 2002, Webster adopted the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation", prospectively, to
all employee and non-employee options granted, modified, or settled January 1,
2002 and thereafter. Awards under the plans, in general, vest over periods
ranging from 3 to 4 years. Therefore, the cost related to this stock-based
compensation included in the determination of net income for 2002 is less than
that which would have been recognized if the fair value based method had been
applied to all option grants since the original effective date of SFAS No. 123.
Webster also grants restricted stock to employees and directors. The cost of
restricted stock granted is reflected in compensation and benefit expense and
totaled $1.7 million, $1.0 million and $325,000 for the years 2002, 2001 and
2000, respectively. The following table illustrates the effect on net income and
earnings per share if the fair value based method had been applied to stock
option awards in each of the periods presented.
Year ended December 31,
- ----------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Net income, as reported $ 152,732 133,188 118,291
Add: Stock option compensation expense included
in reported net income, net of related tax effects 529 -- --
Deduct: Total stock option compensation expense
determined under fair value based method for all awards,
net of related tax effects (3,792) (2,724) (2,079)
- ----------------------------------------------------------------------------------------------------
Pro forma net income $ 149,469 130,464 116,212
- ----------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 3.21 2.71 2.58
- pro forma 3.14 2.66 2.53
- ----------------------------------------------------------------------------------------------------
Diluted - as reported $ 3.16 2.68 2.55
- pro forma 3.09 2.62 2.50
- ----------------------------------------------------------------------------------------------------
47
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
P) LOAN SALES AND SERVICING SALES
Gains or losses on sales of loans are included in noninterest income and are
recognized at the time of sale. SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", requires that
a mortgage banking entity recognize as a separate asset the value of the right
to service mortgage loans for others, regardless of how those servicing rights
are acquired. Fair values are estimated considering loan prepayment predictions,
historical prepayment rates, interest rates, and other economic factors. For
purposes of impairment evaluation and measurement, the Company stratifies
mortgage servicing rights based on predominate risk characteristics of the
underlying loans including loan type, interest rate (fixed or adjustable) and
amortization type. To the extent that the carrying value of mortgage servicing
rights exceeds fair value by individual stratum, a valuation allowance is
established by a charge to noninterest income. The allowance is adjusted for
subsequent changes in fair value. The cost basis of mortgage servicing rights is
amortized into noninterest income over the estimated period of servicing
revenue.
Q) FEE REVENUE
Generally, fee revenue from deposit service charges and loans is recognized when
earned, except where ultimate collection is uncertain and is then recognized
when received. Insurance revenue is recognized on property and casualty
insurance when the insured is billed. Customer policy cancellations may result
in a partial refund of previously collected revenue and, therefore, an
adjustment to previously recognized income. Revenue for other lines of
insurance, such as life, health, etc., is recognized when earned.
Generally, financial advisory services revenue is recognized to the extent that
work has been completed on specific projects. Additionally, some revenues are
contingent on successful completion of the project. Revenues on these contracts
are not recognized until determinable.
Trust revenue is recognized as received from individual's accounts based upon a
percentage of asset value. Fee income on managed institutional accounts is
accrued as earned and collected quarterly based on asset value managed at
quarter end.
R) COMPREHENSIVE INCOME
Comprehensive income includes net income and any changes in equity from sources
that bypass the statements of income (such as changes in net unrealized gains
and losses on securities available for sale). At the Company, comprehensive
income represents net income plus other comprehensive income, which consists of
the net changes for the period in unrealized gains or losses in securities
available for sale and minimum pension liability adjustment, net of income
taxes. Accumulated other comprehensive income represents the net unrealized
gains or losses on securities available for sale and minimum pension liability
adjustment, net of income taxes.
S) EARNINGS PER SHARE
Basic net income per common share ("EPS") is calculated by dividing net income
available to common shareholders by the weighted-average number of shares of
common stock outstanding. Diluted EPS reflects the potential dilution that could
occur if contracts to issue common stock (such as stock options) were exercised
or converted into common stock that would then share in the earnings of the
Company. Diluted EPS is calculated by dividing net income available to common
shareholders by the weighted-average number of common shares outstanding,
adjusted for the additional common shares that would have been outstanding if
all potentially dilutive common shares were issued during the reporting period.
Unallocated employee stock ownership plan ("ESOP") shares are not included in
the weighted-average number of common shares outstanding for either basic or
diluted earnings per share. For each of the years in the three-year period ended
December 31, 2002, the difference between basic and diluted weighted average
shares outstanding was entirely due to the effect of stock options as potential
common shares.
At December 31, 2002, 2001 and 2000, options to purchase 91,328, 715,799 and
1,156,469 shares of common stock at exercise prices from $35.60 to $39.45;
$31.10 to $36.69; and $23.25 to $35.38, respectively, were not considered in the
computation of diluted potential common stock since the exercise prices of the
options were greater than the average market price of the Company's common stock
for 2002, 2001 and 2000 periods, respectively.
T) STANDBY LETTERS OF CREDIT
Substantially all of the Bank's outstanding standby letters of credit are
performance standby letters of credit within the scope of FASB Interpretation
No. 45. These are irrevocable undertakings by the Bank, as guarantor, to make
payments in the event a specified third party fails to perform under a
nonfinancial contractual obligation. Most of the Bank's performance standby
letter of credit arise in connection with lending relationships and have terms
of one year or less. At December 31, 2002, Webster's standby letters of credit
totaled $127.8 million.
U) RECLASSIFICATION
Certain financial statement balances as previously reported have been
reclassified to conform to the 2002 Consolidated Financial Statements
presentation.
48
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: ACQUISITIONS
- --------------------
The following acquisitions were completed by Webster during 2002 and 2001. The
guidelines of SFAS No. 141 were followed for acquisitions occurring July 1, 2001
and thereafter for the recognition of goodwill and/or intangible assets. The
results of operations of the acquired companies are included in the Consolidated
Financial Statements only for periods subsequent to the date of acquisition.
FLEMING, PERRY & COX
In October 2002, Webster acquired Fleming, Perry & Cox, ("Fleming"), a financial
planning and investment services firm, to be part of Webster Financial Advisors.
Based in Norwalk, Connecticut, Fleming serves high net worth clients in the
Northeast. The company offers financial planning, investment management, risk
management and tax and estate planning services. Fleming operates as a direct
subsidiary of Webster. Webster recorded $3.5 million of goodwill for this
acquisition.
WHITEHALL BUSINESS CREDIT CORPORATION
In August 2002, through the Bank, Webster acquired the asset-based loans of IBJ
Whitehall Business Credit Corporation, a subsidiary of The Industrial Bank of
Japan Trust Company. The loans, as well as selected personnel and office
facilities, were acquired by a subsidiary of the Bank named Whitehall Business
Credit Corporation ("Whitehall"), and operates from its main office in New York,
New York with additional offices in Braintree, Massachusetts and Atlanta,
Georgia. Webster acquired $451.1 million of outstanding loans and $59.5 million
of letters of credit in addition to adding the existing staff and certain
facilities. Webster did not record any goodwill, as this was an acquisition of
selected assets and liabilities.
WOLFF ZACKIN & ASSOCIATES AND BENEFIT PLANS DESIGN & ADMINISTRATION
In April 2001, through Webster Insurance, Webster acquired Wolff Zackin &
Associates Inc. ("Wolff Zackin") and its sister company, Benefits Plans Design &
Administration Inc. ("Benefit Plans"). Wolff Zackin is a multiple lines
insurance business specializing in personal and corporate life insurance,
personal and commercial property and casualty insurance and deferred
compensation plans. Benefit Plans provides businesses with pension, profit
sharing, individual retirement account (IRA) and 401(k) investment plans.
Benefit Plans also provides group life, disability income, and medical and
dental care plans for businesses. Webster recorded $7.2 million of goodwill for
this acquisition.
CENTER CAPITAL CORPORATION
In March 2001, through the Bank, Webster acquired Center Capital Corporation
("Center Capital"), a privately owned Farmington, Connecticut-based equipment
financing company. Center Capital finances equipment for construction and
transportation; environmental, machine tool, aviation and professional practices
through equipment financing programs to customers throughout the United States.
Webster recorded $14.0 million of goodwill for this acquisition.
MUSANTE REIHL ASSOCIATES
In January 2001, through Webster Insurance, the Company acquired Musante Reihl
Associates ("Musante"), a privately owned Cheshire, Connecticut-based insurance
agency. Musante specializes in group benefits, long-term care and life insurance
products. Webster recorded $1.7 million of goodwill for this acquisition.
NOTE 3: RECENT ACCOUNTING STANDARDS
- -----------------------------------
On December 2, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both the annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on the reported results. On July
24, 2002, Webster announced, retroactive to January 1, 2002, it began 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 has been recorded for stock options granted in 2002 to
employee and non-employee directors using the fair value method with the cost
amortized over the vesting period. 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. See Notes 1 and 18 of Notes to
Consolidated Financial Statements for more information on the effects of
electing to use SFAS No. 123, as amended by SFAS No. 148, to account for
employee and non-employee directors stock-based compensation.
49
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 1, 2002, FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions". This 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 of 2002, with a required effective
date of January 1, 2002. See Note 9 of Notes to Consolidated 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". This statement 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 this statement is adopted.
On April 2, 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, 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 was 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. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Company adopted the provisions of Statement
No. 141 effective July 1, 2001 and the provisions of Statement No. 142 effective
January 1, 2002. See Note 9 of Notes to Consolidated Financial Statements for
information concerning the impact of SFAS Nos. 141 and 142 on Webster.
In January 2003, FASB issued FASB Interpretation No. ("FIN") 46, "Consolidation
of Variable Interest Entities". This interpretation addresses consolidation by
business enterprises of variable interest entities which have one or both of the
following characteristics: 1) The entity investment is not sufficient to support
its activities without additional financial support, 2) equity investors lack
one or more of the essential characteristics of a controlling interest. This
interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities, and improve comparability
between enterprises engaged in similar activities even if some activities are
conducted through variable interest entities. The Company does not expect any
material impact on its financial statements as a result of this interpretation.
50
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2002, FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". This interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements. It also clarifies that
a guarantor is required to recognize, at inception of guarantee, a liability for
the fair value of the obligation undertaken in issuing a guarantee. The
recognition of a liability for obligations under taken upon issuing a guarantee
results in a more representationally faithful depiction of the guarantor's
assets and liabilities. There was no material impact on the Company's financial
statements as a result of this interpretation.
51
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: SECURITIES
- ------------------
A summary of securities follows:
At December 31,
- -------------------------------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Estimated Amortized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------------
TRADING SECURITIES:
Securities (a) $ 5,752 -- -- 5,752 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes -- -- -- -- 2,014 -- -- 2,014
U.S. Government Agency -- -- -- -- -- -- -- --
Municipal bonds and notes 104,676 4,388 (39) 109,025 78,349 1,266 (536) 79,079
Corporate bonds and notes 181,810 1,432 (6,029) 177,213 207,024 786 (18,428) 189,382
Equity securities (b) 177,051 5,234 (1,616) 180,669 166,054 7,689 (3,857) 169,886
Mortgage-backed securities (c) 3,571,160 81,487 (309) 3,652,338 3,519,067 50,008 (10,303) 3,558,772
Purchased interest-rate
contracts -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
4,034,697 92,541 (7,993) 4,119,245 3,972,508 59,749 (33,124) 3,999,133
- -------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY PORTFOLIO (D):
U.S. Treasury Notes -- -- -- -- -- -- -- --
Municipal bonds and notes -- -- -- -- -- -- -- --
Corporate bonds and notes -- -- -- -- -- -- -- --
Mortgage-backed securities (a) -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total $ 4,040,449 92,541 (7,993) 4,124,997 $ 3,972,508 59,749 (33,124) 3,999,133
- -------------------------------------------------------------------------------------------------------------------
At December 31,
- ------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------
Amortized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------
TRADING SECURITIES:
Securities (a) 6 -- -- 6
- ------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 11,042 3 -- 11,045
U.S. Government Agency 46,246 3 (353) 45,896
Municipal bonds and notes 34,401 530 (47) 34,884
Corporate bonds and notes 73,265 -- (15,379) 57,886
Equity securities (b) 177,061 4,501 (5,877) 175,685
Mortgage-backed securities (c) 2,796,365 29,852 (11,571) 2,814,646
Purchased interest-rate
contracts 6,317 -- (3,032) 3,285
- ------------------------------------------------------------------------------------
3,144,697 34,889 (36,259) 3,143,327
- ------------------------------------------------------------------------------------
HELD TO MATURITY PORTFOLIO (D):
U.S. Treasury Notes 3,786 5 (2) 3,789
Municipal bonds and notes 23,267 173 (31) 23,409
Corporate bonds and notes 135,404 -- (12,879) 122,525
Mortgage-backed securities (a) 99,290 558 (1,356) 98,492
- ------------------------------------------------------------------------------------
261,747(d) 736 (14,268) 248,215
- ------------------------------------------------------------------------------------
Total 3,406,450 35,625 (50,527) 3,391,548
- ------------------------------------------------------------------------------------
(a) Stated at fair value.
(b) As of December 31, 2002, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $150.0 million, preferred stock of
$5.8 million and common stock of $24.9 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. As of
December 31, 2000, the fair value of equity securities consisted of FHLB
stock of $125.3 million, preferred stock of $8.2 million and common stock
of $42.2 million.
(c) Includes mortgage-backed securities, which are guaranteed by Fannie Mae,
Freddie Mac and Government National Mortgage Association and represent
participating interests in direct pass through pools of mortgage loans
originated and serviced by the issuers of the securities.
(d) On January 1, 2001, as permitted by the provisions of SFAS No. 133, Webster
reclassified all held to maturity securities to available for sale
securities.
52
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of realized gains and losses follows:
Years ended December 31,
-----------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(In thousands) Gains Losses Net Gains Losses Net Gains Losses Net
- ------------------------------------------------------------------------------------------------------------------
Trading Securities:
Mortgage-backed securities $ -- -- -- -- -- -- 3,069 (2,273) 796
Corporate debt 105 (60) 45 -- -- -- -- -- --
U.S. Treasury Notes 400 (199) 201 342 -- 342 -- -- --
US Government agencies 31 -- 31 -- -- -- -- -- --
Municipal securities 154 (94) 60 -- -- -- -- -- --
Futures and options contracts 1 (17) (16) 90 (190) (100) 10,505 (12,901) (2,396)
- ------------------------------------------------------------------------------------------------------------------
Total 691 (370) 321 432 (190) 242 13,574 (15,174) (1,600)
- ------------------------------------------------------------------------------------------------------------------
Available for Sale:
Mortgage-backed securities 21,214 (1) 21,213 10,541 (1,145) 9,396 2,857 (292) 2,565
U.S. Treasury Notes -- -- -- 74 -- 74 13 (154) (141)
U.S. Government Agencies -- -- -- 100 (271) (171) 5 (849) (844)
Corporate debt 6 (5,058) (5,052) -- (1,300) (1,300) -- (71) (71)
Mutual funds -- -- -- -- -- -- -- (640) (640)
Equity securities 9,080 (2,185) 6,895 2,578 (198) 2,380 9,644 (418) 9,226
Other -- -- -- -- -- -- -- (50) (50)
- ------------------------------------------------------------------------------------------------------------------
Total 30,300 (7,244) 23,056 13,293 (2,914) 10,379 12,519 (2,474) 10,045
- ------------------------------------------------------------------------------------------------------------------
Total $ 30,991 (7,614) 23,377 13,725 (3,104) 10,621 26,093 (17,648) 8,445
- ------------------------------------------------------------------------------------------------------------------
The Company enters into short and long futures and options positions to minimize
the price volatility of certain assets held as trading securities and to profit
from trading opportunities. At December 31, 2002 and 2001, Webster had no such
positions. Changes in the market value of futures and options positions are
recognized as a gain or loss in the period for which the change occurred. All
gains and losses resulting from futures and options positions are reflected in
other noninterest income for the year ended December 31, 2002.
On January 1, 2001, Webster reclassified held to maturity securities, with a
market value of $248.2 million and an amortized cost of $261.7 million, to
available for sale securities, as permitted by SFAS No. 133.
As part of its ongoing review of its investment portfolio, management evaluates
unrealized losses on securities for declines in value that are other than
temporary in nature. During the year ended December 31, 2002, Webster recorded a
writedown of $1.8 million, included in gain on sale of securities, for two
equity holdings whose value decline was deemed to be other than temporary. There
were no such writedowns during 2001 or 2000.
53
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the amortized cost and weighted-average yield
(based on amortized cost) of debt securities at December 31, 2002, by
contractual maturity. Mortgage-backed securities are included by final
contractual maturity. Actual maturities will differ from contractual maturities
because certain issuers have the right to call or prepay obligations with or
without call or prepayment penalties.
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------
After one year After five years
One year or less through five years through ten years After 10 years Total
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
- ----------------------------------------------------------------------------------------------------------------------
Available for sale:
Municipal bonds and
notes $ 1,044 4.18% $ 19,483 5.83% $ 8,293 4.58% $ 75,856 5.09% $ 104,676 5.18%
Corporate bonds and
notes 50 5.76 12,770 4.34 13,217 8.37 155,773 6.00 181,810 6.06
Mortgage-backed
securities -- -- 5,747 7.76 76,566 6.20 3,488,847 5.37 3,571,160 5.39
- ----------------------------------------------------------------------------------------------------------------------
Total $ 1,094 4.25% $ 38,000 5.62% $ 98,076 6.36% $ 3,720,476 5.39% $ 3,857,646 5.42%
- ----------------------------------------------------------------------------------------------------------------------
At December 31, 2002, the Bank held securities with the following single issuers
whose aggregate value exceeded ten percent of total stockholders' equity, or
$103.5 million.
At December 31, 2002
--------------------------------
Aggregate Aggregate
(In thousands) Amortized Cost Market Value
- -----------------------------------------------------------------------
ISSUERS:
Fannie Mae $ 1,908,313 1,961,979
Freddie Mac 912,042 934,704
Washington Mutual Inc. 293,208 294,763
Federal Home Loan Bank 150,049 150,049
54
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: LOANS, NET
- ------------------
A summary of loans, net follows:
At December 31,
---------------------------------------------------
(Dollars in thousands) 2002 2001
- ---------------------------------------------------------------------------------------
Amount % Amount %
------ ---- ------ ---
Residential mortgage loans:
1-4 family units $ 3,134,109 40.2% $ 3,058,662 45.5%
Construction 142,387 1.8 223,583 3.3
Multi-family units 109,711 1.4 104,038 1.5
- ---------------------------------------------------------------------------------------
Total residential mortgage loans 3,386,207 43.4 3,386,283 50.3
- ---------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,378,936 17.7 1,046,874 15.6
Equipment financing 419,962 5.4 320,704 4.7
- ---------------------------------------------------------------------------------------
Total commercial loans 1,798,898 23.1 1,367,578 20.3
- ---------------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 913,030 11.7 892,145 13.3
Commercial construction 116,302 1.5 82,831 1.2
- ---------------------------------------------------------------------------------------
Total commercial real estate 1,029,332 13.2 974,976 14.5
- ---------------------------------------------------------------------------------------
Consumer loans:
Home equity credit loans 1,661,864 21.3 1,038,350 15.5
Other consumer 36,338 0.5 56,113 0.8
- ---------------------------------------------------------------------------------------
Total consumer loans 1,698,202 21.8 1,094,463 16.3
- ---------------------------------------------------------------------------------------
Total loans 7,912,639 101.5 6,823,300 101.4
Less: allowance for loan losses (116,804) (1.5) (97,307) (1.4)
- ---------------------------------------------------------------------------------------
Loans, net $ 7,795,835 100.0% $ 6,725,993 100.0%
- ---------------------------------------------------------------------------------------
At December 31, 2002, loans net included $13.1 million of net discounts and
$27.1 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 loans totaled $56.9 million and $78.2 million at
December 31, 2002 and 2001, respectively.
Significant portions of the Company's loans are secured by real estate in the
state of Connecticut. In addition, substantial portions of foreclosed properties
are located in the state of Connecticut. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio, and the
recovery of the carrying amount of foreclosed properties is dependent on
economic and market conditions in Connecticut.
At December 31, 2002, Webster had $22.4 million of impaired loans as defined by
SFAS No. 114, of which $12.0 million were measured based upon the expected fair
value of the underlying collateral and $10.4 million were measured based upon
the expected future cash flows of the impaired loans. The $12.0 million of
impaired loans had an allowance for loan losses of $3.7 million and the $10.4
million of impaired loans had an allowance for loan losses of $353,000. At
December 31, 2001, Webster had $26.6 million of impaired loans, of which $20.3
million were measured based upon the fair value of the underlying collateral and
$6.3 million were measured based upon the expected future cash flows of the
impaired loans. The $20.3 million of impaired loans had an allowance for loan
losses of $4.5 million and the $6.3 million of impaired loans had an allowance
for loan losses of $291,000. In 2002, 2001 and 2000, the average balance of
impaired loans was $23.4 million, $18.7 million and $16.3 million, respectively.
Webster's policy with regard to the recognition of interest income on commercial
impaired loans includes an individual assessment of each loan. Interest that is
more than 90 days past due is not accrued. When payments on commercial impaired
loans are received, interest income is recorded on a cash basis or is applied to
principal based on an individual assessment of each loan. Cash basis interest
income recognized on commercial impaired loans for the years 2002, 2001 and 2000
amounted to $594,000, $774,000 and $414,000, respectively.
At December 31, 2002 and 2001, the Bank had total troubled debt restructurings
of approximately $922,000 and $5.2 million, respectively. Interest income booked
for 2002 under the restructured terms totaled $222,000 as compared to $395,000
that would have been booked had the restructured loans been under their original
terms during 2002. Interest income booked for 2001 under the restructured terms
totaled $533,000 as compared to $874,000 that would have been booked had the
restructured loans been under their original terms during 2001. At December 31,
2002, Webster had no commitment to lend any additional funds to debtors of
troubled debt restructurings.
55
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Webster's nonaccrual loans totaled $43.3 million and $57.4 million, respectively
at December 31, 2002 and 2001.
Webster is a party to financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and commitments to sell residential first mortgage loans and
commercial loans. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
Consolidated Statements of Condition.
The estimated fair value of commitments to extend credit is considered
insignificant at December 31, 2002 and 2001. Future loan commitments represent
residential and commercial mortgage loan commitments, commercial loan and
equipment financing commitments, letters of credit and commercial and home
equity unused credit lines. Rates for these loans are generally established
shortly before closing. The rates on home equity lines of credit generally vary
with the prime rate.
As of December 31, 2002 and 2001, residential mortgage commitments totaled
$518.4 million and $158.2 million, respectively. Residential commitments
outstanding at December 31, 2002 consisted of adjustable rate and fixed rate
mortgages of $31.8 million and $486.6 million, respectively, at rates ranging
from 4.3% to 7.8%. 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. In addition, at December 31,
2002 and 2001, there were unused portions of home equity credit lines extended
of $1.0 billion and $754.7 million, respectively. Unused commercial lines of
credit, letters of credit, standby letters of credit, equipment financing
commitments and outstanding commercial new loan commitments totaled $1.7 billion
and $800.3 million and at December 31, 2002 and 2001, respectively. As of
December 31, 2002 and 2001, consumer loan commitments totaled $42.4 million and
$49.1 million, respectively.
The Company uses forward commitments to sell residential mortgage loans, which
are entered into for the purpose of reducing the market risk associated with
originating loans held for sale. The types of risk that may arise are from the
possible inability of Webster or the other party to fulfill the contracts. At
December 31, 2002 and 2001, there were forward commitments to sell loans
totaling $533.2 million and $195.4 million, respectively, at rates between 5.0%
and 6.6%, and 5.6% and 7.0%, respectively. At December 31, 2002 and 2001, there
were $400.0 million and $143.9 million, respectively, of residential mortgage
loans held for sale.
NOTE 6: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The allowance for loan loss is maintained at a level to absorb probable losses
inherent in the loan portfolio. This allowance is increased by provisions
charged to operating expense and by recoveries on loans previously charged-off,
and reduced by charge-offs on loans.
A summary of the changes in the allowances for loan losses for three years
follows:
At December 31,
-----------------------------------
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------
Balance at beginning of year $ 97,307 90,809 72,658
Allowances from purchase transactions 16,338 1,851 10,980
Write-down of loans transferred to held for sale (12,432) -- --
Provisions charged to operations 29,000 14,400 11,800
- -----------------------------------------------------------------------------------------
Subtotal 130,213 107,060 95,438
- -----------------------------------------------------------------------------------------
Charge-offs (15,750) (11,575) (6,816)
Recoveries 2,341 1,822 2,187
- -----------------------------------------------------------------------------------------
Net charge-offs (13,409) (9,753) (4,629)
- -----------------------------------------------------------------------------------------
Balance at end of year $ 116,804 97,307 90,809
- -----------------------------------------------------------------------------------------
56
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: PREMISES AND EQUIPMENT, NET
- -----------------------------------
A summary of premises and equipment, net follows:
At December 31,
---------------------------
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
Land $ 12,576 12,684
Buildings and improvements 73,748 68,903
Leasehold improvements 11,612 10,328
Furniture, fixtures and equipment 109,816 101,995
- ---------------------------------------------------------------------------
Total premises and equipment 207,752 193,910
Accumulated depreciation and amortization (123,069) (111,102)
- ---------------------------------------------------------------------------
Premises and equipment, net $ 84,683 82,808
- ---------------------------------------------------------------------------
At December 31, 2002, Webster was obligated under various non-cancelable
operating leases for properties used as branch office facilities. The leases
contain renewal options and escalation clauses which provide for increased
rental expense based primarily upon increases in real estate taxes over a base
year. Rental expense under leases was $12.4 million, $11.0 million and $8.9
million in 2002, 2001 and 2000, respectively. Webster is also entitled to rental
income under various non-cancelable operating leases for properties owned.
Rental income was $1.2 million for 2002 and 2001, and was $1.3 million in 2000.
The following is a schedule of future minimum rental payments and receipts
required under these leases as of December 31, 2002:
Lease Rental
(In thousands) Payments Receipts
- --------------------------------------------------------------
Years ending December 31:
2003 $ 13,497 1,434
2004 11,960 973
2005 9,985 711
2006 8,211 510
2007 5,704 276
Later years 28,458 753
- --------------------------------------------------------------
Total $ 77,815 4,657
- --------------------------------------------------------------
57
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: INCOME TAXES
Income taxes are comprised of the following:
Years ended December 31,
--------------------------------------
(In thousands) 2002 2001 2000
- -----------------------------------------------------------
CURRENT:
Federal $ 73,704 74,100 54,720
State 1,696 42 100
- -----------------------------------------------------------
75,400 74,142 54,820
- -----------------------------------------------------------
DEFERRED:
Federal (797) (4,712) 3,296
State (638) -- --
- -----------------------------------------------------------
(1,435) (4,712) 3,296
- -----------------------------------------------------------
TOTAL:
Federal 72,907 69,388 58,016
State 1,058 42 100
- -----------------------------------------------------------
$ 73,965 69,430 58,116
- -----------------------------------------------------------
In addition to the income taxes shown above, tax benefits of $596,000 were
recorded related to the extraordinary item in 2001, as well as tax benefits of
$3.9 million and $1.2 million related to the cumulative effect of change in
method of accounting in 2002 and 2001, respectively.
The following is a reconciliation of "expected" income taxes to actual income
taxes. "Expected" income taxes are computed by applying the 35% federal
statutory tax rate to income before income taxes, extraordinary item and
cumulative effect of change in method of accounting.
Years ended December 31,
--------------------------------
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------
"Expected" income taxes $ 81,892 72,186 61,742
Increase (decrease) in income taxes resulting from:
Tax-exempt income, net (1,226) (1,153) (822)
Increase in cash surrender value of life insurance (3,165) (3,207) (3,372)
Goodwill amortization -- 4,058 2,536
Other, net (3,536) (2,454) (1,968)
- ------------------------------------------------------------------------------------------
Income taxes $ 73,965 69,430 58,116
- ------------------------------------------------------------------------------------------
Webster's federal net operating loss carryforwards ("NOLs") totaled $7.4 million
at December 31, 2002, and are scheduled to expire in various tax years through
2020. Connecticut NOLs totaled $95.8 million at December 31, 2002, and are
scheduled to expire in 2020 and 2021. A valuation allowance has been established
for the full amount of Webster's Connecticut NOLs, due to uncertainties of
realization.
58
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences comprising Webster's deferred tax
asset, net are summarized below (a valuation allowance has been established for
the full amount of Connecticut deferred tax assets, due to uncertainties of
realization):
At December 31,
---------------------
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses, and other loss allowances 42,128 39,839
Loan discounts 7,866 10,214
Accrued compensation and benefits 9,824 6,163
Other accrued expenses 1,575 3,073
Intangibles 12,139 8,023
Net operating loss and credit carryforwards 7,913 9,767
Equipment financing costs 1,060 1,709
Depreciation and amortization 1,432 --
Other assets-investments 716 219
Other deductible items 314 697
- ------------------------------------------------------------------------------------------------
Total deferred tax assets 84,967 79,704
Less: valuation allowance for full amount of Connecticut portions (10,497) (10,959)
- ------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 74,470 68,745
- ------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Loan premiums and deferred fees 2,301 3,915
Intangibles 13,203 15,744
Compensation and benefits 4,926 2,026
Accrued dividends 525 570
Net unrealized gain on securities available for sale 33,585 10,498
Mortgage servicing rights 4,328 1,815
Depreciation and amortization -- 402
Other taxable items 651 617
- ------------------------------------------------------------------------------------------------
Total deferred tax liabilities 59,519 35,587
- ------------------------------------------------------------------------------------------------
Deferred tax asset, net $ 14,951 33,158
- ------------------------------------------------------------------------------------------------
Management believes it is more likely than not that Webster will realize its net
deferred tax assets, based upon its recent historical and anticipated future
levels of pre-tax income. There can be no absolute assurance, however, that
Webster will generate any specific level of future income.
NOTE 9: 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".
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 intangible asset 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 twelve 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
59
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $11.2 million or $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. Duff and Phelps overall revenues were $19.3
million for the year ended December 31, 2002. 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. No other portion of goodwill or other intangible assets was determined
to be impaired.
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 twelve months ending December 31,
2002, Webster would have recorded $1.1 million 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 unidentified intangible
assets related to these branch purchases was reclassified from intangible
assets, which was subject to amortization, to goodwill, which is subject to
impairment analysis, retroactive to January 1, 2002.
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- --------------------------------------------------------------------------------------
December 31, December 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------
Intangible assets:
Balances subject to amortization:
Core deposit intangibles $ 60,146 76,163
Unidentified intangibles from branch acquisitions -- 20,309
Balances not subject to amortization:
Pension assets 735 880
- --------------------------------------------------------------------------------------
Total intangible assets $ 60,881 97,352
- --------------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill $236,478 222,699
- --------------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the year ended December 31, 2002
are as follows:
Trust and
Retail* Commercial Investment
(In thousands) Banking Banking Services Total
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $185,685 31,198 5,816 222,699
Impairment loss -- (11,200) -- (11,200)
Unidentified intangibles reclassified as goodwill 20,309 -- -- 20,309
Purchase price adjustments 73 369 -- 442
Minority interest purchases -- 688 -- 688
Business combination -- -- 3,540 3,540
- ---------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $206,067 21,055 9,356 236,478
- ---------------------------------------------------------------------------------------------------------
*Includes insurance operations
60
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization of intangible assets for the twelve months ended December 31, 2002,
2001 and 2000 totaled $16.0 million, $16.1 million and $13.3 million,
respectively. The 2001 and 2000 periods also included $15.1 million and $9.1
million of goodwill amortization expense that ceased, effective January 1, 2002
upon the adoption of SFAS No. 142. 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,
2003 $ 15,280
2004 15,262
2005 15,262
2006 11,088
2007 3,032
- --------------------------------------------------------------------------------
The following adjusts reported 2002, 2001 and 2000 net income and earnings per
share to consistently reflect the provisions of SFAS Nos. 142 and 147 in all
periods. The adjustments add back the amortization of goodwill and unidentified
intangible assets prior to the implementation of SFAS Nos. 142 and 147.
- ----------------------------------------------------------------------------------------------------
Year ended December 31,
(In thousands, except for earnings per share amounts) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
NET INCOME:
As reported $ 152,732 133,188 118,291
Add back: Amortization (net of tax) -- 15,082 9,188
- ----------------------------------------------------------------------------------------------------
Adjusted net income $ 152,732 148,270 127,479
- ----------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
As reported $ 3.21 2.71 2.58
Add back: Amortization (net of tax) -- 0.31 0.20
- ----------------------------------------------------------------------------------------------------
Adjusted basic EPS $ 3.21 3.02 2.78
- ----------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
As reported $ 3.16 2.68 2.55
Add back: Amortization (net of tax) -- 0.30 0.20
- ----------------------------------------------------------------------------------------------------
Adjusted diluted EPS $ 3.16 2.98 2.75
- ----------------------------------------------------------------------------------------------------
61
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: MORTGAGE SERVICING RIGHTS
- ----------------------------------
An analysis of mortgage servicing rights for the three years ended December 31,
2002 follows:
Balance of
Mortgage Net Mortgage
Servicing Valuation Book Loans Serviced
(In thousands) Rights Allowance Value for Others
- --------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1999 $ 6,889 -- 6,889 1,335,235
Mortgage servicing rights capitalized 630 -- 630
Amortization charged against mortgage servicing fee income (2,252) -- (2,252)
Additional reserve -- (150) (150)
Reduction of impairment reserve (credit to mortgage servicing
fee income) -- 94 94
Mortgage servicing rights sold -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2000 5,267 (56) 5,211 1,086,053
Mortgage servicing rights capitalized 14,064 -- 14,064
Amortization charged against mortgage servicing fee income (1,651) -- (1,651)
Additional reserve -- (251) (251)
Mortgage servicing rights sold (10,716) -- (10,716)
- --------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 6,964 (307) 6,657 1,090,773
Mortgage servicing rights capitalized 19,998 -- 19,998
Amortization charged against mortgage servicing fee income (2,525) -- (2,525)
Additional reserve -- (918) (918)
Reduction of impairment reserve (credit to mortgage servicing
fee income) -- 72 72
Mortgage servicing rights sold (11,964) -- (11,964)
- --------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 12,473 (1,153) 11,320 1,368,421
- --------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights represents the capitalized net present value of fee
income streams generated by Webster from servicing residential mortgage loans
for other financial institutions. Webster uses a discounted cash flow model to
estimate fair value since observable market prices are not readily available. As
of December 31, 2002, Webster serviced $1.4 billion of residential mortgage
loans with a capitalized net book value of $11.3 million. At December 2002, the
fair market value for these servicing rights was $19.5 million. The fair value
amount included $3.3 million of value related to noncapitalized servicing
rights. Servicing rights are included in other assets on the Consolidated
Statements of Condition.
Webster estimates fair value on individual pools of loans grouped according to
the following characteristics:
(1) fixed versus adjustable coupons
(2) government versus non-government backed collateral
(3) acquired versus Webster originated
The key assumptions used in the valuation model include: (1) current and future
interest rates, (2) expected prepayments of underlying mortgage loans, (3)
servicing fees and (4) cost to service loans. Impairment results when the fair
market value of an individual pool has fallen below its book value. A valuation
allowance is established by a change or credit to noninterest income.
62
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated annual amortization expense for mortgage servicing rights is
summarized below for each of the next five years and in aggregate thereafter.
(In thousands)
- --------------------------------------------------------------------------------
FOR YEARS ENDING DECEMBER 31,
2003 $ 3,491
2004 2,592
2005 2,268
2006 1,887
2007 1,031
Later years 1,204
- --------------------------------------------------------------------------------
NOTE 11: DEPOSITS
- -----------------
The following table sets forth the deposit accounts of the Bank showing average
interest rates, dollar amounts and as percentages of total deposits at the dates
indicated.
December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------
% of % of % of
Average total Average total Average total
(In thousands) Amount rate* deposits Amount rate* deposits Amount rate* deposits
- ----------------------------------------------------------------------------------------------------------------------------
Balance by account type:
Demand deposits $ 982,735 --% 12.9 $ 905,206 --% 12.8 $ 851,071 --% 12.2
NOW accounts 945,145 0.51 12.4 803,416 0.61 11.4 752,600 0.77 10.8
Regular savings and money
market deposit accounts 2,987,595 1.42 39.3 2,430,691 1.80 34.4 1,956,149 2.48 28.0
Time deposits 2,690,647 2.90 35.4 2,927,158 4.12 41.4 3,421,308 5.24 49.0
- ----------------------------------------------------------------------------------------------------------------------------
Total $7,606,122 1.65% 100.0 $7,066,471 2.40% 100.0 $6,981,128 3.34% 100.0
- ----------------------------------------------------------------------------------------------------------------------------
*Average rate on deposits outstanding at year end.
Interest expense on deposits is summarized as follows:
Years ended December 31,
- -------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------
NOW accounts $ 4,402 5,099 6,195
Regular savings and money market deposit accounts 45,119 51,460 44,746
Time deposits 96,641 159,776 173,353
- -------------------------------------------------------------------------------------
Total $146,162 216,335 224,294
- -------------------------------------------------------------------------------------
The following table represents the amount of time deposits maturing during the
periods indicated:
(In thousands)
- --------------------------------------------------------------------------------
MATURING:
January 1, 2003 to December 31, 2003 $ 1,571,544
January 1, 2004 to December 31, 2004 585,225
January 1, 2005 to December 31, 2005 193,924
January 1, 2006 to December 31, 2006 246,299
January 1, 2007 to December 31, 2007 92,204
January 1, 2008 and beyond 1,451
- --------------------------------------------------------------------------------
Total $ 2,690,647
- --------------------------------------------------------------------------------
63
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Time deposits of $100,000 or more amounted to $495.1 million and $502.4 million
and represented approximately 6.5% and 7.1% of total deposits at December 31,
2002 and 2001, respectively.
The following table represents the amount of time deposits of $100,000 or more
maturing during the periods indicated:
(In thousands)
- --------------------------------------------------------------------------------
MATURING:
January 1, 2003 to March 31, 2003 $ 169,464
April 1, 2003 to June 30, 2003 75,942
July 1, 2003 to December 31, 2003 40,068
January 1, 2004 and beyond 209,663
- --------------------------------------------------------------------------------
Total $ 495,137
- --------------------------------------------------------------------------------
NOTE 12: FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
At December 31,
--------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------
Total Total
(In thousands) Outstanding Callable Outstanding Callable
- --------------------------------------------------------------------------------------------------------
FIXED RATE:
1.25% to 6.87% due in 2002 $ -- -- 883,000 --
0.95% to 6.67% due in 2003 381,655 -- 313,440 --
1.99% to 6.78% due in 2004 750,194 -- 550,320 100,000
2.97% to 6.25% due in 2005 150,085 100,000 102,802 100,000
4.68% to 6.31% due in 2006 52,028 -- 52,558 --
4.88% to 6.98% due in 2007 702,273 500,000 502,362 500,000
4.49% to 5.93% due in 2008 29,396 27,000 29,773 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 475 -- 521 --
6.60% due in 2011 2,024 -- 2,200 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- --------------------------------------------------------------------------------------------------------
2,083,130 642,000 2,451,976 742,000
VARIABLE RATE:
5.76% and 6.81% due in 2004 80,000 -- 80,000 --
- --------------------------------------------------------------------------------------------------------
2,163,130 642,000 2,531,976 742,000
Unamortized discount on FHLB advances (101) -- (797) --
- --------------------------------------------------------------------------------------------------------
Total advances, net $ 2,163,029 642,000 2,531,179 742,000
- --------------------------------------------------------------------------------------------------------
The Bank had additional borrowing capacity of approximately $669.7 million from
the FHLB at December 31, 2002 and $112.8 million at December 31, 2001. 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 December 31, 2002 and 2001, investment securities were not
utilized as collateral. If securities had been used for collateral, additional
borrowing capacity at December 31, 2002 and 2001 would be approximately $2.1
billion and $2.4 billion. At December 31, 2002 and 2001, the Bank was in
compliance with the FHLB collateral requirements.
The unamortized discount on FHLB advances at December 31, 2002 and 2001, is a
result of the Mechanics purchase acquisition in June 2000. The remaining balance
of $101,000 is scheduled to be fully amortized over the 2003 year.
During the third and fourth quarter 2002 periods, the Bank received $4.2 million
in one year advances at a rate of 0.95% that were related to the FHLB's
Affordable Housing Program ("AHP"). These advances were an award to the Bank
under that program.
In January 2001, management made a decision to prepay $155.3 million in advances
that were outstanding at December 31, 2000. Of the amount prepaid, $105.0
million was scheduled to mature in 2001 and $50.3 million was scheduled to
mature in 2002. The Company recorded a $1.8 million charge ($1.2 million, net of
taxes) to earnings for the early extinguishment of debt.
64
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER BORROWINGS
- ---------------------------------------------------------------------------
The following table summarizes securities sold under agreement to repurchase and
other borrowings:
At December 31,
- --------------------------------------------------------------------------------------
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------
Securities sold under agreement to repurchase $1,453,596 571,675
Federal funds purchased 291,105 180,000
Treasury tax and loan 403,148 124,510
Other 18,791 --
- --------------------------------------------------------------------------------------
Total $2,166,640 876,185
- --------------------------------------------------------------------------------------
During 2002 and 2001, securities sold under agreements to repurchase
("repurchase agreements") were the primary source of borrowed funds with the
exception of FHLB advances. See Note 12 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further information on
FHLB advances. Repurchase agreements had an average balance that was 30% or more
of the Bank's total equity at the end of 2002 and 2001. Repurchase agreements
were primarily collateralized by U.S. Government agency mortgage-backed
securities. The collateral for these repurchase agreements is delivered to
broker/dealers. Repurchase agreements with broker/dealers are limited to primary
dealers in government securities. Webster also enters into repurchase agreement
transactions directly with commercial and municipal customers through its
Treasury Sales desk. At December 31, 2002, there was $235.0 million in
securities sold under agreements to repurchase that were structured to be
callable by a counterparty. At December 31, 2001, no securities sold under
agreement to repurchase were structured to be callable by a counterparty.
The weighted-average rates on total repurchase agreements and other borrowings
were 1.33% and 1.83% at December 31, 2002 and 2001, respectively.
Information concerning repurchase agreements as of the end of the current period
is presented below:
At December 31, 2002
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------
Weighted- Weighted-
Amortized Cost Market Value Average Average
Original maturity Balance of Collateral of Collateral Rate Maturity
- ----------------------------------------------------------------------------------------------------
Up to 30 days $ 444,158 432,831 444,626 1.15% 2.7 Days
31 to 90 days 122,614 125,345 129,421 1.69 3.0 Months
Over 90 days 886,824 941,073 958,991 1.49 11.7 Months
- ----------------------------------------------------------------------------------------------------
Totals $ 1,453,596 1,499,249 1,533,038 1.40% 7.4 Months
- ----------------------------------------------------------------------------------------------------
The following table sets forth certain information concerning short-term
borrowings under repurchase agreements at the dates and for the years indicated:
Years ended December 31,
---------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
Average amount outstanding during the period $1,243,713 987,334 822,855
Amount outstanding at end of period 1,453,596 571,675 489,434
Highest month end balance 1,871,177 1,517,949 1,094,493
Weighted-average interest rate at end of period 1.40% 1.96 5.83
Weighted-average interest rate during the period 1.70 4.02 5.96
In November 2000, a private placement of $126.0 million of 8.72% unsecured
Senior Notes due in 2007 (the "Senior Notes") was completed. The net proceeds
from the note placement were used for general corporate purposes.
65
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14: SHAREHOLDERS' EQUITY
- -----------------------------
Applicable regulations of the Office of Thrift Supervision ("OTS") require
federal savings banks such as the Bank, to satisfy certain minimum capital
requirements, including a leverage capital requirement (expressed as a ratio of
core or Tier 1 capital to adjusted total assets) and risk-based capital
requirements (expressed as a ratio of core or Tier 1 capital and total capital
to total risk-weighted assets). As an OTS regulated institution, the Bank is
also subject to a minimum tangible capital requirement (expressed as a ratio of
tangible capital to adjusted total assets). At December 31, 2002 and 2001, the
Bank exceeded all OTS regulatory capital requirements and met the Federal
Deposit Insurance Corporation ("FDIC") requirements for a "well capitalized"
institution. In order to be considered "well capitalized" a depository
institution must have a ratio of Tier 1 capital to adjusted total assets of 5%,
a ratio of Tier 1 capital to risk-weighted assets of 6% and a ratio of total
capital to risk-weighted assets of 10%. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's Consolidated Financial Statements. The Bank's
capital amounts and classifications are also subject to qualitative judgments by
the OTS about components, risk weightings and other factors.
At December 31, 2002 and 2001, the Bank was in full compliance with all
applicable capital requirements, as detailed in the following table:
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
Bank's equity (to total assets) $ 1,140,160 8.54%
Non-includable subsidiaries (1,914)
Goodwill and other intangibles (252,425)
Unrealized gain on certain AFS securities, net (50,772)
- --------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 835,049 6.42 $ 260,101 2.00% No Requirement
Qualifying intangibles --
- --------------------------------------------------------------------------------------------------------------------------
Tier 1 capital (to adjusted total assets), net 835,049 6.42 520,201 4.00 $ 650,252 5.00%
Tier 1 Risk-based capital
(to risk-weighted assets) 835,049 9.41 354,989 4.00 532,484 6.00
Allowable allowance for loan losses 110,944
Total Risk-based capital (to risk-
weighted assets) $ 945,993 10.66 709,979 8.00 887,473 10.00
- --------------------------------------------------------------------------------------------------------------------------
AT 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
Regulatory rules currently impose limitations on all capital distributions by
savings institutions, including dividends, stock repurchases and cash-out
mergers. Under current OTS capital distribution regulations, as long as the Bank
meets the OTS capital requirements before and after the payment of dividends and
meets the standards for expedited treatment of applications (including having
certain regulatory composite, compliance and Community Reinvestment Act
ratings), the Bank may pay dividends to the Parent Company without prior OTS
approval in an amount equal to the net income less dividends paid to date for
the calendar year, plus retained net income for the preceding two years. In
addition, the OTS has the discretion to prohibit any otherwise permitted capital
distribution on general safety and soundness grounds, and must be given 30 days
advance notice of all capital distributions during which time it may object to
any proposed distribution. The Bank has paid dividends to the Parent Company
amounting to $180.0 million, and $35.0 million for 2002 and 2001, respectively.
At the time of the respective conversions of the Bank and certain predecessors
from mutual to stock form, each institution established a liquidation account
for the benefit of eligible depositors who continue to maintain their deposit
accounts after conversion. In the event of a complete liquidation of the Bank,
each eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account. The Bank may not declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would cause its
regulatory capital to be reduced below applicable regulatory capital
requirements or the amount required for its liquidation accounts.
66
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retained earnings at December 31, 2002 and 2001 included $50.0 million of
earnings of the Bank appropriated to bad debt reserves (pre-1988), respectively,
which were deducted for federal income tax purposes. Tax law changes were
enacted in August 1996 to eliminate the "thrift bad debt" method of calculating
bad debt deductions for tax years after 1995 and to impose a requirement to
recapture into taxable income (over a six-year period) all bad debt reserves
accumulated after 1987. Since the Company previously recorded a deferred tax
liability with respect to these post-1987 reserves, its total income tax expense
for financial reporting purposes is not affected by the recapture requirement.
The tax law changes also provide that taxes associated with the recapture of
pre-1988 bad debt reserves would become payable under more limited circumstances
than under prior law. Under the tax laws, as amended, events that would result
in recapture of the pre-1988 bad debt reserves include distributions to the
Parent Company from the Bank in excess of specified amounts or the redemption of
outstanding Bank stock. The Company does not expect such reserves to be
recaptured into taxable income.
In February 1996, the Company's Board of Directors adopted a stockholder's
rights plan in which preferred stock purchase rights have been granted as a
dividend at the rate of one right for each share of common stock held of record
as of the close of business on February 16, 1996. The plan is designed to
protect all shareholders against hostile acquirers who may seek to take
advantage of the Company and its shareholders through coercive or unfair tactics
aimed at gaining control of the Company without paying all shareholders a fair
price. Each right initially would entitle the holder thereof to purchase under
certain circumstances one 1/1,000th of a share of a new Series C Preferred Stock
at an exercise price of $100 per share. The rights will expire in February 2006.
The rights will be exercisable only if a person or group in the future becomes
the beneficial owner of 15% or more of the common stock, or announces a tender
or exchange offer which would result in its ownership of 15% or more of the
common stock, or if the Board declares any person or group to be an "adverse
person" upon a determination that such person or group has acquired beneficial
ownership of 10% or more and that such ownership is not in the best interests of
the Company.
The Bank had an ESOP that invested in the Company's common stock as discussed in
Note 18 of Notes to Consolidated Financial Statements. The Company had secured
and guaranteed the ESOP debt. The cost of unallocated shares held by the ESOP
represented unearned compensation expense, and was recorded as a reduction of
shareholders' equity in compliance with SOP 93-6. Both the loan obligation and
the unearned compensation expense were reduced for any loan repayments made by
the ESOP. On January 3, 2001, the remaining ESOP loan balance of $356,575 was
paid off.
During 2002, Webster repurchased a total of 3,960,690 shares of its common stock
at an average cost of $34.97 per common share. Of the shares repurchased,
2,175,404 shares were repurchased from the 2.5 million shares stock buyback
program announced September 14, 2001 and 1,620,504 shares were repurchased in
relation to a stock buyback program announced July 23, 2002. 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. An additional 164,782 shares were repurchased for
acquisition and other corporate purposes.
During 2001, Webster repurchased a total of 374,756 shares of its common stock
at an average cost of $29.95 per common share. The majority of the repurchased
shares, totaling 294,596, was the result of an announcement by the Company
during the third quarter of 2001, to begin to repurchase 2.5 million shares of
its common stock.
For the 2002 and 2001 year periods, there were a total of 159,322 shares of
Webster's restricted common stock granted to senior management and non-employee
directors. The cost of the restricted shares was measured on the date of grant
and charged to compensation expense over restricted period. See Note 18 of Notes
to Consolidated Financial Statements for further information on stock-based
compensation.
NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS
- ------------------------------------------
As discussed in Note 1 of Notes to Consolidated Financial Statements, the
Company adopted the provisions of SFAS No. 133, as amended by SFAS Nos. 137 and
138, effective January 1, 2001. On January 1, 2001, the Company had interest
caps with a notional value of $260 million and interest rate floors with a
notional value of $500 million that were used to manage interest rate risk.
These derivatives did not qualify for hedging under SFAS No. 133. As a result,
the derivatives were recorded on the balance sheet at January 1, 2001, and a
charge to earnings of $3.6 million ($2.4 million, net of taxes) was recorded in
the Company's Consolidated Statements of Income. This charge is reflected in the
Consolidated Statements of Income for the year ended December 31, 2001 as a
cumulative effect of change in method of accounting. The interest rate caps and
floors were sold during the second quarter of 2001.
Additionally, on January 1, 2001, Webster had an interest rate swap with a
notional amount of $25.0 million. This swap was used to hedge the fair value of
a certificate of deposit and qualified for hedge accounting under SFAS No. 133.
The net loss recognized in earnings during 2001 representing the amount of hedge
ineffectiveness was not significant. During the second quarter of 2001, the
interest rate swap and the certificate of deposit were redeemed.
67
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2002, Webster had outstanding interest rate swaps with a total
notional amount of $900 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. Of the total,
$200 million of the interest rate swaps mature in 2003; $500 million of the
interest rate swaps mature in 2004 and $200 million in 2007 and an equivalent
amount of the hedged advances mature on the three 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 readily marketable mortgage loans held for sale ("rate locks")
that are considered to be derivatives, and do not qualify for hedge accounting,
under SFAS No. 133. To mitigate the interest rate risk inherent in these rate
locks, as well as closed mortgage loans held for sale ("loans held for sale"),
Webster 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. Beginning January 1, 2001, the Company has
recorded the estimated fair value of the rate locks and forward commitments on
its balance sheet in either other assets or other liabilities, with the offset
to gain on sales of loans and loan servicing, net included in noninterest
income.
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.
At December 31, 2002 and 2001, the Company had rate locks of approximately
$358.9 million and $79.7 million, mandatory forward commitments of approximately
$439.7 and $194.0 million, and best efforts forward commitments of approximately
$93.5 million and $1.4 million. The impact 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, was not
significant to the consolidated financial statements.
68
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: SUMMARY OF ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------
A summary of estimated fair values of significant financial instruments
consisted of the following:
At December 31,
-----------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 266,463 266,463 218,908 218,908
Short-term investments 15,596 15,596 35,937 35,937
Securities 4,124,997 4,124,997 3,999,133 3,999,133
Loans held for sale 405,157 407,558 143,918 143,918
Total loans 7,912,639 8,128,911 6,823,300 6,893,620
Allowance for loan losses (116,804) (116,804) (97,307) (97,307)
----------- ----------- ----------- -----------
Loans, net 7,795,835 8,012,107 6,725,993 6,796,313
Servicing rights 11,320 19,464 6,609 13,861
LIABILITIES:
Deposits other than time deposits $ 4,915,475 4,859,817 4,139,313 3,964,327
Time deposits 2,690,647 2,748,054 2,927,158 2,959,281
FHLB advances and other borrowings 4,455,669 4,578,820 3,533,364 3,592,874
Capital securities and preferred stock
of subsidiary corp 130,832 161,049 159,577 178,882
The Bank uses its Asset/Liability simulation model to estimate the fair value of
most assets and liabilities. Fair value is estimated by discounting the average
expected cash flows over multiple interest rate paths. An arbitrage-free
trinomial lattice term structure model generates the interest rate paths. The
month-end LIBOR/Swap yield curve and swap option volatilities are used as the
input for deriving forward rates for future months. Cash flows for all
instruments are created for each rate path using product specific behavioral
models and account specific system data. Discount rates are matched with the
time period of the expected cash flow. The Asset/Liability simulation software
is enhanced with a mortgage prepayment model and a Collateralized Mortgage
Obligation database. Instruments with explicit options (i.e., caps, floors, puts
and calls) and implicit options (i.e., prepayment and early withdrawal ability)
require such a rate and cash flow modeling approach to more accurately quantify
value. A spread is added to the discount rates to reflect credit and option
risks embedded in each instrument. Spreads and prices are calibrated to
observable market instruments when available or to estimates based on industry
standards.
The carrying amounts for short-term investments other than time deposits
approximate fair value since they mature in 90 days or less and do not present
unanticipated credit concerns. The fair value of securities (see Note 4 of Notes
to Consolidated Financial Statements) is estimated based on prices or quotations
received from third parties or pricing services. The fair value of interest-rate
contracts was based on the amount Webster could receive or pay to terminate the
agreements. FHLB stock, which is included in securities, has no active market
and is required to be held by member banks. The estimated fair value of FHLB
stock equals the carrying amount. In estimating the fair value of loans and
deposits, about 200 distinct types of accounts are separately valued and
consolidated into the broad categories in the table above. The discount rate
used for the senior notes was calculated using a spread over swap rates
consistent with the spread used to price the senior notes at their inception.
The discount rates used for the capital securities and preferred stock of
subsidiary corporation liabilities were calculated using a spread over swaps
that coincide with the remaining maturities.
69
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings or any part of a particular financial
instrument. Because no active market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
factors are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust and
investment management operation that contributes net fee income annually. The
trust and investment operation is not considered a financial instrument, and its
value has not been incorporated into the fair value estimates. In addition, the
tax ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in the estimate of fair value.
NOTE 17: 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 18: EMPLOYEE BENEFIT AND STOCK OPTION PLANS
- ------------------------------------------------
The Bank sponsors an employee investment savings plan governed by section 401(k)
of the Internal Revenue Code. Under the savings plan, the Bank will match $.50
for every $1.00 of the employee's contribution up to 6% of the employee's annual
compensation. Operations were charged with $2.6 million in 2002 and $1.9 million
for 2001 and 2000 for employer matching contributions to the plan.
Effective as of January 1, 2002, the ESOP will not receive any further employer
contributions or allow any new members to join the plan. Members will continue
to receive dividend payments on their vested balance in the Company's stock.
Benefit payments from the ESOP by the trustee will continue under the benefit
payment provisions of the plan. The final release of unallocated shares under
the ESOP occurred in January 2002.
The Bank's ESOP, which was noncontributory by employees, was designed to invest
in Webster common stock on behalf of eligible employees of the Bank who met
certain minimum age and service requirements. Contributions were made to the
ESOP in such amounts as the Board of Directors determined on an annual basis. To
the extent that the contributions were used to repay the ESOP loan, Webster
common stock was released and allocated to the accounts of participants in the
ESOP. Stock and other amounts allocated to a participant's account became fully
vested after the participant had completed five years of service under the ESOP
guidelines.
The Company accounted for the ESOP and its outstanding debt using the guidance
of Statement of Position 93-6. As loan payments were made to reduce the
outstanding debt of the ESOP, unallocated shares were disbursed based on the
amount of principal and interest payment made during the plan year and allocated
to participants' accounts. The release of shares caused a reduction to the
amount of unearned compensation, a component of shareholders' equity, for the
cost of the allocated shares. Compensation and benefits expense was recorded for
the fair value of the allocated shares. The fair value of the allocated shares
was based on the average market price of Webster's stock for the respective plan
year. The number of weighted average basic and diluted shares were reduced each
year by the number of unallocated shares remaining in the plan. On January 3,
2001, the remaining ESOP loan balance of $356,575 was paid in full. Subsequent
to the loan payoff, all allocated shares were recognized in Webster's basic and
diluted share count.
Operations were charged with $935,000, $881,000 and $1.4 million for the years
ended December 31, 2002, 2001 and 2000, respectively, for costs related to the
ESOP. The 2002 ESOP charge includes $857,000 of compensation expense and $78,000
of administrative costs. For 2001, all interest payments due on the ESOP loan
principal balance were offset by dividend payments received on the unallocated
shares.
The Bank established an Employee Stock Purchase Plan ("ESPP") in April 2000. The
ESPP is governed by Section 423 of the Internal Revenue Code of 1986, as
amended, and is administered by the Company's stock transfer agent. The ESPP
provides eligible employees the opportunity to invest up to 10% of their base
compensation to purchase Webster common stock at a discounted price.
70
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since the inception of the ESPP, participants in the ESPP were able to purchase
Webster common stock at 85% of the fair market value at the lower of the market
price on either the first or last trading day of each offering period. During
2002 and 2001, shares purchased totaled 33,895 and 31,941, respectively. At
December 31, 2002, there were 660,051 shares available for future purchase under
the ESPP. For the year ended December 31, 2002, ESPP charges to compensation and
benefits expense totaled $128,000.
The Bank maintains a noncontributory pension plan for employees who meet certain
minimum service and age requirements. Pension benefits are based upon earnings
of covered employees during the period of credited service.
The following tables set forth changes in benefit obligation, changes in plan
assets and the funded status of the Bank's pension plan at December 31, 2002 and
2001.
December 31,
--------------------------
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation-beginning of year $ 42,437 32,098
Service cost 5,417 4,154
Interest cost 3,098 2,379
Plan amendments -- 101
Actuarial liability loss 2,514 5,145
Benefits paid and administrative expenses (1,638) (1,440)
- --------------------------------------------------------------------------------
Projected benefit obligation-end of year 51,828 42,437
- --------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Plan assets at fair value-beginning of year 35,065 31,011
Actual loss on plan assets (2,401) (353)
Employer contributions 13,574 5,847
Benefits paid and administrative expenses (1,638) (1,440)
- --------------------------------------------------------------------------------
Plan assets at fair value-end of year 44,600 35,065
- --------------------------------------------------------------------------------
Under funded status 7,228 7,372
Unrecognized prior service cost 811 880
Unrecognized net loss (17,318) (9,575)
Unrecognized transition asset 76 85
Additional minimum liability -- 2,234
- --------------------------------------------------------------------------------
(Prepaid) accrued pension benefit cost $ (9,203) 996
- --------------------------------------------------------------------------------
The pension plan held in its investment portfolio 62,000 shares of the Company's
common stock as of December 31, 2002 and 2001. The stock had an approximate
market value of $2.2 million and $2.0 million at December 31, 2002 and 2001,
respectively.
The discount rate, the rate of increase of future compensation levels and the
expected long-term rate of return on assets used at December 31, 2002, were
6.75%, 4.50% and 9.00%, respectively. The corresponding rates at December 31,
2001 were 7.00%, 5.00% and 9.00%, respectively. The Company expects the
long-term rate of return on assets for 2003 to be reduced to approximately
7.75%.
Net pension expense for 2002, 2001 and 2000 included the following components.
Years ended December 31,
- ----------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------
Service cost-benefits earned during the period $ 5,417 4,154 3,488
Interest cost on projected benefit obligations 3,098 2,379 2,006
Expected return on plan assets (3,303) (2,758) (2,432)
Amortization of prior service cost and transition asset (78) (84) (85)
Recognized net loss 475 -- --
- ----------------------------------------------------------------------------------------------
Net pension expense $ 5,609 3,691 2,977
- ----------------------------------------------------------------------------------------------
71
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank also provides other post-retirement benefits to certain retired
employees. The following tables set forth the changes in benefit obligation and
the funded status of the plan at December 31, 2002 and 2001:
At December 31,
---------------------
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Accumulated post-retirement benefit obligation-beginning of year $ 3,392 3,487
Interest cost 210 234
Actuarial (gain) loss 914 (58)
Benefits paid (293) (271)
- ------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation-end of year 4,223 3,392
- ------------------------------------------------------------------------------------------
Funded status 4,223 3,392
Unrecognized prior service cost (806) (868)
Unrecognized net gain (loss) (139) 779
- ------------------------------------------------------------------------------------------
Accrued post-retirement benefit cost $ 3,278 3,303
- ------------------------------------------------------------------------------------------
The discount rate used in determining the accumulated post-retirement benefit
obligation was 6.75% for 2002 and 7.00% for 2001. The assumed healthcare
cost-trend rate is 5.0% for 2002 and 10.0% for 2003 declining 1.00% each year
until 2008 when the rate will be 5.00%. An increase of 1.00% in the assumed
healthcare cost trend rate for the 2002 period would have increased the net
periodic post-retirement benefit cost by $17,000 and increase the accumulated
benefit obligation by $320,000. A decrease of 1.00% in the assumed healthcare
cost trend rate for the 2002 period would have decreased the net periodic
post-retirement cost by $15,000 and decrease the accumulated benefit obligation
by $282,000.
The components of post-retirement benefits cost were as follows:
Years ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Interest cost $210 234 210
Amortization of prior service cost and
net losses (gains) recognized 58 25 (7)
- --------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $268 259 203
- --------------------------------------------------------------------------------
The Company maintains a fixed stock option plan (the "plan") for the benefit of
its officers and directors. The plan grants both incentive and nonqualified
stock options. The Company also has several plans through acquisitions that have
remaining options outstanding as of December 31, 2002. During 2002, effective
January 1, 2002, Webster adopted the fair value recognition provisions of SFAS
No. 123 applied on a prospective basis for its option accounting. Prior to
January 1, 2002, Webster applied the provisions of APB No. 25 and related
interpretations in accounting for its option grants. Under the provisions of APB
No. 25, Webster reported the cost of options granted prior to January 1, 2002 in
pro forma disclosure form. See Note 1 of Notes to Consolidated Financial
Statements for information that discloses net income and earnings per share
information had the fair value method under SFAS No. 123 been applied to options
granted from 1995 through December 31, 2001.
The fair value of each option is determined based on the grant date using the
Black-Scholes Option-Pricing Model with the following weighted-average
assumptions used for grants issued during 2002: expected option term of 8.6
years, expected dividend yield of 2.15%, expected volatility of 31.75%, expected
forfeiture rate of 4.46%, and weighted risk-free interest rate of 4.35%. The
weighted-average assumptions used for grants issued during 2001 were: 8.5 years,
2.15%, 34.76%, 2.99% and 5.37%, respectively; and for 2000 were 9.0 years,
2.35%, 39.02%, 2.00% and 6.76%, respectively. The weighted-average per share
fair value of options granted during 2002, 2001 and 2000 were $12.56, $11.45 and
$9.85, respectively.
72
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the option plans at December 31, 2002, 2001 and 2000 and changes
during the years is presented below:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 3,160,635 $ 23.69 3,096,287 $ 21.14 2,924,905 $ 19.00
Options granted 516,349 35.06 556,410 28.75 686,193 22.81
Options issued in connection with
purchase acquisitions -- -- -- -- 399,249 13.43
Options exercised (236,015) 19.59 (445,082) 12.10 (866,483) 12.02
Options forfeited/canceled (78,670) 24.99 (46,980) 25.13 (47,577) 20.37
- -----------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 3,362,299 $ 25.62 3,160,635 $ 23.69 3,096,287 $ 21.14
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 1,848,025 $ 23.37 1,754,410 $ 22.39 1,971,224 $ 19.41
The following table summarizes information about the option plans at December
31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (in years) Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
$ 7.89 - 11.83 405,066 1.6 $ 9.99 405,066 $ 9.99
11.84 - 15.78 141,502 2.9 13.97 141,502 13.97
15.79 - 19.72 199,536 4.0 18.66 199,536 18.66
19.73 - 23.67 697,161 7.7 22.74 42,111 22.05
23.68 - 27.61 343,886 6.5 25.31 333,886 25.29
27.62 - 31.56 445,022 8.6 29.94 80,647 30.28
31.57 - 35.50 1,046,401 7.2 33.78 611,277 33.24
35.51 - 39.45 83,725 9.3 37.82 34,000 38.54
- ------------------------------------------------------------------------------------------------------------
3,362,299 6.4 $ 25.62 1,848,025 $ 23.37
- ------------------------------------------------------------------------------------------------------------
At December 31, 2002, there were a total of 3,362,299 options outstanding that
included 164,025 of outstanding options related to acquired companies. The
outstanding options amount was comprised of 2,350,178 Non-Qualified and
1,012,121 of Incentive Stock Options. The options that grant the holder the
right to acquire a share of the Company's common stock for each option held, in
general, normally vest over a three to four year period and have a contractual
ten year life. The 1992 Stock Option Plan ("the Plan") was amended in 2001 to
increase the number of shares of common stock available for issuance under the
Plan, to provide for discretionary grants of options to non-employee directors
and to discontinue automatic grants of options to non-employee directors. The
Plan was also amended in 2000 to permit grants of restricted stock. There were
no amendments to the Plan during 2002. During 2002 and 2001, there were 59,666
and 86,750, respectively, of restricted common shares granted to senior
management under the Plan. The restricted common shares granted to management
normally vest over a period ranging from three to five years. The Company also
maintains a Director Retainer Fees plan that provides non-employee directors
with restricted shares in lieu of an annual cash retainer for their services
rendered as directors. During 2002 and 2001, a total of 4,450 and 8,456
restricted shares, respectively, were granted to directors with a vesting
schedule of one year. The cost of all restricted shares granted to directors and
management is amortized to compensation expense over the service vesting period
and such expense is reflected in compensation and benefits expense. Under the
Plan, as of December 31, 2002, there were 362,377 common shares available for
future grants.
73
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: BUSINESS SEGMENTS
- --------------------------
Webster has four segments for purposes of business segment reporting. These
segments include Retail Banking, Commercial Banking, Trust and Investment
Services 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. During 2002,
Webster revised its business segments to reflect its current organizational
hierarchy. Prior year results were restated to reflect this change. The
following table presents the statement of operations and total assets for
Webster's reportable segments.
Operating income and total assets by business segment are as follows:
YEAR ENDED DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
TRUST AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES TREASURY TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 231,924 63,532 1,992 108,280 405,728
Provision for loan losses 6,221 22,503 276 -- 29,000
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 225,703 41,029 1,716 108,280 376,728
Noninterest income 98,747 33,279 16,744 36,802 185,572
Noninterest expense 212,401 56,159 20,104 39,659 328,323
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in method of accounting 112,049 18,149 (1,644) 105,423 233,977
Income taxes expense (benefit) 35,419 5,737 (520) 33,329 73,965
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in method of accounting 76,630 12,412 (1,124) 72,094 160,012
Cumulative effect of change in method
of accounting (net of taxes) -- (7,280) -- -- (7,280)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 76,630 5,132 (1,124) 72,094 152,732
- -----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 6,253,317 2,438,860 48,813 4,727,014 13,468,004
YEAR ENDED DECEMBER 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
TRUST AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES TREASURY TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 234,121 63,775 738 68,845 367,479
Provision for loan losses 3,922 10,090 388 -- 14,400
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 230,199 53,685 350 68,845 353,079
Noninterest income 89,521 23,330 19,125 30,122 162,098
Noninterest expense 213,450 41,898 17,020 36,564 308,932
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item and cumulative effect of
change in method of accounting 106,270 35,117 2,455 62,403 206,245
Income taxes expense 35,753 11,481 806 21,390 69,430
- -----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of change in method
of accounting 70,517 23,636 1,649 41,013 136,815
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 $ 70,517 23,636 1,649 37,386 133,188
- -----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,670,598 1,985,859 35,407 4,165,518 11,857,382
74
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2000
- -------------------------------------------------------------------------------------------------------------------------
TRUST AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES TREASURY TOTAL
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 257,400 51,423 279 17,414 326,516
Provision for loan losses 2,423 9,377 -- -- 11,800
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 254,977 42,046 279 17,414 314,716
Noninterest income 76,251 10,742 18,457 23,371 128,821
Noninterest expense 198,144 27,187 16,374 25,425 267,130
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 133,084 25,601 2,362 15,360 176,407
Income taxes expense 43,710 8,578 778 5,050 58,116
- -------------------------------------------------------------------------------------------------------------------------
Net income after taxes $ 89,374 17,023 1,584 10,310 118,291
- -------------------------------------------------------------------------------------------------------------------------
Total assets at period end $5,638,219 1,669,710 15,809 3,925,770 11,249,508
Retail Banking
- --------------
The Retail Banking segment includes 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.
Commercial Banking
- ------------------
The Commercial 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
and financial advisory services. The results for 2002 include a $7.3 million,
net of tax, charge for the adoption of SFAS No. 142 and increased loan loss
provision resulting from the fourth quarter sale or transfer to held for sale of
classified telecommunications and cable loans.
Trust and Investment Services
- -----------------------------
The Trust and Investment Services segment includes all trust activities,
including Webster Financial Advisors, and the investment services of Webster
Investment Services.
During 2002, Trust and Investment Services were combined into a primary line of
business. This business line which includes WFA, Webster Trust, WIS, Fleming and
Private Banking provides comprehensive wealth management services for
individuals and institutions.
Treasury
- --------
The Treasury segment includes short-term investments, investment securities,
Federal Home Loan Bank advances, repurchase agreements and other borrowings.
Treasury's improved results for 2002 resulted primarily from holding short
duration liabilities during a declining interest rate environment.
Management allocates indirect expenses to its segments. These expenses include
administration, finance, technology and processing operations and other support
functions.
NOTE 20: CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
- ---------------------------------------------------------------------------
SUBSIDIARY TRUSTS
- -----------------
During 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster holds a 100% interest. 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 $100.0 million underwritten public offering of 9.36%
Corporation-Obligated Mandatorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is the $100.0
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 $50.0 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. Webster holds a 100% interest
in Trust II.
75
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total expenses for Trusts I and II were $13.5 million, $14.5 million and $14.3
million for 2002, 2001 and 2000, respectively, inclusive of issuance cost
amortization. The expense associated with Trust I and Trust II is tax deductible
and is included in noninterest expenses.
During 2002, Webster repurchased $28.7 million of the capital securities issued
by Webster Capital Trust I and II. At December 31, 2002, Webster Capital Trust I
had remaining capital securities outstanding of $81.3 million and Webster
Capital Trust II, had remaining capital securities outstanding of $40.0 million.
Webster Capital Trust III was organized in June 1999 and to date the trust has
not been capitalized. Webster Capital Trust III was established for the sole
purpose of issuing trust securities and investing the proceeds in an equivalent
amount of subordinated debentures of Webster.
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. Webster has entered into a guarantee, which together with its
obligations under the subordinated debt securities and the declaration 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. The capital
securities qualify as Tier I capital under regulatory capital definitions.
In November of 2002, the FASB directed its staff to draft a statement to be
issued in February 2003 to establish standards for issuers' classification of
liabilities in the statement of financial position of financial instruments that
have characteristics of both liabilities and equity. If this statement is
adopted, the Company will be required to reclassify its Corporation-obligated
Mandatorily Redeemable Capital Securities of Subsidiary Trusts to borrowings.
Currently, these are classified as a separate line item between total
liabilities and stockholders' equity on the Consolidated Statements of
Condition. In addition, the interest cost of these securities, which is
currently included in noninterest expenses would be classified as interest
expense on borrowings under this proposal. There would be no impact to the
results of operations.
NOTE 21: PREFERRED STOCK OF SUBSIDIARY CORPORATION
- --------------------------------------------------
In December 1997, WPCC raised $50.0 million in a public offering in which $40.0
million was issued as Series A 7.375% cumulative redeemable preferred stock and
$10.0 million was issued as Series B 8.625% cumulative redeemable preferred
stock that is quoted under NASDAQ listing (WBSTP). The Bank owns all of WPCC's
common stock. The Series A preferred stock was redeemed in January 2001. The
Series B preferred stock is not redeemable prior to January 15, 2003, except
upon the occurrence of a specified tax event. Redemption after January 15, 2003
is at the option of WPCC. Dividend expense on the preferred stock, inclusive of
issuance cost amortization, was $863,000, $985,000 and $4.2 million for 2002,
2001 and 2000, respectively. The preferred shares are not exchangeable into
common stock or any other securities of the Bank or Webster, and do not
constitute regulatory capital of either the Bank or Webster.
NOTE 22: LEGAL PROCEEDINGS
- --------------------------
Webster is involved in routine legal proceedings occurring in the ordinary
course of business, which in the aggregate are believed to be immaterial to the
financial condition and results of operations.
76
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23: PARENT COMPANY CONDENSED FINANCIAL INFORMATION
- -------------------------------------------------------
The Parent Company Condensed Statements of Condition for 2002 and 2001 and the
Statements of Income and Cash Flows for the three-year period ended December 31,
2002 are presented below.
STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
At December 31,
----------------------------
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 1,846 1,147
Short-term investments 11,160 15,928
Securities available for sale 63,695 83,202
Loan receivable 4,006 3,163
Investment in subsidiaries 1,185,098 1,161,497
Due from subsidiaries 1,850 1,247
Other direct investments 17,103 16,732
Other assets 4,227 7,217
- --------------------------------------------------------------------------------
Total assets $1,288,985 1,290,133
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Senior notes $ 126,000 126,000
Other liabilities 6,272 7,666
- --------------------------------------------------------------------------------
Total liabilities 132,272 133,666
- --------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts 121,255 150,000
Shareholders' equity 1,035,458 1,006,467
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,288,985 1,290,133
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME:
Dividends from subsidiary $ 180,000 36,000 133,552
Interest on securities 4,949 7,222 7,535
Interest on loans 245 95 --
Gain on sale of securities 5,685 1,674 8,293
Other noninterest income 113 663 1
- ----------------------------------------------------------------------------------------------------------
Total operating income 190,992 45,654 149,381
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Interest expense on borrowings 11,163 11,164 7,383
Capital securities expense 13,525 14,462 14,323
Compensation and benefits 5,926 3,966 3,094
Other expenses 3,720 2,747 1,607
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 34,334 32,339 26,407
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed earnings of subsidiaries 156,658 13,315 122,974
Income tax benefit 9,123 9,300 4,335
- ----------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 165,781 22,615 127,309
Equity in undistributed (losses) earnings of subsidiaries (13,049) 110,573 (9,018)
- ----------------------------------------------------------------------------------------------------------
Net income $ 152,732 133,188 118,291
- ----------------------------------------------------------------------------------------------------------
77
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Years ended December 31,
- --------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 152,732 133,188 118,291
Decrease (increase) in interest receivable 100 510 (41)
Increase in other assets (1,901) (1,826) (11,671)
Gain on sale of securities (5,685) (1,674) (8,293)
Equity in undistributed loss (earnings) of subsidiaries 13,049 (110,573) 9,018
Increase (decrease) in other liabilities 1,745 (2,010) 4,220
Amortization of stock-based compensation 3,385 1,184 595
Amortization of securities, net 45 72 73
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 163,470 18,871 112,192
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (20,406) (7,268) (354,560)
Sales and maturities of securities available for sale 51,045 30,852 382,669
Decrease (increase) in short-term investments 4,768 24,431 (40,021)
Increase in loan receivable (843) (3,163) --
Net cash paid for purchase acquisitions (650) (25,670) (27,187)
Distribution from bank subsidiary -- -- (527)
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 33,914 19,182 (39,626)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayment of borrowings -- (357) (856,649)
Proceeds from borrowings -- -- 903,240
Redemption of capital securities (28,745) -- --
Exercise of stock options 6,034 7,622 13,308
Cash dividends to shareholders (35,463) (33,003) (28,645)
Common stock repurchases (138,511) (11,223) (110,797)
- --------------------------------------------------------------------------------------------------------
Net cash used by financing activities (196,685) (36,961) (79,543)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 699 1,092 (6,977)
Cash and cash equivalents at beginning of year 1,147 55 7,032
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,846 1,147 55
- --------------------------------------------------------------------------------------------------------
NOTE 24: SUBSEQUENT EVENTS
- --------------------------
On January 6, 2003, Webster announced that it acquired The Mathog and Moniello
Companies, ("Mathog"). Mathog is a commercial property and casualty insurance
agency that specializes in providing risk management products and services to
self-insured businesses and groups. Mathog is based in East Haven, Connecticut
with offices in West Hartford, Connecticut and Harrison, New York.
On January 14, 2003, Webster Bank completed an offering of $200 million of
subordinated notes. The notes have an interest rate of 5.875% and will mature on
January 15, 2013. The securities were offered through a firm commitment
underwriting in minimum denominations of $250,000 to institutional investors.
The subordinated notes were rated investment grade by the major rating agencies.
The subordinated notes constitute new funding and will supplement the Bank's
existing capital including regulatory capital. At December 31, 2002, Webster
Bank was a well-capitalized institution.
On January 24, 2003, Webster Bank acquired Budget Installment Corp., ("BIC").
BIC is an insurance premium financing company based in Rockville Centre, New
York. BIC finances commercial property and casualty premiums for businesses that
pay their insurance premiums on a monthly basis. BIC has the majority of its
borrowers located in the New York and New Jersey areas.
78
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information regarding the directors of the Company is omitted from this report
as the Company has filed its definitive proxy statement within 120 days after
the end of the fiscal year covered by this Report, and the information included
therein is incorporated herein by reference.
The following table sets forth certain information for the executive officers of
Webster, each of whom is elected to serve for a one-year period.
AGE AT POSITIONS HELD WITH WEBSTER
NAME DECEMBER 31, 2002 AND WEBSTER BANK
- ---- ----------------- ---------------------------
James C. Smith 53 Chairman, Chief Executive Officer and Director
William T. Bromage 57 President, Chief Operating Officer and Director of
Webster and Webster Bank; Vice Chairman of Webster Bank
William J. Healy 58 Executive Vice President and Chief Financial Officer
Peter K. Mulligan 58 Senior Executive Vice President - Retail Banking
Joseph J. Savage 50 Executive Vice President - Commercial Banking
Jo D. Keeler 52 Executive Vice President and Chief Risk Officer of
Webster and Webster Bank and Chief Credit Policy
Officer of Webster Bank
Harriet Munrett Wolfe 49 Executive Vice President, General Counsel and Secretary
Information concerning the principal occupation of these executive
officers of Webster and Webster Bank during at least the last five years is set
forth below.
JAMES C. SMITH is Chairman, Chief Executive Officer and a director of
Webster and Webster Bank, having been elected Chairman in 1995 and Chief
Executive Officer in 1987. Mr. Smith joined Webster Bank in 1975, and was
elected President, Chief Operating Officer and a director of Webster Bank in
1982 and of Webster in 1986. Mr. Smith, who served as a member of the Board of
Directors of the American Bankers Association until December 2002, is Chairman
of the Corporate Governance Task Force of the American Bankers Association. Mr.
Smith served as President of Webster and Webster Bank until April 2000. He is a
director of MacDermid, Incorporated (NYSE: MRD), a manufacturer and wholesaler
of specialty chemical products, and St. Mary's Hospital, both of Waterbury,
Connecticut. Mr. Smith is co-chair of the Governor's Council on Economic
Competitiveness and Technology in Connecticut, and is active in numerous
community and economic development organizations.
WILLIAM T. BROMAGE is President, Chief Operating Officer and a director
of Webster and Webster Bank and Vice Chairman of Webster Bank. Mr. Bromage was
elected President in April 2000 and Chief Operating Officer in January 2002.
From September 1999 to April 2000, he served as Senior Executive Vice President
- -- Business Banking and Corporate Development of Webster and Webster Bank. From
May 1996 to August 1999, Mr. Bromage served as Executive Vice President --
Business Banking of Webster and Webster Bank. Prior to joining Webster, he was a
Consultant at Aetna Life & Casualty in Hartford, Connecticut from 1995 to March
1996. Before his association with Aetna, he was Executive Vice President in
Credit Administration at Shawmut National Corporation since 1990 and had served
Shawmut in other positions since 1969.
79
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WILLIAM J. HEALY is Executive Vice President and Chief Financial Officer
of Webster and Webster Bank, positions he has held since April 2001. Prior to
joining Webster, Mr. Healy was the Executive Vice President and Chief Financial
Officer for Summit Bancorp, a bank holding company in Princeton, New Jersey.
From 1994 to 1998, Mr. Healy was Executive Vice President, Chief Accounting
Officer and Controller for Summit. He joined Summit in 1973, after working for
KPMG Peat Marwick for several years as a supervising senior accountant and
senior accountant.
PETER K. MULLIGAN is Senior Executive Vice President -- Retail Banking of
Webster and Webster Bank, positions he has held since June 2000. From 1995 until
June 2000, he served as Executive Vice President -- Consumer and Small Business
Banking of Webster and Webster Bank. Prior to joining Webster Bank, he was the
Director of Product Management, Retail Sales and Insurance at The Bank of Boston
from 1992 to 1995, and served as the Executive Vice President of the Banking
Division at The Society for Savings, Hartford, Connecticut from 1988 until 1992.
Society was acquired by The Bank of Boston in 1992.
JOSEPH J. SAVAGE is Executive Vice President of Webster Financial
Corporation and Executive Vice President of Commercial Banking for Webster Bank.
He joined Webster in April of 2002. Prior to joining Webster, Mr. Savage was
Executive Vice President of the Communications and Energy Banking Group for
CoBank in Denver, Colorado from 1996 to April of 2002. Prior to joining CoBank,
he was President of Keystone Ventures, LLC in Farmington, Connecticut from
December of 1995 to November of 1996, where he successfully raised equity and
debt for investment in rural cellular properties. Before his tenure with
Keystone, Mr. Savage was Senior Vice President, Specialized Lending for Shawmut
Bank and served as President of Shawmut National Ventures.
JO D. KEELER is Executive Vice President and Chief Risk Officer of
Webster and Webster Bank and Chief Credit Policy Officer of Webster Bank. Mr.
Keeler joined Webster in 2001. Prior to joining Webster, Mr. Keeler was an
Executive Credit Officer for FleetBoston Financial in Boston, Massachusetts,
from June 1993 to March 2001. From January 1991 to June 1993, he served as Chief
Financial Officer for a privately held Pennsylvania based steel manufacturing
company. Prior to that, Mr. Keeler spent thirteen years from 1978 to 1991 with
Mellon Bank in Pittsburgh, Pa., serving in various lending capacities.
HARRIET MUNRETT WOLFE is Executive Vice President, General Counsel and
Secretary of Webster and Webster Bank. Ms. Wolfe joined Webster and Webster Bank
in March 1997 as Senior Vice President and Counsel, was appointed Secretary in
June 1997 and General Counsel in September 1999. In January 2003, she was
appointed Executive Vice President. Prior to joining Webster and Webster Bank,
she was in private practice. From November 1990 to January 1996, she was Vice
President and Senior Counsel of Shawmut Bank Connecticut, N.A., Hartford,
Connecticut. Prior to joining Shawmut, she was Associate Legal Counsel and
Assistant Secretary of the former Citytrust, Bridgeport, Connecticut.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information regarding compensation of executive officers and directors is
omitted from this Report as the Company has filed a definitive proxy statement
within 120 days after the end of the fiscal year covered by this Report, and the
information included therein (excluding the Compensation Committee Report on
Executive Compensation and the Comparative Company Performance information) is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information required by this Item is omitted from this Report as the Company has
filed a definitive proxy statement within 120 days after the end of the fiscal
year covered by this Report, and the information included therein is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information regarding certain relationships and related transactions is omitted
from this Report as the Company has filed a definitive proxy statement within
120 days after the end of the fiscal year covered by this Report, and the
information included therein is incorporated herein by reference.
80
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 14. 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 and 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a)(1) The Consolidated Financial Statements of Registrant and its subsidiaries
are included within Item 8 of Part II of this Report.
(a)(2) All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(a)(3) The exhibits listed below are either filed as part of this Report or are
incorporated herein by reference; references to First Federal Bank now mean
Webster Bank.
EXHIBIT NO. EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
Exhibit No. 3. Certificate of Incorporation and Bylaws.
3.1 Second Restated Certificate of Incorporation (filed as
Exhibit 3.1 to the Corporation's Annual Report on Form 10-K
filed with the SEC on March 29, 2000 and incorporated
herein by reference).
3.2 Certificate of Amendment (filed as Exhibit 3.2 to the
Corporation's Annual Report on Form 10-K filed with the SEC
on March 29, 2000 and incorporated herein by reference).
3.3 Bylaws, as amended (filed as Exhibit 3 to the Corporation's
Registration Statement on Form S-8 filed with the SEC on
July 25, 2000 and incorporated herein by reference).
Exhibit No. 4 Instruments Defining the Rights of Security Holders.
4.1 Specimen common stock certificate (filed as Exhibit 4.1 to
the Corporation's Registration Statement on Form S-3 (File
No. 333-81563) filed with the SEC on June 25, 1999 and
incorporated herein by reference).
4.2 Rights Agreement, dated as of February 5, 1996, between the
Corporation and Chemical Mellon Shareholder Services,
L.L.C. (filed as Exhibit 1 to the Corporation's Current
Report on Form 8-K filed with the SEC on February 12, 1996
and incorporated herein by reference).
4.3 Amendment No. 1 to Rights Agreement, entered into as of
November 4, 1996, by and between the Corporation and
ChaseMellon Shareholder Services, L.L.C. (filed as an
exhibit to the Corporation's Current Report on Form 8-K
filed with the SEC on November 25, 1996 and incorporated
herein by reference).
4.4 Amendment No. 2 to Rights Agreement, entered into as of
October 30, 1998, between the Corporation and American
Stock Transfer & Trust Company (filed as Exhibit 1 to the
Corporation's Current Report on Form 8-K filed with the SEC
on October 30, 1998 and incorporated herein by reference).
81
Exhibit No. 10. Material Contracts.
10.1 1986 Stock Option Plan of Webster Financial Corporation
(filed as Exhibit 10(a) to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986
and incorporated here in by reference).
10.2 Amendment to 1986 Stock Option Plan (filed as Exhibit 10.3
to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein
by reference).
10.3 Mechanics Savings Bank 1996 Officer Stock Plan (filed as
Exhibit 10.1 of MECH Financial, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
10.4 Amendment No. 1 to Mechanics Savings Bank 1996 Officer
Stock Option Plan (filed as Exhibit 4.1 (b) of MECH
Financial Inc.'s Registration Statement on Form S-8 as
filed with the SEC on April 2, 1998 and incorporated herein
by reference).
10.5 Mechanics Savings Bank 1996 Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 of MECH
Financial, Inc.'s Annual Report on Form 10-K filed with the
SEC on March 30, 1998 and incorporated herein by
reference).
10.6 Amendment No. 1 to Mechanics Savings Bank 1996 Director
Stock Option Plan (filed as Exhibit 4.2 (b) of MECH
Financial, Inc.'s Registration Statement on Form S-8 as
filed with the SEC on April 2, 1998 and incorporated herein
by reference).
10.7 New England Community Bancorp, Inc., 1997 Non-Officer's
Directors' Stock Option Plan (filed as Exhibit 4.1 of New
England Community Bancorp, Inc.'s Registration Statement on
Form S-8 as filed with the SEC on October 6, 1998 and
incorporated herein by reference).
10.8 Amended and Restated 1992 Stock Option Plan (filed as
Exhibit 99.2 to the Corporation's Registration Statement on
Form S-8, filed with the SEC on August 8, 2001 and
incorporated herein by reference).
10.9 Economic Value Added Incentive Plan (the description of the
plan in the last paragraph that begins on page 17 of the
Corporation's definitive proxy materials for the 2000
Annual Meeting of Shareholders is incorporated herein by
reference).
10.10 Performance Incentive Plan (filed as Exhibit A to the
Corporation's definitive proxy materials for the
Corporation's 1996 Annual Meeting of Shareholders and
incorporated herein by reference).
10.11 Amendment to Webster Financial Corporation Performance
Incentive Plan as amended and restated effective January 1,
1996 (filed as Exhibit 10.11 to the Corporation's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998 and incorporated herein by reference).
10.12 Amended and Restated Deferred Compensation Plan for
Directors and Officers of Webster Bank (filed as Exhibit
10.12 to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and incorporated
herein by reference).
10.13 2001 Directors Retainer Fees Plan (filed as Exhibit A to
the Corporation's Definitive Proxy Statement filed with the
SEC on March 21, 2001 and incorporated herein by
reference).
10.14 Supplemental Retirement Plan for Employees of Webster Bank,
as amended and restated effective January 1, 2003.
10.15 Qualified Performance-Based Compensation Plan (filed as
Exhibit A to the Corporation's definitive proxy materials
for the Corporation's 1998 Annual Meeting of Shareholders
and incorporated herein by reference).
10.16 Employee Stock Purchase Plan (filed as Appendix A to the
Company's Definitive Proxy Statement filed with the SEC on
March 23, 2000 and incorporated herein by reference).
10.17 Employment Agreement, dated as of January 1, 1998, among
James C. Smith, the Corporation and Webster Bank (filed as
Exhibit 10.27 to the Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and
incorporated herein by reference).
82
10.18 Employment Agreement, dated as of January 1, 1998, among
William T. Bromage, the Corporation and Webster Bank (filed
as Schedule 10.27 to Exhibit 10.27 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by reference).
10.19 Employment Agreement, dated as of January 1, 1998, among
Peter K. Mulligan, the Corporation and Webster Bank (filed
as Schedule 10.27 to Exhibit 10.27 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by reference).
10.20 Employment Agreement, dated as of April 24, 2002, among
Joseph J. Savage, the Corporation and Webster Bank.
10.21 Amendment to Employment Agreement, entered into as of March
17, 1998, by and among Webster Bank, the Corporation and
James C. Smith (filed as Exhibit 10.28 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by reference).
10.22 Amendment to Employment Agreement, entered into as of March
17, 1998, by and among Webster Bank, the Corporation and
William T. Bromage (filed as Schedule 10.28 to Exhibit
10.28 to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.23 Amendment to Employment Agreement, entered into as of March
17, 1998, by and among Webster Bank, the Corporation and
Peter K. Mulligan (filed as Schedule 10.28 to Exhibit 10.28
to the Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein
by reference).
10.24 Change of Control Employment Agreement, dated as of
December 15, 1997, by and between the Corporation and James
C. Smith (filed as Exhibit 10.29 to the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by reference).
10.25 Change of Control Employment Agreement, dated as of
December 15, 1997, by and between the Corporation and
William T. Bromage (filed as Schedule 10.29 to Exhibit
10.29 to the Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and incorporated
herein by reference).
10.26 Change of Control Employment Agreement, dated as of
December 15, 1997, by and between the Corporation and Peter
K. Mulligan (filed as Schedule 10.29 to Exhibit 10.29 to
the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 and incorporated herein by
reference).
10.27 Change of Control Employment Agreement, dated as of April
24, 2002, by and between the Corporation and Joseph J.
Savage.
10.28 Employment Agreement, dated as of March 30, 2001, among
William J. Healy, the Corporation and Webster Bank (filed
as Exhibit 10.1 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 30, 2001 and
incorporated herein by reference).
10.29 Change of Control Employment Agreement, dated as of March
30, 2001, by and between Webster Financial Corporation and
William J. Healy (filed as Exhibit 10.2 to the
Corporation's Quarterly Report on Form 10-Q for the quarter
ended March 30, 2001 and incorporated herein by reference).
10.30 Purchase and Assumption Agreement, dated as of October 2,
1992, among the Federal Deposit Insurance Corporation (the
"FDIC"), in its corporate capacity as receiver of First
Constitution Bank, the FDIC and First Federal Bank (filed
as Exhibit 2 to the Corporation's Current Report on Form
8-K filed with the SEC on October 19, 1992 and incorporated
herein by reference).
10.31 Amendment No. 1 to Purchase and Assumption Agreement, made
as of August 8, 1994, by and between the FDIC, the FDIC as
receiver of First Constitution Bank, and First Federal Bank
(filed as Exhibit 10.36 to the Corporation's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994
and incorporated herein by reference).
10.32 Indenture, dated as of June 15, 1993, between the
Corporation and Chemical Bank, as trustee, relating to the
Corporation's 8 3/4% Senior Notes due 2000 (filed as
Exhibit 99.5 to the Corporation's Current Report on Form
8-K/A filed with the SEC on November 10, 1993 and
incorporated herein by reference).
83
10.33 Junior Subordinated Indenture, dated as of January 29, 1997
between the Corporation and The Bank of New York, as
trustee, relating to the Corporation's Junior Subordinated
Deferrable Interest Debentures (filed as Exhibit 10.41 to
the Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 and incorporated herein by
reference).
Exhibit No. 21 Subsidiaries.
Exhibit No. 23 Consent of KPMG L.L.P.
Exhibit No. 99.1 Section 906 Certification of Chief Executive Officer
Exhibit No. 99.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K
Current Report on Form 8-K, filed with SEC on December 5, 2002
Current Report on Form 8-K, filed with SEC on December 17, 2002
(c) Exhibits to this Form 10-K are attached or incorporated herein by reference
as stated above.
(d) Not applicable.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 20, 2003.
WEBSTER FINANCIAL CORPORATION
By /s/ James C. Smith
---------------------------------
James C. Smith
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 20, 2003.
Name: Title:
---- -----
/s/ James C. Smith Chairman and Chief Executive Officer
---------------------------------- (Principal Executive Officer)
James C. Smith
/s/ William J. Healy Executive Vice President and
---------------------------------- Chief Financial Officer
William J. Healy (Principal Financial and Accounting Officer)
/s/ Joel S. Becker Director
----------------------------------
Joel S. Becker
/s/ William T. Bromage President and Director
----------------------------------
William T. Bromage
/s/ George T. Carpenter Director
----------------------------------
George T. Carpenter
/s/ John J. Crawford Director
----------------------------------
John J. Crawford
/s/ Robert A. Finkenzeller Director
----------------------------------
Robert A. Finkenzeller
/s/ C. Michael Jacobi Director
----------------------------------
C. Michael Jacobi
/s/ John F. McCarthy Director
----------------------------------
John F. McCarthy
/s/ Michael G. Morris Director
----------------------------------
Michael G. Morris
85
CERTIFICATION
I, James C. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of Webster Financial
Corporation.
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this annual
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: March 20, 2003
/s/ James C. Smith
- --------------------------------
James C. Smith
Chairman and Chief Executive Officer
86
CERTIFICATION
I, William J. Healy, certify that:
1. I have reviewed this annual report on Form 10-K of Webster Financial
Corporation.
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this annual
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: March 20, 2003
/s/ William J. Healy
- -------------------------------------
William J. Healy
Executive Vice President and Chief Financial Officer
87