UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended MARCH 31, 2003.
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
- --=------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(203) 578-2476
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 45,606,418
- ------------------------------ ---------------------------------------
Class Outstanding at April 30, 2003
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Statements of Condition at March 31, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Income for the three months ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2003
and 2002 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2003
and 2002 (unaudited) 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2003
and 2002 (unaudited) 7
Notes to Consolidated Interim Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 40
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
SIGNATURE 42
CERTIFICATIONS 43
EXHIBITS 45
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. INTERIM FINANCIAL STATEMENTS
- -------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
MARCH 31, DECEMBER 31,
(In thousands, except share and per share data) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 238,370 266,463
Short-term investments 13,696 15,596
Securities: (Note 4)
Trading, at fair value 10,924 5,752
Available for sale, at fair value 4,497,686 4,119,245
Loans held for sale (Note 5) 321,637 405,157
Loans, net (Notes 6 and 7) 8,390,695 7,795,835
Accrued interest receivable 58,137 54,601
Goodwill (Note 9) 256,450 236,478
Cash surrender value of life insurance 174,181 172,066
Premises and equipment, net 82,525 84,683
Intangible assets (Note 9) 64,492 60,881
Deferred tax asset, net (Note 8) 9,680 14,951
Prepaid expenses and other assets 237,186 236,296
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 14,355,659 13,468,004
========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 10) $ 7,783,809 7,606,122
Federal Home Loan Bank advances (Note 11) 2,885,098 2,163,029
Other borrowings (Note 12) 2,030,553 2,166,640
Senior notes and subordinated debt (Note 13) 326,000 126,000
Accrued expenses and other liabilities 128,921 239,923
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,154,381 12,301,714
- ------------------------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities
of subsidiary trusts (Note 17) 121,255 121,255
Preferred stock of subsidiary corporation 9,577 9,577
Commitments and contingencies (Notes 7, 8 and 16)
Shareholders' Equity (Note 14):
Common stock, $.01 par value:
Authorized - 200,000,000 shares at March 31, 2003 and December 31, 2002;
Issued - 49,506,970 shares at March 31, 2003 and December 31, 2002 495 495
Paid-in capital 414,712 415,067
Retained earnings 738,807 707,531
Less Treasury stock at cost, 3,889,839 shares at March 31,
2003 and 3,880,973 shares at December 31, 2002 (134,747) (134,318)
Unearned compensation (4,227) (3,913)
Accumulated other comprehensive income 55,406 50,596
- ------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,070,446 1,035,458
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,355,659 13,468,004
========================================================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands, except per share data) 2003 2002
- ---------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $113,221 110,275
Loans held for sale 4,481 1,220
Securities and short-term investments 51,745 59,598
- ---------------------------------------------------------------------------------------------
Total interest income 169,447 171,093
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 10) 29,418 39,613
Borrowings (Notes 11, 12 and 13) 35,353 34,997
- ---------------------------------------------------------------------------------------------
Total interest expense 64,771 74,610
- ---------------------------------------------------------------------------------------------
Net interest income 104,676 96,483
Provision for loan losses (Note 7) 5,000 4,000
- ---------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 99,676 92,483
- ---------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Deposit service charges 16,890 13,806
Insurance revenue 10,964 7,436
Loan fees 5,905 3,885
Financial advisory services 5,431 3,959
Trust and investment services 4,578 4,387
Gain on sale of loans and loan servicing, net 2,771 393
Gain on sale of securities, net 2,633 3,405
Increase in cash surrender value of life insurance 2,115 2,202
Other income 1,861 2,010
- ---------------------------------------------------------------------------------------------
Total noninterest income 53,148 41,483
- ---------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and benefits 50,561 40,148
Occupancy 8,099 6,285
Furniture and equipment 7,521 6,568
Intangible amortization (Note 9) 3,962 4,038
Marketing 3,485 2,424
Professional services 2,478 2,327
Capital securities and dividends on preferred stock of
subsidiary corporation (Note 17) 3,138 3,832
Other expenses 13,562 10,577
- ---------------------------------------------------------------------------------------------
Total noninterest expenses 92,806 76,199
- ---------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
change in accounting method 60,018 57,767
Income taxes 20,081 18,152
- ---------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting method 39,937 39,615
Cumulative effect of change in method of accounting (net of tax
benefit of $3,920) (Note 9) -- (7,280)
- ---------------------------------------------------------------------------------------------
NET INCOME $ 39,937 32,335
=============================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands, except per share data) 2003 2002
- --------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Income before cumulative effect of change in accounting method $ 0.88 0.81
Cumulative effect of change in method of accounting -- (0.15)
- --------------------------------------------------------------------------------------------------
Net income $ 0.88 0.66
==================================================================================================
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of change in accounting method $ 0.86 0.80
Cumulative effect of change in method of accounting -- (0.15)
- --------------------------------------------------------------------------------------------------
Net Income $ 0.86 0.65
==================================================================================================
Dividends paid per common share $ 0.19 0.17
AVERAGE SHARES OUTSTANDING:
Basic 45,461 48,803
Diluted 46,192 49,583
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net income $ 39,937 32,335
Other comprehensive income, net of tax:
Unrealized net holding gain (loss) on securities available for sale
arising during year (net of income tax effect of $2,917, and
($9,764), for 2003 and 2002, respectively) 4,725 (14,428)
Reclassification adjustment for net gains included in
net income (net of income tax effect of $1,039
and $1,224 for 2003 and 2002, respectively) (1,569) (2,272)
Deferred gain on cash flow hedge (net of $36,000 of amortization) 1,654 --
- ------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 4,810 (16,700)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income $ 44,747 15,635
============================================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
Common Paid-in Retained Treasury Compen- Purchased Income
(In thousands, except per share data) Stock Capital Earnings Stock sation With Debt (Loss) Total
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
Net income for the three months
ended March 31, 2002 -- -- 32,335 -- -- -- -- 32,335
Dividends paid:
$.17 per common share -- -- (8,337) -- -- -- -- (8,337)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (694) -- 2,496 -- 1,802
Common stock repurchased -- -- -- (12,477) -- -- -- (12,477)
Restricted stock grants, net
of amortization -- -- (17) 718 (92) -- -- 609
Net unrealized loss on securities
available for sale, net of taxes -- -- -- -- -- -- (16,700) (16,700)
Other, net -- (165) -- -- -- -- -- (165)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $ 495 414,906 614,235 (19,404) (4,090) -- (1,751) 1,004,391
===============================================================================================================================
THREE MONTHS ENDED MARCH 31, 2003
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 495 415,067 707,531 (134,318) (3,913) -- 50,596 1,035,458
Net income for the three months
ended March 31, 2003 -- -- 39,937 -- -- -- -- 39,937
Dividends paid:
$.19 per common share -- -- (8,661) -- -- -- -- (8,661)
Exercise of stock options -- (1,082) -- 3,437 -- -- -- 2,355
Common stock repurchased -- -- -- (4,781) -- -- -- (4,781)
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 3,156 3,156
Stock-based compensation -- 727 -- 915 (314) -- -- 1,328
Hedge deferred gain, net of
amortization -- -- -- -- -- -- 1,654 1,654
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2003 $ 495 414,712 738,807 (134,747) (4,227) -- 55,406 1,070,446
===============================================================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 39,937 32,335
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 5,000 4,000
Depreciation and amortization 7,198 5,287
Amortization of securities premiums, net 3,146 18
Amortization of loan premiums, net 207 334
Amortization of intangible assets 3,962 4,038
Cumulative effect of change in accounting method, net -- 7,280
Gains on sale of foreclosed properties, net (34) (141)
Gains on sale of securities, net (2,608) (3,496)
Losses on sale of loans and servicing, net (2,771) (393)
Increase in cash surrender value of life insurance (2,115) (2,202)
Gains (losses) on trading securities, net (25) 91
Increase in trading securities (5,147) (618)
Loans originated for sale (678,062) (208,597)
Proceeds from sale of loans originated for sale 761,582 250,167
Increase in interest receivable (3,536) (4,640)
Decrease (increase) in prepaid expenses and other assets 3,146 (33,053)
(Decrease) increase in accrued expenses and other liabilities, net (122,893) 7,157
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,987 57,567
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (1,064,466) (766,842)
Principal collected on securities 535,595 387,000
Maturities of securities 50 2,570
Proceeds from sales of securities, available for sale 155,174 130,655
Decrease short-term investments, net 1,900 2,465
Increase in loans, net (562,284) (316,909)
Proceeds from sale of foreclosed properties 2,085 2,131
Purchases of premises and equipment, net (1,019) (3,682)
Net cash paid for acquisitions (27,447) --
Other, net -- (428)
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (960,412) (563,040)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 177,687 102,875
Proceeds from FHLB advances 16,698,246 3,169,424
Repayment of FHLB advances (15,976,177) (3,301,024)
(Decrease) increase in other borrowings (163,337) 501,462
Subordinated debt issuance 200,000 --
Cash dividends to common shareholders (8,661) (8,337)
Exercise of stock options 2,355 1,802
Common stock repurchased (4,781) (12,477)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 925,332 453,725
- --------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (28,093) (51,748)
Cash and cash equivalents at beginning of period 266,463 218,908
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 238,370 167,160
====================================================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 383 2,236
Interest paid 61,698 65,379
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties 1,739 977
============================================================================================================
Assets acquired and liabilities assumed were as follows:
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------
Fair value of noncash assets acquired in purchase acquisitions $43,058 --
Fair value of liabilities assumed in purchase acquisitions 42,514 --
============================================================================================================
See accompanying Notes to Consolidated Interim Financial Statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
- -------------------------------------------------------------
The Consolidated Interim Financial Statements include the accounts of Webster
Financial Corporation ("Webster" or the "Company") and its subsidiaries. The
Consolidated Interim Financial Statements and Notes thereto have been prepared
in conformity with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany transactions have been eliminated in consolidation.
Amounts in prior period financial statements are reclassified whenever necessary
to conform to current period presentations. The results of operations for the
three months ended March 31, 2003 are not necessarily indicative of the results
which may be expected for the year as a whole.
The preparation of the Consolidated Interim Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the Consolidated Interim Financial Statements and
the reported amounts of revenues and expenses for the periods presented. The
actual results of Webster could differ from those estimates. Material estimates
that are susceptible to near-term changes include the determination of the
allowance for loan losses and the valuation allowance for the deferred tax
asset. These Consolidated Interim Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and Notes thereto
included in Webster's Annual Report on Form 10-K for the year ended December 31,
2002.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2: STOCK-BASED COMPENSATION
- --------------------------------
At March 31, 2003 and 2002, Webster had a fixed stock-based employee and
non-employee director compensation plan. During 2002, effective January 1, 2002,
Webster adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", for all employee and non-employee
stock options granted, modified, or settled January 1, 2002 and thereafter.
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. Awards under the plans, in
general, vest over periods ranging from 3 to 4 years. Webster also grants
restricted stock to employees and directors.
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.
THREE MONTHS ENDED MARCH 31,
(In thousands except per share data) 2003 2002
- --------------------------------------------------------------------------------------------
Net income, as reported $ 39,937 32,335
Add: Stock option compensation expense included
in reported net income, net of related tax effects 469 --
Deduct: Total stock option compensation expense
determined under fair value based method for all awards,
net of related tax effects (982) (711)
- --------------------------------------------------------------------------------------------
Pro forma net income $ 39,424 31,624
============================================================================================
Earnings per share:
Basic - as reported $ .88 .66
- pro forma .87 .65
============================================================================================
Diluted - as reported $ .86 .65
- pro forma .85 .64
============================================================================================
The cost of restricted stock granted is reflected in compensation and benefits
expense and totaled $395,000 and $424,000, net of taxes, for the periods ended
March 31, 2003 and 2002, respectively.
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 the first quarter of 2003: expected
option term of 8.7 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 3.97%. There were no options granted during the first quarter of 2002.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3: ACQUISITIONS
- --------------------
The following acquisitions were completed by Webster during the first quarter
period of 2003. The results of operations of the acquired companies are included
in the Consolidated Statements of Income subsequent to the date of acquisition.
On January 6, 2003, Webster announced that it acquired The Mathog and Moniello
Holding Co., Inc. ("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 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 an installment basis. A majority of its borrowers
are located in the New York and New Jersey areas.
NOTE 4: SECURITIES
- ------------------
A summary of securities follows:
MARCH 31, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
TRADING SECURITIES:
Municipal securities (a) $ 10,924 -- -- 10,924 $ 5,752 -- -- 5,752
================================================================================================================================
AVAILABLE FOR SALE PORTFOLIO:
Municipal bonds and notes $ 107,907 4,703 (103) 112,507 104,676 4,388 (39) 109,025
Corporate bonds and notes 170,674 1,440 (4,381) 167,733 181,810 1,432 (6,029) 177,213
Equity securities (b) 178,764 5,720 (1,980) 182,504 177,051 5,234 (1,616) 180,669
Mortgage-backed securities (c) 3,950,462 85,308 (828) 4,034,942 3,571,160 81,487 (309) 3,652,338
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 4,407,807 97,171 (7,292) 4,497,686 $ 4,034,697 92,541 (7,993) 4,119,245
================================================================================================================================
(a) For trading securities, amortized cost equals market value and includes
recognized gains and losses.
(b) As of March 31, 2003, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $152.5 million, and common stock
of $30.0 million. The fair value of equity securities at December 31, 2002
consisted of FHLB stock of $150.0 million, preferred stock of $5.8 million
and common stock of $24.9 million.
(c) Includes mortgage-backed securities comprised of Fannie Mae, Freddie Mac,
Government National Mortgage Association and non-agency issued
mortgage-backed securities
As part of its continuous review of the investment portfolio, management
evaluates unrealized losses on securities for declines in value that are other
than temporary in nature. During the three months ended March 31, 2003 and 2002,
Webster did not identify any declines in value that were other than temporary in
nature.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5: LOANS HELD FOR SALE
- ---------------------------
Loans held for sale totaled $321.6 million and $405.2 million at March 31, 2003
and December 31, 2002. The residential loan portion was $317.7 million and
$400.0 million, respectively for each period. Commercial loans of $3.9 million
at March 31, 2003 and $5.2 million at December 31, 2002 comprised the remainder.
At March 31, 2003 and December 31, 2002, residential mortgage origination
commitments totaled $711.1 million and $518.4 million, respectively. Residential
commitments outstanding at March 31, 2003 consisted of adjustable rate and fixed
rate mortgages of $38.7 million and $672.4 million, respectively, at rates
ranging from 4.1% to 7.3%. 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%. Commitments to
originate loans generally expire within 60 days. At March 31, 2003 and December
31, 2002, Webster also had outstanding commitments to sell residential mortgage
loans of $595.4 million and $533.2 million, respectively.
At March 31, 2003 and December 31, 2002, Webster serviced, for the benefit of
others, residential and commercial loans totaling approximately $1.4 billion and
$1.6 billion, respectively.
NOTE 6: LOANS, NET
- ------------------
A summary of loans, net follows:
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) MARCH 31, 2003 DECEMBER 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
Amount % Amount %
------ ---- ------ ---
Residential mortgage loans $ 3,657,707 43.6% $ 3,386,207 43.4%
Commercial loans:
Commercial non-mortgage 982,031 11.7 913,536 11.8
Asset-based loans 527,315 6.3 465,400 5.9
Equipment financing 437,821 5.2 419,962 5.4
- ---------------------------------------------------------------------------------------------------------------------
Total commercial loans 1,947,167 23.2 1,798,898 23.1
Commercial real estate 1,062,891 12.7 1,029,332 13.2
Consumer loans:
Home equity credit lines 1,313,962 15.6 1,235,723 15.9
Fixed home equity 495,030 5.9 426,141 5.4
Other consumer 32,534 0.4 36,338 0.5
- ---------------------------------------------------------------------------------------------------------------------
Total consumer loans 1,841,526 21.9 1,698,202 21.8
- ---------------------------------------------------------------------------------------------------------------------
Total loans 8,509,291 101.4 7,912,639 101.5
Less: allowance for loan losses (118,596) (1.4) (116,804) (1.5)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net $ 8,390,695 100.0% $ 7,795,835 100.0%
=====================================================================================================================
At March 31, 2003, loans net included $2.8 million of net discounts and $31.6
million of deferred costs. At December 31, 2002, loans net included $13.1
million of net discounts and $27.1 million of deferred costs. The unadvanced
portions of closed loans totaled $53.4 million and $56.9 million at March 31,
2003 and December 31, 2002, respectively.
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At March 31, 2003 and December 31, 2002, unused portions of home equity credit
lines extended were $1.1 billion and $1.0 billion, respectively. Unused
commercial lines of credit, letters of credit, standby letters of credit,
equipment financing commitments and outstanding commercial loan commitments
totaled $1.6 billion and $1.7 billion at March 31, 2003 and December 31, 2002,
respectively. Consumer loan commitments totaled $45.5 million and $42.4 million
at March 31, 2003 and December 31, 2002, respectively.
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 March 31, 2003 and December 31, 2002. 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.
NOTE 7: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The following table provides a summary of the activity in the allowance for loan
losses:
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 116,804 97,307
Provisions charged to operations 5,000 4,000
Allowance for purchased loans 146 --
- ---------------------------------------------------------------------------------------------------------
Subtotal 121,950 101,307
- ---------------------------------------------------------------------------------------------------------
Total charge-offs 3,874 2,641
Total recoveries 520 264
- ---------------------------------------------------------------------------------------------------------
Net charge-offs 3,354 2,377
- ---------------------------------------------------------------------------------------------------------
Balance at end of period $ 118,596 98,930
=========================================================================================================
Ratio of net charge-offs to average loans outstanding
during the period (annualized) .16% .14
=========================================================================================================
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8: DEFERRED TAX ASSET, NET
- -------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 2003 and
December 31, 2002 are summarized below. Temporary differences arise for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A 100% valuation allowance has been applied to the State
of Connecticut ("Connecticut") deferred tax assets due to uncertainties of
realization.
- ------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses, and other loss allowances $ 43,946 42,128
Intangibles 12,072 12,139
Net operating loss and credit carryforwards 7,796 7,913
Accrued compensation and benefits 7,746 9,824
Loan discounts 7,291 7,866
Depreciation and amortization 1,006 1,432
Equipment financing costs 631 1,060
Other assets-investments 1,182 716
Other accrued expenses 1,047 1,575
Other deductible items 273 314
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 82,990 84,967
Less: valuation allowance for full amount of Connecticut portions (9,642) (10,497)
- ------------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 73,348 74,470
- ------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale 35,685 33,585
Intangibles 15,573 13,203
Compensation and benefits 4,376 4,926
Mortgage servicing rights 3,971 4,328
Loan premiums and deferred fees 2,013 2,301
Equipment financing depreciation 1,310 314
Accrued dividends 483 525
Other taxable items 257 337
- ------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 63,668 59,519
- ------------------------------------------------------------------------------------------------------------------
Deferred tax asset, net $ 9,680 14,951
==================================================================================================================
Management believes it is more likely than not that Webster will realize its net
deferred tax asset, 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.
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9: GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------
During the first quarter of 2002, 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. The imputed value was
impacted by the extremely challenging business environment and especially by the
slowdown in mergers and acquisitions activity, which comprised a significant
portion of their 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. The reported net income for the first
quarter 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.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- ---------------------------------------------------------------------------------------------------------------
March 31, December 31,
(In thousands) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Intangible assets:
Balances subject to amortization:
Core deposit intangibles $ 56,331 60,146
Other identified intangibles 7,426 --
Balances not subject to amortization:
Pension assets 735 735
- ---------------------------------------------------------------------------------------------------------------
Total intangible assets $ 64,492 60,881
===============================================================================================================
Balances not subject to amortization:
Goodwill $ 256,450 236,478
===============================================================================================================
Identified intangible assets were acquired as part of the Mathog and BIC
business combinations. These intangibles, which totaled $7.6 million at
acquisition, have estimated lives ranging from two to twenty-five years with a
weighted average life of sixteen years. None of the acquired identified
intangibles were exempt from amortization.
Changes in the carrying amount of goodwill for the quarter ended March 31, 2003:
Trust and
Retail* Commercial Investment
(In thousands) Banking Banking Services Total
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 206,067 21,055 9,356 236,478
Purchase price adjustments -- 635 7 642
Business combinations 16,222 3,108 -- 19,330
- ---------------------------------------------------------------------------------------------------------------
Balance at March 31, 2003 $ 222,289 24,798 9,363 256,450
===============================================================================================================
*Includes insurance operations
Amortization of intangible assets for the three months ended March 31, 2003,
totaled $4.0 million. Estimated annual amortization expense of current
intangible assets with finite useful lives, absent any impairment or change in
estimated useful lives, is summarized below.
(In thousands)
- --------------------------------------------------------------------------------
FOR YEARS ENDING DECEMBER 31,
2003 (full year) $ 15,866
2004 15,872
2005 15,872
2006 11,698
2007 3,642
2008 and thereafter 4,770
- --------------------------------------------------------------------------------
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10: DEPOSITS
- -----------------
The following table summarizes deposits at the dates indicated.
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
% of % of
(In thousands) Amount total Amount total
- -------------------------------------------------------------------------------------------------------------------
Balance by account type:
Demand deposits $ 974,043 12.5% $ 982,735 12.9%
NOW accounts 991,592 12.8 945,145 12.4
Money market deposit and savings accounts 3,200,605 41.1 2,987,595 39.3
Time deposits 2,617,569 33.6 2,690,647 35.4
- -------------------------------------------------------------------------------------------------------------------
Total $ 7,783,809 100.0% $ 7,606,122 100.0%
===================================================================================================================
Interest expense on deposits is summarized as follows:
- --------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------
NOW accounts $ 1,009 1,075
Money market deposit and savings accounts 10,195 10,441
Time deposits 18,214 28,097
- --------------------------------------------------------------------------------------------
Total $ 29,418 39,613
=========================================================================================-==
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11: FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
- --------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
Total Total
(In thousands) Outstanding Callable Outstanding Callable
- --------------------------------------------------------------------------------------------------------------------------
FIXED RATE:
0.95% to 6.67% due in 2003 $ 1,104,186 -- 381,655 --
3.27% to 6.78% due in 2004 750,161 -- 750,194 --
2.97% to 6.25% due in 2005 149,873 100,000 150,085 100,000
4.68% to 6.31% due in 2006 51,890 -- 52,028 --
4.88% to 6.98% due in 2007 702,249 500,000 702,273 500,000
4.49% to 5.93% due in 2008 29,298 27,000 29,396 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 463 -- 475 --
6.60% due in 2011 1,978 -- 2,024 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- --------------------------------------------------------------------------------------------------------------------------
2,805,098 642,000 2,083,130 642,000
VARIABLE RATE:
5.76% due in 2004 80,000 -- 80,000 --
- --------------------------------------------------------------------------------------------------------------------------
2,885,098 642,000 2,163,130 642,000
Unamortized discount on FHLB advances -- -- (101) --
- --------------------------------------------------------------------------------------------------------------------------
Total advances, net $ 2,885,098 642,000 2,163,029 642,000
==============================================================================================================-===========
Webster Bank ("Bank") had additional borrowing capacity of approximately $168.2
million from the FHLB at March 31, 2003 and $669.7 million at December 31, 2002.
Advances are secured by a blanket security agreement. This agreement requires
the Bank to maintain as collateral certain qualifying assets, principally
residential mortgage loans and securities. At March 31, 2003 and December 31,
2002, investment securities were not utilized as collateral. If securities had
been used for collateral, additional borrowing capacity at March 31, 2003 and
December 31, 2002 would be approximately $1.7 billion and $2.1 billion. At March
31, 2003 the Bank was in compliance with the FHLB collateral requirements.
During the third and fourth quarters of 2002, the Bank received $4.2 million in
one year advances at a rate of 0.95% under the FHLB's Affordable Housing
Program.
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: OTHER BORROWINGS
- -------------------------
The following table summarizes balances for other borrowings:
- -------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Securities sold under agreement to repurchase $ 1,489,701 1,453,596
Federal funds purchased 502,615 291,105
Treasury tax and loan 16,874 403,148
Other 21,363 18,791
- -------------------------------------------------------------------------------------------------------------
Total $ 2,030,553 2,166,640
=============================================================================================================
Repurchase agreements are primarily collateralized by U.S. Government Agency
mortgage-backed securities. The quarter average balance for borrowings under
short-term repurchase agreements exceeded 30% of total shareholders' equity at
March 31, 2003.
Information concerning short-term repurchase agreements as of the end of the
current period is presented below:
- -------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------
Quarter end balance $ 1,054,701 1,453,596
Quarter average balance 1,040,800 1,465,644
Highest month end balance during quarter 1,054,701 1,636,177
Weighted-average maturity (in months) 1.2 2.0
Weighted-average interest rate 1.22% 1.40
Amortized cost of collateral $ 1,093,531 1,504,820
Fair value of collateral 1,114,555 1,539,731
NOTE 13: SENIOR NOTES AND SUBORDINATED DEBT
- -------------------------------------------
On January 14, 2003, the Bank completed an offering of $200 million of
subordinated notes. The notes bear an interest rate of 5.875% and will mature on
January 15, 2013. The securities were offered in minimum denominations of
$250,000 to institutional investors. The subordinated notes were rated
investment grade by the major rating agencies. The notes constitute new funding
and will supplement the Bank's existing capital including regulatory capital. At
March 31, 2003, Webster Bank was a well-capitalized institution for regulatory
purposes. The Bank entered into a futures derivative contract in anticipation of
the debt issuance to hedge the fixed rate on the subordinated notes. The
contract qualified as a cash flow hedge under the guidelines of SFAS No. 133.
The gain of $1.7 million recognized on the futures contract transaction is being
amortized over the life of the subordinated notes as a reduction of interest
expense.
In November 2000, Webster completed a private placement of $126 million of
unsecured Senior Notes due in 2007. The net proceeds were used for general
corporate purposes.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14: SHAREHOLDER'S 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 March 2003, the Bank exceeded all
OTS regulatory capital requirements and met the Federal Deposit Insurance
Corporation ("FDIC") requirements for a "well capitalized" institution.
The following table provides information on the Bank's capital ratios as of
March 31, 2003 and December 31, 2002.
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 2003
Bank's equity (to total assets) $ 1,142,448 8.04%
Non-includable subsidiaries (2,084)
Goodwill and other intangibles (254,695)
Unrealized gain on certain AFS securities, net (53,408)
Cash flow hedging gain (1,654)
- --------------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 830,607 5.99 277,198 2.00% No Requirement
Tier 1 capital (to adjusted total assets), net 830,607 5.99 554,396 4.00 692,995 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
Tier 1 Risk-based capital
(to risk-weighted assets) 830,607 9.02 368,459 4.00 552,689 6.00
Qualifying subordinated debt 200,000
Allowable allowance for loan losses 114,187
- --------------------------------------------------------------------------------------------------------------------------------
Total Risk-based capital (to risk-
weighted assets) $ 1,144,794 12.43 736,919 8.00 921,148 10.00
================================================================================================================================
AT DECEMBER 31, 2002
Bank's equity (to total assets) $ 1,140,160 8.54%
Tangible capital (to adjusted total assets) 835,049 6.42 $ 260,101 2.00% No Requirement
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
Total Risk-based capital
(to risk-weighted assets) 945,993 10.66 709,979 8.00 887,473 10.00
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15: BUSINESS SEGMENTS
- --------------------------
Webster has three segments for purpose of reporting business line results. These
segments include Retail Banking, Commercial Banking and Trust and Investment
Services. The balance of the activity is reflected in Corporate. The
methodologies and organizational hierarchies that define the business segments
are periodically reviewed and revised. The March 31, 2002 results have been
restated, to reflect changes in the methodologies and organizational structure
adopted and reflected in the results for the three months ended March 31, 2003.
The following table presents the statement of income and total assets for
Webster's reportable segments.
THREE MONTHS ENDED MARCH 31, 2003
- -------------------------------------------------------------------------------------------------------------------------------
TRUST AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 66,970 18,546 693 18,467 104,676
Provision for loan losses 1,974 5,226 46 (2,246) 5,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 64,996 13,320 647 20,713 99,676
Noninterest income 34,169 12,284 4,716 1,979 53,148
Noninterest expense 54,197 17,214 6,236 15,159 92,806
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 44,968 8,390 (873) 7,533 60,018
Income tax expense (benefit) 15,042 2,806 (292) 2,525 20,081
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 29,926 5,584 (581) 5,008 39,937
===============================================================================================================================
Total assets at period end $ 6,614,668 2,621,780 64,377 5,054,834 14,355,659
THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
TRUST AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 57,313 13,406 385 25,379 96,483
Provision for loan losses 2,094 2,503 23 (620) 4,000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 55,219 10,903 362 25,999 92,483
Noninterest income 24,668 6,678 4,728 5,409 41,483
Noninterest expense 46,896 12,653 6,154 10,496 76,199
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of change in method of accounting 32,991 4,928 (1,064) 20,912 57,767
Income tax expense (benefit) 10,365 1,548 (334) 6,573 18,152
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in method of accounting 22,626 3,380 (730) 14,339 39,615
Cumulative effect of change in method
of accounting (net of taxes) -- (7,280) -- -- (7,280)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 22,626 (3,900) (730) 14,339 32,335
===============================================================================================================================
Total assets at period end $ 5,827,945 1,962,588 44,320 4,500,242 12,335,095
Retail Banking
- --------------
The Retail Banking segment includes insurance services, small business lending,
consumer lending and the Bank's deposit generation and direct banking
activities, which include the operation of automated teller machines and
telebanking customer support and sales. The Retail Banking segment also includes
the Bank's residential real estate lending, loan servicing and secondary
marketing activities. The growth in net interest income compared to a year ago
can be attributed to the increase in consumer loans and loans held for sale. The
Mathog acquisition, the increase in residential mortgage originations along with
the growth in deposits as a result of the High Performance Checking product
have improved the level of noninterest income.
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Commercial Banking
- ------------------
The Commercial Banking segment includes the Bank's middle market, specialized,
equipment financing, asset-based and commercial real estate lending activities.
This segment also includes business deposits, cash management activities for
business banking and financial advisory services (Duff & Phelps). The results
for 2003 reflect the results of our acquisitions of Whitehall and BIC as well as
the growth in equipment financing and commercial real estate loans. These
additions significantly added to the segment's net interest income and
noninterest income as compared to March 2002. The results for 2002 include a
$7.3 million, net of tax, charge for the adoption of SFAS No. 142.
Trust and Investment Services
- -----------------------------
During 2002, Trust and Investment Services were combined into a primary line of
business, which includes Webster Financial Advisors, Webster Trust Company,
N.A., Webster Investment Services and Fleming, Perry and Cox, to provide
comprehensive wealth management services for individuals and institutions.
The Trust and Investment Services segment includes all trust and personal
financial planning activities, including Webster Trust Company, N.A., and the
investment services of Webster Investment Services. The primary source of
revenue for this line of business are fees from trust management activities
and investment product sales.
Corporate
- ---------
Corporate includes the Treasury unit, which is responsible for managing the
wholesale investment portfolio and funding needs. It also includes expenses not
allocated to the business lines, the residual impact of methodology allocations
such as the provision for loan losses and funds transfer pricing offsets.
Management uses certain methodologies to allocate income and expenses to the
business lines. Funds transfer pricing assigns interest income and interest
expense to each line of business on a matched maturity funding concept based on
each business's assets and liabilities. The provision for loan losses is
allocated to business lines on an "expected loss" basis. Expected loss is an
estimate of the average loss rate that individual credits will experience over
an economic cycle, based on historical loss experiences and the grading assigned
each loan. This economic cycle methodology differs from that used to determine
our consolidated provision for loan losses, which is based on an evaluation of
the adequacy of the reserve for loan losses considering the risk characteristics
in the portfolio at a point in time. The difference between the sum of the
provisions for each line of business determined using the expected loss
methodology and the consolidated provision is included in Corporate. Indirect
expenses are allocated to segments. These expenses include administration,
finance, technology and processing operations and other support functions. Taxes
are allocated to each segment based on the effective rate for the period shown.
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
At March 31, 2003, Webster had outstanding interest rate swaps with a notional
amount of $1.1 billion. 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. Of the total, $200 million of
the interest rate swaps mature in 2003, $500 million in 2004 and $350 million in
2007, and an equivalent amount of the hedged advances mature on these dates. At
March 31, 2003, the Bank had no other derivatives that qualified for hedge
accounting under SFAS No. 133. See Note 13 for derivative information related to
Webster's issuance of subordinated debt in the first quarter period.
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
notional amount of customer derivatives and the offsetting counterparty
derivatives each totaled $110 million at March 31, 2003.
The Bank also has rate lock commitments extended to borrowers that relate to the
origination of mortgage loans held for sale ("rate locks"). To mitigate the
interest rate risk inherent in rate locks, as well as closed mortgage loans held
for sale ("loans held for sale"), the Bank enters into mandatory forward
commitments to sell mortgage-backed securities and best efforts forward
commitments to sell individual mortgage loans ("forward commitments"). Rate
locks and forward commitments are considered to be derivatives under SFAS No.
133. The estimated fair value of the rate locks and forward commitments are
recorded on the balance sheet in either other assets or other liabilities, with
the offset to net gain on sales of loans and servicing 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 March 31, 2003, the Company had rate locks of approximately $507.6 million,
mandatory forward commitments of approximately $489.0 million, and best efforts
forward commitments of approximately $106.4 million. The recording of the
estimated fair value of the rate locks and forward commitments, offset by the
lower of cost or market adjustment on the residential mortgage loans held for
sale portfolio, did not significantly impact the Consolidated Financial
Statements. At December 31, 2002, the Company had rate locks of approximately
$358.9 million, mandatory forward commitments of approximately $439.7 million,
and best efforts forward commitments of approximately $93.5 million.
NOTE 17: 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.
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
At March 31, 2003, Trust I had remaining capital securities outstanding of $81.3
million and Trust II had remaining capital securities outstanding of $40.0
million. Further information concerning Trust I and II can be found in Webster's
2002 Annual Report filed on Form 10-K.
Expense of the securities, including amortization of issuance costs, for the
three months ended March 31, 2003 and 2002, was $2.9 million and $3.6 million,
respectively.
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. As of the filing of this report, draft statements
expected in February 2003 have not been issued.
At March 31, 2003, Webster Preferred Capital Corporation, a subsidiary of
Webster Bank, had outstanding $10.0 million of Series B 8.625% cumulative
redeemable preferred stock. Dividend expense on the preferred stock for the
three month periods ended March 31, 2003 and 2002 was $216,000.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products, services and prices. Some of these and other factors are discussed in
Webster's annual and quarterly reports previously filed with the Securities and
Exchange Commission. Such developments could have an adverse impact on Webster's
financial position and results of operations.
GENERAL - DESCRIPTION OF BUSINESS
- ---------------------------------
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 primarily in Connecticut and equipment financing, mortgage
origination and financial advisory services to public and private companies
throughout the United States. Webster Bank provides business and consumer
banking, mortgage lending, trust and investment services and insurance services
through 111 banking and other offices, 219 ATM's and its Internet website
(www.websteronline.com). The Bank was founded in 1935 and converted from a
federal mutual to a federal stock institution in 1986. Webster commenced trading
of its common stock on the New York Stock Exchange under the symbol of "WBS" on
October 17, 2002. Previous to this date, Webster's common stock traded on the
NASDAQ under the symbol of "WBST". Webster's financial reports can be accessed
through its website within 24 hours of filing with the SEC.
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 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 within the Management's Discussion and Analysis of Financial
Condition and Results of Operation of the 2002 Annual Report on Form 10-K.
INCOME TAXES
Webster uses the asset and liability method of accounting for income taxes.
Deferred income taxes are recognized 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 for the years in which the temporary
difference are expected to be recovered or settled. 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 taxes previously
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
paid or 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. These judgments and estimates are reviewed on a
regular basis as regulatory and business factors change. The actual realization
of the assets could differ materially from that recorded if actual factors and
conditions differ from those used by management. These factors and conditions
include federal and state tax laws and regulations and future levels of
Webster's taxable income.
VALUATION OF GOODWILL AND INTANGIBLE ASSETS 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 institutions' branches and selected assets (not entire
institutions). 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 may 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 in the 2002 Annual Report on Form
10-K.
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.
FINANCIAL CONDITION
- -------------------
Webster, on a consolidated basis at March 31, 2003 and December 31, 2002, had
total assets of $14.4 billion and $13.5 billion, including total securities of
$4.5 billion and $4.1 billion, and total loans of $8.5 billion and $7.9 billion,
respectively. At March 31, 2003 and December 31, 2002, total deposits were $7.8
billion and $7.6 billion, borrowings were $5.2 billion and $4.5 billion, and
shareholders' equity totaled $1.1 billion and $1.0 billion, respectively.
Total assets increased $887.7 million, or 6.6%, at March 31, 2003 from December
31, 2002. The overall increase is primarily due to increases in loans of $594.9
million and securities of $383.6 million, partially offset by a decrease of
$83.5 million in loans held for sale. The increase in loans was due primarily to
growth in residential mortgage loans of $271.5 million, home equity loans of
$147.1 million and commercial loans of $148.3 million.
Total liabilities rose $852.7 million or 6.9% at March 31, 2003 from December
31, 2002 primarily due to increases in borrowings of $786.0 million and deposits
of $177.7 million. The increase in deposits was primarily the result of
increases in NOW, regular savings and MMDA accounts of $259.5 million that was
partially offset by a decrease in certificates of deposits of $73.1 million.
Refer to Notes 11, 12 and 13 of Notes to Consolidated Interim Financial
Statements contained within this report for further information on Webster's
borrowings. The net increase in total equity of $35.0 million is primarily due
to net income of $39.9 million, $3.2 million in tax-effected unrealized gains on
the available for sale securities and $2.4 million in stock option exercise
proceeds, partially offset by $4.8 million in repurchases of common stock and
$8.7 million in common stock dividend payments.
During the first quarter period of the current year, Webster acquired The Mathog
and Moniello Holding Co., Inc. ("Mathog") and Budget Installment Corp. ("BIC").
These acquisitions in total contributed approximately $44.8 million in total
assets. See Note 3 of Notes to Consolidated Interim Financial Statements with
this report for further information concerning these acquisitions.
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Bank also completed an offering of $200 million of subordinated notes during
the first quarter period. The subordinated notes constitute new funding and will
supplement the Bank's regulatory capital. See Note 13 of Notes to Consolidated
Interim Financial Statements within this report for further information
concerning the subordinated notes issuance.
LENDING ACTIVITIES
- ------------------
Webster, through the Bank and the Bank's subsidiaries, originates various types
of residential, commercial and consumer loans. At March 31, 2003 and December
31, 2002, total loans receivable were $8.5 billion and $7.9 billion,
respectively. The Bank offers commercial and residential permanent and
construction mortgage loans, commercial and industrial loans including
asset-based loans, equipment financing loans and secured and unsecured loans to
middle market and small business and consumer loans including home equity lines
of credit and home equity loans. At March 31, 2003 and December 31, 2002,
residential loans represented 44% and 43% of Webster's loan portfolio and
commercial loans (including commercial real estate) represented 36% for both
respective periods. The remaining portion of the loan portfolios consisted of
consumer loans. Refer to Webster's 2002 Annual Report on Form 10-K, pages 4
through 8, for a more complete description of the Company's lending activities
and credit administration policies and procedures.
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. For the three months
ending March 31, 2003 and 2002, Webster originated $975.0 million and $449.0
million of residential mortgage loans, respectively. As a result of the low
interest rate environment during the later half of 2002 and early 2003,
Webster's origination volume increased substantially. Webster's channels for the
origination of these loans include its network of branches, referrals, loan
officers, call center, as well as its National Wholesale Lending Group through
third party licensed mortgage brokers in targeted areas of the United States.
Substantially all this originated loan volume is sold in the secondary market.
Webster sells these residential mortgage loans in a manner consistent with its
asset/liability management objectives. At March 31, 2003 and December 31, 2002,
Webster had $317.7 million and $400.0 million, respectively, of residential
mortgage loans held for sale. See Note 5 of Notes to Consolidated Interim
Financial Statement within this report for further information.
The residential mortgage loan portfolio totaled $3.7 billion and $3.4 billion at
March 31, 2003 and December 31, 2002, respectively. At March 31, 2003,
approximately $1.1 billion, or 28%, of the total residential mortgage loan
portfolio were adjustable rate loans. Adjustable rate mortgage loans are offered
at initial interest rates discounted from the fully-indexed rate. Adjustable
rate loans originated during 2003 and 2002, when fully-indexed, will be 2.75%
above the constant maturity one-year U.S. Treasury yield index. At March 31,
2003, approximately $2.6 billion, or 72%, of the total residential mortgage loan
portfolio were fixed rate.
COMMERCIAL LENDING
The following is a discussion of Commercial loans by each of Webster' commercial
lending divisions.
Middle Market
- -------------
The Bank's Middle Market Division provides a full array of financial services to
a diversified group of companies, primarily privately held and located in
Connecticut, with annual revenues greater than $10 million. At March 31, 2003
and December 31, 2002 middle market loans, including commercial and commercial
real estate, totaled $597.1 million and $538.9 million, respectively, an
increase of 10.8%. The increase resulted from a combination of increased
utilization of lines of credit and new relationships being developed.
Originations for the first quarter of 2003 and 2002 totaled $65.1 million and
$8.0 million, respectively.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Asset-Based Lending
- -------------------
Whitehall Business Credit Corporation ("Whitehall"), an asset-based lending
subsidiary of the Bank, was acquired in August 2002, further deepening Webster's
commitment to asset-based lending. At the time of the acquisition, Webster had a
successful Hartford asset-based lending division for the previous five years,
which had loans totaling $108.9 million outstanding at December 31, 2002.
Asset-based loans are generally secured by accounts receivable and inventory of
the borrower and in some cases also include additional collateral such as
property and equipment. During the first quarter of 2003, Whitehall originated
$91.4 million of commitment and $41.0 million of funded loans. At March 31, 2003
and December 31, 2002, total asset-based loans were $527.3 million and $465.4
million respectively, an increase of 13.3%. Similar to Middle Market, the
increase resulted from a combination of increased utilization of lines of credit
and new relationships being developed. The Asset-Based Lending Division
originates, as agent, loans for its portfolio and sells participations to other
financial institutions. In addition, it participates in loans originated by
other banks and financial institutions. In its capacity as agent, it generally
establishes depository relationships with the borrower in the form of cash
management accounts. At March 31, 2003 and December 31, 2002, the total of these
deposits was $43.2 million and $35.0 million, respectively.
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.
At March 31, 2003 and December 31, 2002, the Specialized Lending portfolio
totaled $282.2 million and $299.8 million, respectively, a decrease of 5.9% of
funded loans against commitments of $447.3 million and $500.5 million,
respectively. During 2002 and in the first quarter of 2003, the Bank reduced its
exposure to certain industries and sectors through a combination of redirected
cash flows from maturities and amortization and sales of loans. As part of that
strategy, during the fourth quarter of 2002, approximately $35 million of
telecommunications (wireless and other telecom) and cable loans were sold or
transferred to loans 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. At March 31, 2003, December 31,
2002 and March 31, 2002, cable, wireless communications and other
telecommunications loans totaled $102.1 million, $105.1 million and $142.0
million, respectively. At March 31, 2003, none of these loans were classified.
See "Asset Quality" and "Allowance for Loan Losses" sections contained elsewhere
within this report for additional information.
Additionally, the portfolio contained $84.7 million and $84.9 million of funded
Collateralized Loan Obligations ("CLOs") at March 31, 2003 and December 31,
2002, respectively, and commitments of $91.7 million for both periods. All of
the loans held as part of the CLO portfolio 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,
Webster had $466.9 million of loans that are also monitored by the SNC program
against commitments of $1.1 billion at March 31, 2003. This compares with $384.3
million of loans and $1.1 billion of commitments 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.
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Small Business Banking
- ----------------------
The Bank's Small Business Banking Division ("SBB") provides a full complement of
loan and deposit products to small businesses located throughout Connecticut.
Their target market is businesses with annual revenues of up to $10 million.
This market represents a significant percentage of commercial businesses located
in Connecticut. SBB uses the Bank's branch network as well as dedicated business
development officers to fully service its existing customer base and call on
potential new customers. The Fair Isaac credit scoring model is utilized to
assist in loan approvals of up to $250,000 and offers a $100,000 same day line
of credit approval program. SBB provides all of the Bank's commercial loan
products including lines of credit, letters of credit, term loans and mortgages
on owner-occupied real estate. The Bank is also a Small Business Administration
("SBA") preferred lender authorized to offer all SBA loan guaranty products and
is also active in several loan programs sponsored by the Connecticut Development
Authority. At March 31, 2003 and December 31, 2002, the SBB portfolio, which
includes both commercial and commercial real estate loans, was approximately
$325.8 million and $326.3 million, respectively. The first quarter is
essentially flat to year end; this reflects an improved trend over the prior six
quarters due principally to improved retention efforts and more focused
calling activity. Originations totaled $25.3 million for the first quarter of
2003 as compared to $16.0 million during the same period in 2002.
Equipment Financing
- -------------------
Center Capital Corporation ("Center Capital"), an equipment financing subsidiary
of the Bank, transacts business with end-users of equipment, either by
soliciting this business on a direct basis or through referrals from various
manufacturers, dealers and distributors with whom they have business
relationships. The portfolio totaled $437.8 million at March 31, 2003 compared
with $420.0 million at December 31, 2002, an increase of 4.3%. Center Capital
originated $55.8 million in loans during the first quarter of 2003, compared to
$46.5 million during the same period a year ago.
Insurance Premium Financing
- ---------------------------
On January 24, 2003, the Bank acquired Budget Installment Corp., ("BIC"). BIC is
an insurance premium financing company based in Rockville Centre, New York,
which finances commercial property and casualty premiums for businesses that pay
their insurance premiums on an installment basis. The majority of its borrowers
are located in the New York and New Jersey areas. At March 31, 2003 total loans
outstanding were $40.5 million.
COMMERCIAL REAL ESTATE LENDING
The Bank provides financing 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
form the property and its tenants is the primary repayment source. The Bank also
makes acquisitions, development and construction loans to residential builders.
At March 31, 2003 and December 31, 2002, outstanding commercial real estate
loans totaled $1.1 billion and $1.0 billion, respectively, an increase of 10%
primarily attributable to new relationships. Included in these loans are
owner-occupied loans originated by the Middle Market and Small Business Banking
Divisions of $348.8 million and $336.4 million at March 31, 2003 and December
31, 2002, respectively.
The Bank has cultivated relationships with high quality local, regional and
national developers, both directly and through loan participations with selected
banks outside its primary market, as it looks to cultivate a group of borrower
for repeat business, for cross selling opportunities, and to diversify its
portfolio by geographic location. During the first three months of 2003, Webster
originated $63.0 million of commercial real estate loans, an increased of $27.9
million, or 79.5%, from the same period a year earlier.
CONSUMER
At March 31, 2003 and December 31, 2002, consumer loans totaled $1.8 billion and
$1.7 billion, respectively. Consumer loan volume increased significantly in 2002
and, at December 31, consumer loans represented 21.8% of the total loan
portfolio. This growth continued during the first three months of 2003, as
consumer loans grew $143.3 million or 8.4% to $1.8 billion, or 21.9 % of the
loan portfolio at March 31, 2003. The growth occurred in home equity credit
lines and loans and is attributable to the lower interest rate environment and
the expansion of lending into states contiguous to Connecticut and other
targeted states through a network of regional offices. Originations during the
first three months of 2003 totaled $328.9 million, compared to $259.0 for the
same period a year earlier.
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
- ---------------------
Webster, directly and through the Bank, maintains an investment portfolio that
is primarily structured to provide a source of liquidity for its operating
needs, to generate interest income and provide a means to balance interest rate
sensitivity. At March 31, 2003 and December 31, 2002, the investment portfolio
totaled $4.5 billion and $4.1 billion, respectively. The increase in the
portfolio in the first quarter was a result of the investment of a portion of
the proceeds from the $200 million subordinated note issuance as well as
prefunding of April 2003 maturities. At both March 31, 2003 and December 31,
2002, the portfolio consisted primarily of mortgage-backed securities. See Note
4 of Notes to Consolidated Interim Financial Statements contained elsewhere
herein for details on the components of the portfolio.
The portfolio is managed by the Bank's Treasury Group in accordance with
regulatory guidelines and established corporate investment policies. These
guidelines and policies include limitations on aspects such as investment grade
and ratings, concentrations and investment type to help manage risk associated
with investing in securities.
DEPOSIT ACTIVITIES
- ------------------
Total deposits increased $177.7 million, or 2.3%, to $7.8 billion at March 31,
2003 from December 31, 2002 and $614.5 million or 8.6% from March 31, 2002. The
increases occurred entirely in the lower cost deposits. These changes reflect
the success of Webster's strategic plan, which calls for increasing these lower
cost, deposits as a percentage of total deposits. The percentage of lower cost
deposits increased to 66.4% at March 31, 2003 from 64.6% at December 31, 2002
and from 59.3% at March 31 a year ago. The growth in first quarter compared to
December 31, 2002 can also be attributed to the continued success with High
Performance Checking products, de novo branch activity and the Bank's marketing
efforts.
BORROWED FUNDS
- --------------
Total borrowed funds increased $786.0 million, or 17.6% to $5.2 billion at March
31, 2003 from December 31, 2002. As growth in loan and security balances
outpaced the growth in deposits, Webster increased its wholesale borrowing
balances. The Bank's issuance of subordinated debt during the first quarter
accounted for $200.0 million of the increase. See Note 13 of Notes to
Consolidated Interim Financial Statements for additional information. The
remaining increase occurred in FHLB advances.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- ------------------------------------------
Interest rate risk is the sensitivity of the market value of interest-sensitive
assets and liabilities and the sensitivity of earnings to changes in interest
rates over short-term and long-term time horizons. Webster's Asset/Liability
Management Committee manages interest rate risk to maximize net income and net
market value over time in changing interest rate environments, within limits set
by the Board of Directors. Management measures interest rate risk using
simulation analyses to measure earnings and equity at risk. Earnings at risk is
defined as the change in earnings from a base scenario due to changes in
interest rates. Equity at risk is defined as the change in the net market value
of assets and liabilities due to changes in interest rates. Market value is
measured as the net present value of future cash flows. Simulation analysis
incorporates assumptions about balance sheet changes such as asset and liability
growth, loan and deposit pricing and changes to the mix of assets and
liabilities. Key assumptions relate to the behavior of interest rates and
spreads, prepayment speeds and the run-off of deposits. From such simulations,
interest rate risk is quantified and appropriate strategies are formulated and
implemented.
Interest rate risk simulation analyses cannot precisely measure the impact that
higher or lower rate environments will have on net interest income or market
value. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes, changes in cash flow patterns
and market conditions, as well as changes in management's strategies. Results
may also vary based upon actual customer loans and deposit behaviors as compared
with those simulated. These simulated estimates assume that management does not
take any action to mitigate any negative effects from changing interest rates.
Management believes that Webster's interest rate risk position at March 31, 2003
represents a reasonable level of risk.
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table summarizes the estimated economic value of Webster's assets,
liabilities and hedges at March 31, 2003 and December 31, 2002 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
- ---------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003
- --------------
Assets $ 14,355,659 14,236,817 164,640 (248,206)
Liabilities 13,285,213 13,404,422 321,709 (269,768)
Off-balance sheet contracts -- 22,100 16,241 (15,767)
--------------------------------------------------------------------------
Net equity 1,070,446 854,495 (140,828) 5,795
Net change as % of Tier 1 Capital (17.0)% 0.7%
DECEMBER 31, 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)
-------------------------------------------------------------------------------
Net equity 1,035,458 810,169 (180,226) 22,509
Net change as % of Tier 1 Capital (22.1)% 2.8%
The book value of assets exceeded the estimated market value at March 31, 2003
and December 31, 2002 because the equity at risk model assigns no value to
goodwill and other intangible assets, which totaled $320.9 million and $297.4
million, respectively.
As noted in the table above, the estimated volatility in economic value of
equity has changed modestly from the prior year end. The yield curve between
December 31, 2002 and March 31, 2003 remained relatively constant, but the
duration of assets extended 0.1 years while liabilities shortened 0.1 years.
During the quarter, about 75% of Webster's asset growth was funded with
wholesale borrowings. The longer duration assets were intentionally funded with
shorter duration liabilities to provide more protection in a falling interest
rate environment.
The estimated impact on Webster's net income, as of March 31, 2003, for the
subsequent twelve month period, if interest rates instantaneously increase or
decrease by 100 basis points was an increase of 6.3% and a decrease of 11.2%,
respectively. The estimated impact, as of December 31, 2002, was an increase of
7.1% and a decrease of 12.8%, respectively.
Webster's net income sensitivity has decreased in 2003. Webster will continue to
benefit more in a rising interest rate environment than in prior years due to
its higher concentration of floating-rate commercial and consumer loans, and
larger core deposit funding base. The sensitivity is not as great as last
quarter due to funding the increased size of the balance sheet with generally
short duration liabilities. While we expect interest rates to fall or stay low
in the short-term, the longer-term expectation is for a general rise in interest
rates as the economy rebounds. Webster is positioned to benefit from this
expectation and ready to respond to changing conditions.
31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity management allows Webster to meet its cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable, cost-effective funding to support the balance
sheet. Liquidity comes from a variety of sources such as the cash flow from
operating activities including principal and interest payments on loans and
investments, unpledged securities, which can be sold or utilized as collateral
to secure funding and by 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.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Webster has a detailed liquidity contingency plan, which is designed
to respond to liquidity concerns in a prompt and comprehensive manner. It is
designed to provide early detection of potential problems and details specific
actions required to address liquidity risks.
At March 31, 2003 and December 31, 2002, the Bank had FHLB advances outstanding
of $2.9 billion and $2.2 billion, respectively. The Bank is a member of the FHLB
system and had additional borrowing capacity from the FHLB of approximately
$168.2 million at March 31, 2003. In addition, the Bank had approximately $1.7
billion of unpledged securities at March 31, 2003 that, if necessary, could have
been used to increase borrowing capacity at the FHLB or to collateralize other
borrowings such as repurchase agreements.
The main sources of liquidity at the holding company level are dividends from
the Bank, investment income and net proceeds from capital offerings and
borrowings. The main uses of liquidity are the payment of dividends to common
stockholders, repurchases of Webster's common stock, purchases of investment
securities, and the payment of interest on borrowings and capital securities.
There are certain regulatory restrictions on the payment of dividends by the
Bank to Webster. At March 31, 2003, the Bank had $94.1 million of retained
earnings available for dividend to the holding company. Webster also maintains
$75.0 million in available revolving lines of credit with correspondent banks.
On July 23, 2002, Webster announced an additional stock buyback program of 2.4
million shares, or approximately 5 percent of its 48.0 million shares of
outstanding common stock as of the announcement date. Through March 31, 2003,
Webster has repurchased 1,683,838 shares of its common stock under the buyback
program with 716,162 remaining shares to be repurchased. During the first
quarter of 2003, 133,798 shares were repurchased at a cost of $4.8 million with
an average per share cost of $35.73.
ASSET QUALITY
- -------------
LOAN PORTFOLIO REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY
Webster devotes significant attention to maintaining asset quality through
conservative underwriting standards, active servicing of loans and aggressively
managing nonperforming assets. The allowance for loan losses is maintained at a
level estimated by management to provide adequately for probable losses inherent
in the current loan portfolio. Probable losses are estimated based upon a
quarterly review of the loan portfolio, loss experience, specific problem loans,
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses. In assessing the specific
risks inherent in the portfolio, management takes into consideration the risk of
loss on nonperforming loans and classified loans, including an analysis of the
collateral for these loans.
32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The adequacy of the allowance is subject to judgment in its determination.
Actual loan losses could differ materially from management's estimate if actual
loss factors and conditions differ significantly from the assumptions utilized.
These factors and conditions include the general economic conditions within
Connecticut and nationally, trends 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 at March 31, 2003, actual results in future periods may prove different
and these differences could be significant. Management considers the adequacy of
the allowance for loan losses to be a critical accounting policy.
Refer to the Allowance for Loan Losses Methodology section within Management's
Discussion and Analysis on page 34 of Webster's 2002 Annual Report on Form 10-K
for additional information.
NONPERFORMING ASSETS
The amount of nonperforming assets increased to $61.9 million or 0.43% of total
assets at March 31, 2003 from $50.0 million, or 0.37% of total assets, at
December 31, 2002 and $54.3 million, or 0.44% of total assets, at March 31,
2002. Nonperforming loans increased $11.0 million, and foreclosed properties
increased $1.1 million since year end. The majority of the increase in
nonperforming loans occurred in commercial loans, principally in the Asset-Based
Lending portfolio. This increase was the result of one lending relationship with
a balance of $14.1 million that was added to nonaccrual status in the first
quarter of 2003. This loan was originated three years ago in the Bank's Hartford
asset-based lending group and is not related to the recent Whitehall purchase.
Decreases in nonperforming commercial real estate and residential loans were
offset by an increase in nonperforming equipment financing and consumer loans.
The following table details Webster's nonperforming assets:
- ----------------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
(In thousands) 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Commercial:
Commercial banking $ 25,793 15,486 18,426
Specialized lending 3,399 3,399 3,399
Equipment financing 8,960 6,586 7,510
- ----------------------------------------------------------------------------------------------------------------------------
Total commercial 38,152 25,471 29,335
Commercial real estate 6,910 9,109 9,925
Residential 5,712 7,263 6,262
Consumer 1,510 894 1,545
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccruing loans 52,284 42,737 47,067
- ----------------------------------------------------------------------------------------------------------------------------
Nonaccruing loans held for sale:
Commercial 3,444 3,706 --
- ----------------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial 1,991 515 2,035
Commercial real estate -- -- 1,197
- ----------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing 1,991 515 3,232
Foreclosed Properties:
Residential and consumer 235 509 1,336
Commercial 3,967 2,568 2,690
- ----------------------------------------------------------------------------------------------------------------------------
Total foreclosed property 4,202 3,077 4,026
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 61,921 50,035 54,325
============================================================================================================================
33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The allowance for loan losses at March 31, 2003 was $118.6 million and
represented 219% of nonperforming loans and 1.39% of total loans. This compares
with an allowance of $116.8 million that represented 270% of nonperforming loans
and 1.48% of total loans at December 31, 2002. The allowance was $98.9 million
or 197% of nonperforming loans and 1.39% of total loans at March 31, 2002.
PAST DUE LOANS
The following table sets forth information as to loans past due 30-89 days.
MARCH 31, 2003 DECEMBER 31, 2002 MARCH 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Principal Percent of loans Principal Percent of loans Principal Percent of loans
(Dollars in thousands) Balances outstanding Balances outstanding Balances outstanding
- --------------------------------------------------------------------------------------------------------------------------------
PAST DUE 30-89 DAYS:
Residential $ 13,975 0.16% $ 13,318 0.17% $ 14,792 0.20%
Commercial 20,102 0.24 21,894 0.28 10,431 0.14
Commercial real estate 12,772 0.15 21,324 0.27 10,689 0.15
Consumer 5,125 0.06 6,757 0.08 3,529 0.05
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 51,974 0.61% $ 63,293 0.80% $ 39,441 0.54%
================================================================================================================================
The overall decrease in loans past due 30-89 days of $11.3 million at March 31,
2003 from December 31, 2002 is primarily due to a reduction of $8.6 million in
commercial real estate loans as a result of three loan relationships totaling
$10.4 million that were current at March 31, 2003, but past due at December 31,
2002.
TROUBLED DEBT RESTRUCTURINGS
At March 31, 2003 and December 31, 2002, the Bank had total accruing troubled
debt restructurings of approximately $1.2 million and $1.0 million,
respectively. This compares to $4.8 million at March 31, 2002. A troubled debt
restructuring occurs when, for economic or legal reasons related to debtor's
financial difficulties, a financial institution grants a concession to the
debtor that it would not otherwise consider. Interest income recognized for the
three months ended March 31, 2003 under the restructured terms totaled $18,400
as compared to $23,800 that would have been booked under their original terms.
At March 31, 2003, the $1.2 million of debt restructurings were performing in
accordance with their restructured terms and not included in nonperforming
loans.
34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CLASSIFIED LOANS
The following table summarizes Webster's classified loans, including
nonperforming loans at March 31, 2003, December 31, 2002 and March 31, 2002.
Commercial
--------------------------
Commercial
(In thousands) Total Residential Banking* Specialized CRE** Consumer
- --------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2003
Substandard:
Accruing $ 74,398 1,212 50,909 22,277 -- --
Nonaccruing 45,005 5,606 38,002 -- -- 1,397
- --------------------------------------------------------------------------------------------------------------------------
Total substandard 119,403 6,818 88,911 22,277 -- 1,397
Doubtful:
Nonaccruing 7,279 105 3,662 3,399 -- 113
Loss -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total classified loans $ 126,682 6,923 92,573 25,676 -- 1,510
==========================================================================================================================
Classified as a percent of loans 1.5% 0.2 5.9 7.0 -- 0.1
==========================================================================================================================
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
==========================================================================================================================
MARCH 31, 2002
Substandard:
Accruing $ 94,864 1,326 45,103 48,364 -- 71
Nonaccruing 43,146 6,165 35,761 -- 5 1,215
- --------------------------------------------------------------------------------------------------------------------------
Total substandard 138,010 7,491 80,864 48,364 5 1,286
Doubtful:
Accruing 11 -- -- -- -- 11
Nonaccruing 3,756 97 94 3,399 -- 166
- --------------------------------------------------------------------------------------------------------------------------
Total doubtful 3,767 97 94 3,399 -- 177
Loss -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total classified loans $ 141,777 7,588 80,958 51,763 5 1,463
==========================================================================================================================
Classified as a percent of loans 2.0% 0.2 5.8 12.0 0.0 0.1
==========================================================================================================================
* 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.
35
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The prolonged weakness in the business sector of the economy has continued to
impact the level of classified loans. These loans increased $13.7 million since
December 31, 2002. The increase in Commercial Banking was primarily due to an
asset-based lending relationship which totaled $14.1 million which was
classified during the first quarter of 2003. See Nonperforming Assets on page 33
of this report for further details on this loan. The Specialized Lending
increase was primarily attributable to one credit totaling $5.0 million which
was classified during the first quarter of 2003 but is still accruing interest.
Webster believes that early identification and management of problem loans
serves to minimize future losses, therefore it employs a rigorous portfolio
review and management process, which identifies deteriorating credit risk and
proactively manages problem loans.
The total of nonperforming loans included in classified loans at March 31, 2003
was $52.3 million, up $9.6 million from year end and $5.4 million from March 31,
2002. The remaining classified loans of $74.4 million continued to perform in
accordance with their contractual terms and accrue interest. Due to their
classification as substandard, these currently performing loans are considered
by management to be potential problem loans, and may in the future become
nonperforming loans.
RESULTS OF OPERATIONS
- ---------------------
A COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002.
GENERAL
Net income for the three months ended March 31, 2003, was $39.9 million, or $.86
per diluted share, compared to $32.3 million, or $.65 per diluted share, for the
same period ended a year earlier.
The increase in net income for the current quarter was driven by strong growth
in revenues. Total revenue, consisting of net interest income and total
noninterest income, rose approximately 14.4% for the period compared to a year
ago. The growth was due primarily to an increase of $12.5 million of fee based
revenue. The Mathog and Moniello, Whitehall, and Budget Installment acquisitions
contributed $5.5 million of this growth. Deposit service fees, loan fees and
gain on sale of loans added another $7.0 million of the growth in the quarter.
During the second quarter of 2002, the Company completed a review of the
carrying value of all its goodwill and other intangible assets in compliance
with the requirements of SFAS No. 142 and determined that a portion of goodwill
related to the acquisition of Duff & Phelps LLC was impaired. Accordingly, a
one-time transitional charge of $11.2 million, $7.3 million net of taxes or
$0.15 per diluted share, was recorded retroactive to January 1, 2002. Excluding
this charge, Webster's first quarter 2002 net income would have been $39.6
million or $0.80 per diluted share.
NET INTEREST INCOME
Net interest income for the first quarter of 2003 increased $8.2 million, or
8.5%, over the year ago period. This improvement can be attributed to the growth
in earnings assets, particularly the loan portfolio, funded by an increasing
base of core deposits. Partially offsetting this volume growth was a decline in
the net interest margin. The margin was 3.30% in the first quarter, down from
3.51% the prior year. As long-term interest rates declined, mortgage related
loans and other assets prepaid at increasing levels and the proceeds are
reinvested at lower yields. As a result, the yield on earning assets during the
quarter declined faster than the cost of interest bearing liabilities.
With a continued low interest rate environment, the Company will continue to
experience downward pressure on asset yields and there will be further
compression of the net interest margin.
INTEREST INCOME
Total interest income for the first quarter of 2003 decreased $1.6 million, or
1.0%, from the first quarter of the prior year. The decline is primarily due to
a decrease in the yield realized on interest-earning assets, which declined by
89 basis points. Declines occurred in both in the loan and investment
portfolios, where yields dropped 87 and 96 basis points,
36
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
respectively, compared to the first quarter a year ago. The yield on loans
declined as a result of the low interest rate environment during 2003 and 2002,
which resulted in an accelerated level of mortgage prepayments and new volumes
were priced at significantly lower yields. The investment portfolio was
similarly impacted as mortgage related securities prepaid and proceeds were
reinvested at significantly lower rates. The impact on interest income of lower
yields on interest-earning assets was partially offset by an increase in the
volume of average earnings assets of approximately $1.7 billion.
INTEREST EXPENSE
Total interest expense for the first quarter of 2003 decreased $9.8 million, or
13.2%, from the first quarter of 2002. The decrease was primarily due to a 73
basis point decline in the overall cost of interest-bearing liabilities. The
cost of deposits and borrowings decreased 72 and 95 basis points, respectively,
compared to the first quarter a year ago. The low interest rate environment was
the primary factor for this decline as existing balances were repriced at lower
rates. Partially offsetting the favorable impact of lower interest rates was the
increased expense resulting from growth in volume of deposits and borrowings.
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned or paid by Webster.
THREE MONTHS ENDED MARCH 31,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002
Fully Tax- Fully Tax-
Average Equivalent Average Equivalent
(Dollars in thousands) Balance Interest (b) Yield Balance Interest (b) Yield
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans and loans held for sale $ 8,552,652 $ 117,702 5.52% $ 6,996,981 $111,495 6.39%
Securities and short-term investments 4,235,752 52,089 5.02(a) 4,044,428 59,902 5.98(a)
----------- -------- ---- ----------- -------- ----
Total interest-earning assets 12,788,404 169,791 5.35 11,041,409 171,397 6.24
-------- --------
Noninterest-earning assets 935,423 874,232
----------- -----------
TOTAL ASSETS $13,723,827 $11,915,641
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,597,550 29,418 1.57% $ 7,023,570 39,613 2.29%
Borrowings 4,878,463 35,353 2.90 3,633,984 34,997 3.85
----------- -------- ---- ----------- -------- ----
Total interest-bearing liabilities 12,476,013 64,771 2.09 10,657,554 74,610 2.82
Noninterest-bearing liabilities 66,604 86,892
----------- -----------
TOTAL LIABILITIES 12,542,617 10,744,446
Capital securities and preferred stock of
subsidiary corporation 130,832 159,577
Shareholders' equity 1,050,378 1,011,618
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,723,827 $11,915,641
=========== -------- =========== --------
Fully-taxable net interest income 105,020 96,787
Less: Fully-taxable equivalent adjustments (344) (304)
--------- ---------
Net interest income $ 104,676 $ 96,483
======== ========
Interest-rate spread 3.26% 3.42%
==== ====
Net interest margin 3.30% 3.51%
==== ====
(a) For purposes of this computation, unrealized gains of $86.6 million and
$39.0 million for 2003 and 2002, respectively, are excluded from the
average balance for rate calculations.
(b) On a fully tax-equivalent basis.
37
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Net interest income can be understood in terms of the impact of changing rates
and changing volumes. The following table describes the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have impacted interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to changes attributable to changes in volume (changes in volume
multiplied by prior rate), changes attributable to changes in rates (changes in
rates multiplied by prior volume) and the total net change. The change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
THREE MONTHS ENDED MARCH 31,
2003 V. 2002
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) due to
(In thousands) Rate Volume Total
- -----------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans and loans held for sale $ (16,520) 22,727 6,207
Securities and short-term investments (10,453) 2,640 (7,813)
- -----------------------------------------------------------------------------------------------------------------
Total (26,973) 25,367 (1,606)
- -----------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (13,308) 3,113 (10,195)
Borrowings (9,883) 10,239 356
- -----------------------------------------------------------------------------------------------------------------
Total (23,191) 13,352 (9,839)
- -----------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $ (3,782) 12,015 8,233
=================================================================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses was $5.0 million for the three month period ended
March 31, 2003 compared to $4.0 million for the same period in 2002. Management
performs a quarterly review of the loan portfolio and based on this review
determines the level of provision necessary to maintain an adequate loan loss
allowance. Several factors influenced the increase in the provision, primarily
growth in the loan portfolio, the rise in net charge-offs, the elevated level of
nonaccrual loans, and the continued reduced level of economic activity. At March
31, 2003 and December 31, 2002, the allowance for loan losses totaled $118.6
million and $116.8 million, or 1.39% and 1.48% of total loans, and represented
219% and 270% of nonperforming loans, respectively.
For further information see the "Loan Portfolio Review and Allowance for Loan
Loss Methodology" included in the "Financial Condition - Asset Quality" section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 32 through 33 of this report.
NONINTEREST INCOME
Total noninterest income for first quarter of 2003 increased $11.7 million, or
28.1%, from the same quarter a year ago. The increase was primarily due to
increases in deposit fees of $3.1 million, insurance revenue of $3.5 million,
gain on sale of loans of $2.4 million, loan fees of $2.0 million and financial
advisory revenue of $1.5 million. These increases were partially offset by
decreases in securities gains of $772,000 and other revenues of $149,000. The
deposit fees increased as a result of increased insufficient funds fees, cash
management fees and ATM fees. The increase in insurance revenue is primarily
attributable to $3.1 million from the Mathog acquisition in January 2003 and
$500,000 from increased premiums. Loan fees increased due to the acquisitions of
Whitehall in August 2002 and Budget Installment Corporation in January 2003,
partially offset by a $750,000 writedown of mortgage servicing rights. Whitehall
generated $1.9 million in loan fee income in the first quarter of 2003 and BIC
generated $200,000. The Financial Advisory Services revenue increase resulted
from increases in valuation revenues at Duff & Phelps.
38
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NONINTEREST EXPENSES
Total noninterest expenses for the first quarter of 2003 increased $16.6
million, or 21.8%, over the same quarter a year ago. The effect of recent
acquisitions accounted for $5.4 million of this growth. A majority of the
remaining $11.2 million increase occurred in salaries and benefits expense.
Salaries largely reflect the effects of annual merit increases and strategic
growth initiatives made to support the expansion of the mortgage origination
business with four new regional offices, the addition of four de novo branches
and an increase in the equipment finance lending staff. The increase in benefits
results from higher cost of medical and pension plans.
On July 24, 2002, Webster announced that, 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 used 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 employee stock option grants using the fair value method and
amortized over the vesting period commencing with grants made during 2002. For
the first quarter of 2003, compensation expense recognized for stock option
grants was $720,000. No expense was recognized during the first quarter of 2002.
INCOME TAXES
Tax expense for the three month period ended March 31, 2003 is higher than the
prior year period primarily due to a higher level of income before taxes, as
well as an increased effective tax rate. The effective tax rates for the three
months ended March 31, 2003 and 2002 were approximately 33.5% and 31.4%,
respectively. The increased rate is attributable to, both, the favorable
resolution of certain tax matters in 2002, and Webster's expanded presence
outside of Connecticut, including, the acquisition of certain businesses during
the third quarter of 2002 and first quarter of 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears under Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", on pages 30 through 31 under the caption
"Asset/Liability Management and Market Risk".
ITEM 4. CONTROLS & PROCEDURES
- ------------------------------
(a) The Company's management, including the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as
amended) (the "Exchange Act") as of a date (the "Evaluation Date")
within 90 days prior to the filing date of this report. Based upon that
evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were
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) There were no significant changes made in the Company's internal
controls or in other factors that that could significantly affect these
internal controls subsequent to the date of the evaluation performed by
the Company's Chief Executive Officer and Chief Financial Officer.
39
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which Webster or any of its
subsidiaries is a party or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(a) Not applicable
(b) Not applicable
(c) On January 6, 2003, in connection with the acquisition of Mathog,
Webster issued 12,000 shares of its common stock to James Moniello and
Alan D. Mathog under the Non-Compete Agreements entered on January 3,
2003 by and among Mathog and its subsidiaries and James Moniello and
Alan D. Mathog, respectively. The offer and sale of the stock was
exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act") pursuant to Section (4)(2) thereof (transactions
by an issuer not involving a public offering).
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
40
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
- --------------------------
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
99.1 Additional Exhibit - Section 906 Certification of Chief
Executive Officer
99.2 Additional Exhibit - Section 906 Certification of Chief
Financial Officer
(b) Reports on Form 8-K
Current Report on Form 8-K, filed with the SEC on January 10, 2003.
Current Report on Form 8-K, filed with the SEC on January 24, 2003.
Current Report on Form 8-K, filed with the SEC on February 24, 2003.
41
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: May 14, 2003 By: /s/ William J. Healy
-----------------------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
42
- --------------------------------------------------------------------------------
CERTIFICATION
I, James C. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Webster Financial
Corporation and Subsidiaries.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ James C. Smith
- -------------------------------------------
James C. Smith
Chairman and Chief Executive Officer
43
- --------------------------------------------------------------------------------
CERTIFICATION
I, William J. Healy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Webster Financial
Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying 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 quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ William J. Healy
- -------------------------------------------------------
William J. Healy
Executive Vice President and Chief Financial Officer
44