Back to GetFilings.com
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 JUNE 30, 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: 001-31486
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) 45,668,459
- ------------------------------ ----------------------------------
Class Outstanding at July 31, 2003
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
- -----------------------------------------------------------------------------------------------------------------------------------
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (unaudited)
Consolidated Statements of Condition at June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income for the three and six months ended June 30, 2003
and 2002 4
Consolidated Statements of Comprehensive Income for the three and six months ended
June 30, 2003 and 2002 6
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2003
and 2002 7
Consolidated Statements of Cash Flows for the six months ended June 30, 2003
and 2002 8
Notes to Consolidated Interim Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities and Use of Proceeds 46
Item 3. Defaults upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 48
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURE 49
EXHIBITS 50
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. INTERIM FINANCIAL STATEMENTS
- -------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
- -------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands, except share and per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 254,645 266,463
Short-term investments 20,671 15,596
Securities: (Note 4)
Trading, at fair value 3,893 5,752
Available for sale, at fair value 4,395,400 4,119,245
Loans held for sale (Note 5) 321,055 405,157
Loans, net (Notes 6 and 7) 8,590,707 7,795,835
Accrued interest receivable 54,034 54,601
Goodwill (Note 9) 256,465 236,478
Cash surrender value of life insurance 176,324 172,066
Premises and equipment, net 85,062 84,683
Intangible assets (Note 9) 60,524 60,881
Deferred tax asset, net (Note 8) 16,201 14,951
Prepaid expenses and other assets 217,591 236,296
- ---------------------------------------------------------------------------------------------------------
Total assets $ 14,452,572 13,468,004
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 10) $ 8,085,702 7,606,122
Federal Home Loan Bank advances (Note 11) 2,185,830 2,163,029
Other borrowings (Note 12) 2,480,666 2,166,640
Senior notes and subordinated debt (Note 13) 326,000 126,000
Accrued expenses and other liabilities 155,233 239,923
- ---------------------------------------------------------------------------------------------------------
Total liabilities 13,233,431 12,301,714
- ---------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities
of subsidiary trusts (Note 17) 110,255 121,255
Preferred stock of subsidiary corporation 9,577 9,577
Shareholders' equity (Note 14):
Common stock, $.01 par value:
Authorized - 200,000,000 shares at June 30, 2003
and December 31, 2002;
Issued - 49,512,045 shares at June 30, 2003 and
49,506,970 December 31, 2002 495 495
Paid-in capital 414,458 415,067
Retained earnings 769,827 707,531
Less: Treasury stock, at cost, 3,872,028 shares at June 30,
2003 and 3,880,973 shares at December 31, 2002 (134,157) (134,318)
Unearned compensation (3,790) (3,913)
Accumulated other comprehensive income 52,476 50,596
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,099,309 1,035,458
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,452,572 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $114,734 112,502 227,944 223,082
Securities and short-term investments 45,772 59,340 97,517 118,938
Loans held for sale 4,231 1,525 8,723 2,440
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 164,737 173,367 334,184 344,460
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 10) 28,750 37,005 58,168 76,618
Borrowings 35,368 33,797 70,721 68,794
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 64,118 70,802 128,889 145,412
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 100,619 102,565 205,295 199,048
Provision for loan losses (Note 7) 5,000 4,000 10,000 8,000
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 95,619 98,565 195,295 191,048
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Deposit service charges 17,529 14,924 34,419 28,730
Insurance revenue 9,980 6,376 20,944 13,812
Loan fees 4,723 4,211 10,628 8,096
Financial advisory services 5,229 4,357 10,660 8,316
Wealth and investment services 4,521 4,068 9,099 8,455
Gain on sale of loans and loan servicing, net 4,066 1,239 6,837 1,632
Gain on sale of securities, net 8,666 1,126 11,299 4,531
Increase in cash surrender value of life insurance 2,143 2,267 4,258 4,469
Other income 1,423 1,047 3,284 3,057
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income 58,280 39,615 111,428 81,098
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and benefits 50,506 41,248 101,067 81,396
Occupancy 7,672 6,212 15,771 12,497
Furniture and equipment 7,575 6,812 15,096 13,380
Intangible amortization (Note 9) 3,968 4,004 7,930 8,042
Marketing 3,236 2,438 6,721 4,862
Professional services 2,994 2,820 5,472 5,147
Capital securities and dividends on preferred stock of
subsidiary corporation (Note 17) 2,958 3,753 6,096 7,585
Acquisition expenses -- 616 -- 616
Other expenses 14,290 10,940 27,852 21,517
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 93,199 78,843 186,005 155,042
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
change in accounting method 60,700 59,337 120,718 117,104
Income taxes 20,090 18,765 40,171 36,917
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 40,610 40,572 80,547 80,187
Cumulative effect of change in method of accounting
(net of tax benefit of $3,920) (Note 9) -- -- -- (7,280)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,610 40,572 80,547 72,907
- ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED), CONTINUED
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting method $ 0.89 0.83 1.77 1.65
Cumulative effect of change in method of accounting -- -- -- (0.15)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.89 0.83 1.77 1.50
- ----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting method $ 0.88 0.82 1.74 1.62
Cumulative effect of change in method of accounting -- -- -- (0.15)
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 0.88 0.82 1.74 1.47
- ----------------------------------------------------------------------------------------------------------------------
Dividends paid per common share $ 0.21 0.19 0.40 0.36
AVERAGE SHARES OUTSTANDING:
Basic 45,446 48,631 45,453 48,717
Diluted 46,242 49,585 46,217 49,584
See accompanying Notes to Consolidated Interim Financial Statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income $ 40,610 40,572
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
year (net of income tax effect of $1,517, and
$32,890, for 2003 and 2002, respectively) 2,261 49,692
Reclassification adjustment for net gains included in
net income (net of income tax effect of $3,416
and $439 for 2003 and 2002, respectively) (5,150) (663)
Reclassification adjustment for cashflow hedge amortization
included in net income (net of tax effect of $15)(Note 13) (27) --
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (2,916) 49,029
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 37,694 89,601
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income $ 80,547 72,907
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
year (net of income tax effect of $4,657, and
$23,555 for 2003 and 2002, respectively) 6,987 35,046
Reclassification adjustment for net gains included in
net income (net of income tax effect of $4,456
and $1,833 for 2003 and 2002, respectively) (6,719) (2,716)
Deferred gain on cash flow hedge (Note 13) 1,690 --
Reclassification adjustment for cashflow hedge amortization
included in net income (net of tax effect of $27) (Note 13) (51) --
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income 1,907 32,330
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 82,454 105,237
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
Employee
Stock Accumulated
Ownership Other
Unearned Plan Shares Compre-
Common Paid-in Retained Treasury Compen- Purchased hensive
(In thousands, except per share data) Stock Capital Earnings Stock sation With Debt Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
Net income for the six months
ended June 30, 2002 -- -- 72,907 -- -- -- -- 72,907
Dividends paid:
$.36 per common share -- -- (17,623) -- -- -- -- (17,623)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (948) -- 5,252 -- 4,304
Common stock repurchased -- -- -- (33,011) -- -- -- (33,011)
Stock-based compensation -- 703 (17) 731 134 -- -- 1,551
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 32,330 32,330
Other, net -- (59) -- -- -- -- -- (59)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 $ 495 415,461 645,521 (37,169) (3,864) -- 47,279 1,067,723
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 495 415,067 707,531 (134,318) (3,913) -- 50,596 1,035,458
Net income for the six months
ended June 30, 2003 -- -- 80,547 -- -- -- -- 80,547
Dividends paid:
$.40 per common share -- -- (18,251) -- -- -- -- (18,251)
Exercise of stock options -- (1,358) -- 5,060 -- -- -- 3,702
Common stock repurchased -- -- -- (5,795) -- -- -- (5,795)
Stock-based compensation -- 1,740 -- 896 123 -- -- 2,759
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 268 268
Repurchase of capital trust securities -- (991) -- -- -- -- -- (991)
Hedge deferred gain, net of
amortization -- -- -- -- -- -- 1,612 1,612
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $ 495 414,458 769,827 (134,157) (3,790) -- 52,476 1,099,309
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 80,547 72,907
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 10,000 8,000
Depreciation and amortization 15,288 10,606
Amortization of securities premiums, net 8,059 465
Amortization of loan premiums, net 1,734 4,835
Amortization of intangible assets 7,930 8,042
Cumulative effect of change in accounting method, net -- 11,200
Gains on sale of foreclosed properties, net (67) (237)
Gains on sale of securities, net (11,175) (4,549)
Gain on sale of loans and servicing, net (6,837) (1,632)
Increase in cash surrender value of life insurance (4,258) (4,469)
(Gains) losses on trading securities, net (124) 18
Decrease (increase) in trading securities 1,983 (181)
Loans originated for sale (1,513,786) (501,223)
Proceeds from sale of loans originated for sale 1,604,725 535,346
Decrease (increase) in interest receivable 567 (2,255)
Decrease (increase) in prepaid expenses and other assets 17,238 (6,360)
Decrease in accrued expenses and other liabilities, net (96,286) (6,828)
Other, net -- (396)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 115,538 123,289
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (2,318,567) (939,629)
Principal collected on securities 1,092,061 633,628
Maturities of securities 621 3,550
Proceeds from sales of securities, available for sale 953,595 204,649
Increase short-term investments, net (5,075) (19,602)
Increase in loans, net (772,448) (510,132)
Proceeds from sale of foreclosed properties 1,051 3,850
Purchases of premises and equipment, net (7,618) (7,667)
Net cash paid for acquisitions (27,447) --
Other, net -- (660)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,083,827) (632,013)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 479,580 271,118
Proceeds from FHLB advances 20,261,731 5,766,914
Repayment of FHLB advances (20,238,930) (6,101,109)
Increase in other borrowings, net 286,776 658,480
Subordinated debt issuance 200,000 --
Cash dividends to common shareholders (18,251) (17,623)
Redemption of capital securities (12,342) (15,000)
Exercise of stock options 3,702 4,304
Common stock repurchased (5,795) (33,011)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 956,471 534,073
- ------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,818) 25,349
Cash and cash equivalents at beginning of period 266,463 218,908
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,645 244,257
- ------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 38,748 36,530
Interest paid 124,142 139,083
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties 2,588 1,672
- -----------------------------------------------------------------------------------------------------
Assets acquired and liabilities assumed were as follows:
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(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.
9
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 and six months ended June 30, 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, the valuation allowance for the deferred tax asset
and the determination of the obligation for pension and other post retirement
benefits. 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.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2: STOCK-BASED COMPENSATION
- --------------------------------
At June 30, 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income, as reported $40,610 40,572 80,547 72,907
Add: Stock option compensation expense included
in reported net income, net of related tax effects 537 332 1,006 332
Deduct: Total stock option compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,051) (1,043) (2,034) (1,754)
- ----------------------------------------------------------------------------------------------------------------
Pro forma net income $40,096 39,861 79,519 71,485
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 0.89 0.83 1.77 1.50
- pro forma 0.88 0.82 1.75 1.47
- ----------------------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.88 0.82 1.74 1.47
- pro forma 0.87 0.80 1.72 1.44
- ----------------------------------------------------------------------------------------------------------------
The fair value of each option is determined as of the grant date using the
Black-Scholes Option-Pricing Model with the following weighted-average
assumptions used for grants issued during the second quarter and first six
months of 2003: expected option term of 8.6 and 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%, respectively. For the
second quarter and first six months of 2002, the following weighted-average
assumptions were: expected option term of 8.2 years, expected dividend yield of
2.15%, expected volatility of 33.47%, expected forfeiture rate of 3.15%, and
weighted risk-free interest rate of 5.16% and 5.22% respectively. The
Black-Scholes model was developed to estimate the fair value of traded options,
which have different characteristics than employee stock options. In addition,
changes to the subjective input assumptions can result in materially different
fair market value estimates. Therefore, this model may not necessarily provide a
reliable single measure of the fair value of employee stock options.
The cost of restricted stock granted is reflected in compensation and benefits
expense and totaled $394,158 and $303,467, net of taxes, for the three month
ended June 30, 2003 and 2002, and $789,158 and $727,467, net of taxes, for the
six month ended June 30, 2003 and 2002, respectively.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3: ACQUISITIONS
- --------------------
The following acquisitions were announced by Webster during the first six months
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 City and Northern New Jersey areas.
On June 5, 2003, Webster announced that it had reached a definitive agreement to
acquire North American Bank and Trust Company in a combination cash and stock
transaction valued at approximately $30 million, or $11.25 per common share of
North American stock. North American Bank is a state-chartered, commercial bank
with $195 million in assets and 8 offices in the Greater Waterbury region. Its
branch offices are located in Bristol, Monroe, Stratford, Waterbury, Wolcott and
Wethersfield, Connecticut. The definitive agreement is subject to approval by
regulatory authorities and North American shareholders. Webster expects the
transaction to close in the fourth quarter of 2003.
NOTE 4: SECURITIES
- ------------------
A summary of available for sale securities follows:
JUNE 30, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO:
Government Agency $ 106,669 -- (2,575) 104,094 -- -- -- --
Municipal bonds and notes 122,752 6,740 (253) 129,239 104,676 4,388 (39) 109,025
Corporate bonds and notes 242,064 2,429 (2,127) 242,366 181,810 1,432 (6,029) 177,213
Equity securities (a) 178,832 12,020 (1,406) 189,446 177,051 5,234 (1,616) 180,669
Mortgage-backed securities (b) 3,659,787 72,644 (2,176) 3,730,255 3,571,160 81,487 (309) 3,652,338
- --------------------------------------------------------------------------------------------------------------------------------
Total $4,310,104 93,833 (8,537) 4,395,400 $4,034,697 92,541 (7,993) 4,119,245
- --------------------------------------------------------------------------------------------------------------------------------
(a) As of June 30, 2003, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $152.4 million, and common stock
of $37.0 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.
(b) 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 six months ended June 30, 2003, Webster did
not identify any declines in value that were other than temporary in nature.
During the same period of 2002, Webster recorded a write down of $1.8 million
for two equity holdings, whose value decline was deemed to be other than
temporary in nature.
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5: LOANS HELD FOR SALE
- ---------------------------
Loans held for sale totaled $321.1 million and $405.2 million at June 30, 2003
and December 31, 2002. The residential loan portion was $320.5 million and
$400.0 million, respectively for each period. Commercial loans of $0.6 million
at June 30, 2003 and $5.2 million at December 31, 2002 comprised the remainder.
At June 30, 2003 and December 31, 2002, residential mortgage origination
commitments totaled $1.0 billion and $518.4 million, respectively. Residential
commitments outstanding at June 30, 2003 consisted of adjustable rate and fixed
rate mortgages of $37.7 million and $997.3 million, respectively, at rates
ranging from 3.6% to 6.8%. 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 June 30, 2003 and December
31, 2002, Webster also had outstanding commitments to sell residential mortgage
loans of $782.2 million and $533.2 million, respectively.
At June 30, 2003 and December 31, 2002, Webster serviced, for the benefit of
others, residential and commercial loans totaling approximately $929.4 million
and $1.6 billion, respectively.
NOTE 6: LOANS, NET
- ------------------
A summary of loans, net follows:
- --------------------------------------------------------------------------------------
(Dollars in thousands) JUNE 30, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------
Amount % Amount %
------ ---- ------ ---
Residential mortgage loans $ 3,541,922 41.2% $ 3,386,207 43.4%
Commercial loans:
Commercial non-mortgage 984,187 11.5 913,536 11.8
Asset-based loans 560,006 6.5 465,400 5.9
Equipment financing 465,916 5.4 419,962 5.4
- --------------------------------------------------------------------------------------
Total commercial loans 2,010,109 23.4 1,798,898 23.1
Commercial real estate 1,144,429 13.3 1,029,332 13.2
Consumer loans:
Home equity credit lines 1,393,357 16.2 1,235,723 15.9
Fixed home equity loans 589,390 6.9 426,141 5.4
Other consumer 30,739 0.4 36,338 0.5
- --------------------------------------------------------------------------------------
Total consumer loans 2,013,486 23.5 1,698,202 21.8
- --------------------------------------------------------------------------------------
Total loans 8,709,946 101.4 7,912,639 101.5
Less: allowance for loan losses (119,239) (1.4) (116,804) (1.5)
- --------------------------------------------------------------------------------------
Loans, net $ 8,590,707 100.0% $ 7,795,835 100.0%
- --------------------------------------------------------------------------------------
At June 30, 2003, loans net included $1.9 million of net discounts and $27.7
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 $63.4 million and $56.9 million at June 30,
2003 and December 31, 2002, respectively.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 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 $1.7 billion at June 30, 2003 and December 31, 2002. Consumer loan
commitments totaled $56.4 million and $42.4 million at June 30, 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. See Note 16 for further discussion.
The estimated fair value of commitments to extend credit is considered
insignificant at June 30, 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.
A majority of the Bank's outstanding letters of credit are performance standby
letters of credit within the scope of FASB Interpretation No. ("FIN") 45. These
are irrevocable undertakings by the Bank, as guarantor, to make payments in the
event a specified third party fails to perform under a nonfinancial contractual
obligation. Most of the Bank's performance standby letters of credit arise in
connection with lending relationships and have a term of one year or less. The
risk involved in issuing stand-by letters of credit is essentially the same as
the credit risk involved in extending loan facilities to customers, and they are
subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products. At
June 30, 2003, Webster's standby letters of credit totaled $132.4 million.
NOTE 7: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The following table provides a summary of the activity in the allowance for loan
losses:
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $118,596 98,930 116,804 97,307
Provisions charged to operations 5,000 4,000 10,000 8,000
Allowance for purchased loans -- -- 146 --
- ---------------------------------------------------------------------------------------------------------------
Subtotal 123,596 102,930 126,950 105,307
- ---------------------------------------------------------------------------------------------------------------
Total charge-offs 4,872 3,789 8,746 6,430
Total recoveries 515 557 1,035 821
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs 4,357 3,232 7,711 5,609
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $119,239 99,698 119,239 99,698
- ---------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.20% 0.18 0.18 0.16
- ---------------------------------------------------------------------------------------------------------------
14
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 June 30, 2003 and
December 31, 2002 are summarized below. Temporary differences result from 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.
- --------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses and other loss allowances $ 44,492 42,128
Intangibles 11,979 12,139
Accrued compensation and benefits 9,597 9,824
Net operating loss and credit carryforwards 8,033 7,913
Loan discounts 6,283 7,866
Depreciation and amortization 1,257 1,432
Equipment financing costs 631 1,060
Other assets-investments 1,040 716
Other accrued expenses 1,246 1,575
Other deductible items 642 314
- --------------------------------------------------------------------------------------------------------
Total deferred tax assets 85,200 84,967
Less: valuation allowance for full amount of Connecticut portions (10,399) (10,497)
- --------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 74,801 74,470
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale 33,786 33,585
Intangibles 14,910 13,203
Compensation and benefits 3,580 4,926
Mortgage servicing rights 2,420 4,328
Loan premiums and deferred fees 1,748 2,301
Equipment financing depreciation 1,329 314
Accrued dividends 479 525
Other taxable items 348 337
- --------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 58,600 59,519
- --------------------------------------------------------------------------------------------------------
Deferred tax asset, net $ 16,201 14,951
- --------------------------------------------------------------------------------------------------------
Management believes 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.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9: GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------
During 2002 in conjunction with the implementation of SFAS No. 142, Webster
performed a reevaluation of the remaining useful lives of all previously
recognized other intangible assets with finite useful lives and found no
adjustment necessary to the amortization periods used. Webster also found that
no reclassifications of intangible assets were required. The review of the
carrying value of goodwill was completed during the second quarter of 2002. As a
result, it was determined that a portion of the goodwill related to the
acquisition of Duff & Phelps, LLC was impaired. Accordingly, a one-time
transitional charge of $11.2 million ($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. Webster's annual evaluation of
goodwill and intangible assets will be performed during the third quarter.
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 second
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 is subject to amortization) to
goodwill (which is subject to impairment analysis) retroactive to January 1,
2002.
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------
Intangible assets:
Balances subject to amortization:
Core deposit intangibles $ 52,515 60,146
Other identified intangibles 7,274 --
Balances not subject to amortization:
Pension assets 735 735
- -------------------------------------------------------------------------------
Total intangible assets $ 60,524 60,881
- -------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill $256,465 236,478
- -------------------------------------------------------------------------------
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 six months ended June 30,
2003:
Wealth 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 (23) 612
Purchased business transactions 16,222 3,153 -- 19,375
- -------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $222,289 24,843 9,333 256,465
- -------------------------------------------------------------------------------------------------
*Includes insurance operations
Amortization of intangible assets for the three and six months ended June 30,
2003, totaled $4.0 million and $7.9 million, respectively. Estimated annual
amortization expense of current intangible assets with finite useful lives,
absent any impairment or change in estimated useful lives, is summarized below.
(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
- -------------------------------------------------------------------------------------------------
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10: DEPOSITS
- -----------------
The following table summarizes deposits at the dates indicated.
- --------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
% of % of
(In thousands) Amount total Amount total
- --------------------------------------------------------------------------------------------------------
Demand deposits $1,035,389 12.8% $ 982,735 12.9%
NOW accounts 1,064,336 13.2 945,145 12.4
Money market deposit and savings accounts 3,365,781 41.6 2,987,595 39.3
Time deposits 2,620,196 32.4 2,690,647 35.4
- --------------------------------------------------------------------------------------------------------
Total $8,085,702 100.0% $7,606,122 100.0%
- --------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
NOW accounts $ 1,009 1,110 2,018 2,185
Money market deposit and savings accounts 10,340 10,907 20,535 21,347
Time deposits 17,401 24,988 35,615 53,086
- ----------------------------------------------------------------------------------------------------------
Total $28,750 37,005 58,168 76,618
- ----------------------------------------------------------------------------------------------------------
18
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:
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
Total Total
(In thousands) Outstanding Callable Outstanding Callable
- ---------------------------------------------------------------------------------------------------------------
FIXED RATE:
0.95% to 6.67% due in 2003 $ 405,489 -- 381,655 --
3.27% to 6.78% due in 2004 750,128 -- 750,194 --
2.97% to 6.25% due in 2005 149,657 100,000 150,085 100,000
4.68% to 6.31% due in 2006 51,750 -- 52,028 --
4.88% to 6.98% due in 2007 702,226 500,000 702,273 500,000
4.49% to 5.93% due in 2008 29,199 27,000 29,396 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 450 -- 475 --
6.60% due in 2011 1,931 -- 2,024 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------------------
2,105,830 642,000 2,083,130 642,000
VARIABLE RATE:
5.76% due in 2004 80,000 -- 80,000 --
- ---------------------------------------------------------------------------------------------------------------
2,185,830 642,000 2,163,130 642,000
Unamortized discount on FHLB advances -- -- (101) --
- ---------------------------------------------------------------------------------------------------------------
Total advances, net $2,185,830 642,000 2,163,029 642,000
- ---------------------------------------------------------------------------------------------------------------
Webster Bank ("Bank") had additional borrowing capacity of approximately $1.3
billion from the FHLB at June 30, 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 June 30, 2003 and December 31,
2002, investment securities were not fully utilized as collateral. If all
securities had been used for collateral, additional borrowing capacity at June
30, 2003 and December 31, 2002 would be approximately $2.2 billion and $2.1
billion. At June 30, 2003 the Bank was in compliance with the FHLB collateral
requirements. As of June 30, 2003, $1.1 billion of fixed rate advances were
converted to floating rate through the use of interest rate swaps. See Note 16
of Notes to Consolidated Interim Financial Statements for further information.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: OTHER BORROWINGS
- -------------------------
The following table summarizes balances for other borrowings:
- ----------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------
Securities sold under agreement to repurchase $1,995,909 1,453,596
Federal funds purchased 426,300 291,105
Treasury tax and loan 40,357 403,148
Other 18,100 18,791
- ----------------------------------------------------------------------------------
Total $2,480,666 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
June 30, 2003.
Information concerning short-term repurchase agreements as of the end of the
current period is presented below:
- ----------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------
Quarter end balance $1,260,171 1,453,596
Quarter average balance 1,086,886 1,465,644
Highest month end balance during quarter 1,260,171 1,636,177
Weighted-average maturity (in months) 2.3 2.0
Weighted-average interest rate 1.08% 1.40%
Amortized cost of collateral $1,246,949 1,504,820
Fair value of collateral 1,266,631 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 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 regulatory capital. At June 30, 2003 and
December 31, 2002, 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.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14: SHAREHOLDERS' EQUITY
- -----------------------------
Applicable regulations of the Office of Thrift Supervision ("OTS") require
federal savings banks, such as the Bank, to satisfy certain minimum capital
requirements, including a leverage capital requirement (expressed as a ratio of
core or Tier 1 capital to adjusted total assets) and risk-based capital
requirements (expressed as a ratio of core or Tier 1 capital and total capital
to total risk-weighted assets). As an OTS regulated institution, the Bank is
also subject to a minimum tangible capital requirement (expressed as a ratio of
tangible capital to adjusted total assets). At June 30, 2003, the Bank exceeded
all OTS regulatory capital requirements and met the requirements for a "well
capitalized" institution.
The following table provides information on the Bank's capital ratios as of June
30, 2003 and December 31, 2002.
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2003
Bank's equity (to total assets) $ 1,178,468 8.23%
Non-includable subsidiaries (2,103)
Goodwill and other intangibles (251,551)
Unrealized gain on certain AFS securities, net (45,686)
Cash flow hedging gain (1,612)
- --------------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 877,516 6.28 279,453 2.00% No Requirement
Tier 1 capital (to adjusted total assets), net 877,516 6.28 558,906 4.00 698,632 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
Tier 1 Risk-based capital
(to risk-weighted assets) 877,516 9.34 375,974 4.00 563,961 6.00
Qualifying subordinated debt 200,000
Allowable allowance for loan losses 115,733
- --------------------------------------------------------------------------------------------------------------------------------
Total Risk-based capital (to risk-
weighted assets) $ 1,193,249 12.70% 751,949 8.00% 939,936 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
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15: BUSINESS SEGMENTS
- --------------------------
Webster has three segments for purposes of reporting business line results.
These segments include Retail Banking, Commercial Banking and Wealth 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 June 30, 2002 results have been
restated, to reflect changes in the methodologies and organizational structure
adopted and reflected in the results for the three and six months ended June 30,
2003. The following table presents the statement of income and total assets for
Webster's reportable segments.
THREE MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 70,881 20,219 829 8,690 100,619
Provision for loan losses 1,871 4,339 40 (1,250) 5,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 69,010 15,880 789 9,940 95,619
Noninterest income 34,518 11,227 4,632 7,903 58,280
Noninterest expense 55,945 13,876 6,167 17,211 93,199
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 47,583 13,231 (746) 632 60,700
Income tax expense (benefit) 15,749 4,379 (247) 209 20,090
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 31,834 8,852 (499) 423 40,610
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,672,333 2,770,243 65,655 4,944,341 14,452,572
THREE MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 60,832 14,539 516 26,678 102,565
Provision for loan losses 1,924 2,568 25 (517) 4,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 58,908 11,971 491 27,195 98,565
Noninterest income 24,156 7,378 4,201 3,880 39,615
Noninterest expense 49,066 11,220 5,756 12,801 78,843
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in method
of accounting 33,998 8,129 (1,064) 18,274 59,337
Income tax expense (benefit) 10,750 2,570 (336) 5,781 18,765
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 23,248 5,559 (728) 12,493 40,572
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $5,928,673 2,013,200 46,666 4,502,391 12,490,930
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 137,845 38,905 1,524 27,021 205,295
Provision for loan losses 3,782 8,417 77 (2,276) 10,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 134,063 30,488 1,447 29,297 195,295
Noninterest income 68,665 22,740 9,348 10,675 111,428
Noninterest expense 109,714 29,587 12,398 34,306 186,005
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 93,014 23,641 (1,603) 5,666 120,718
Income tax expense (benefit) 30,955 7,868 (533) 1,881 40,171
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 62,059 15,773 (1,070) 3,785 80,547
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,672,333 2,770,243 65,655 4,944,341 14,452,572
SIX MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 118,125 28,861 896 51,166 199,048
Provision for loan losses 4,018 5,071 48 (1,137) 8,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 114,107 23,790 848 52,303 191,048
Noninterest income 48,824 13,814 8,929 9,531 81,098
Noninterest expense 95,915 22,648 11,901 24,578 155,042
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of change in
method of accounting 67,016 14,956 (2,124) 37,256 117,104
Income tax expense (benefit) 21,123 4,714 (669) 11,749 36,917
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in method
of accounting 45,893 10,242 (1,455) 25,507 80,187
Cumulative effect of change in method
of accounting (net of taxes) -- (7,280) -- -- (7,280)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 45,893 2,962 (1,455) 25,507 72,907
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,928,673 2,013,200 46,666 4,502,391 12,490,930
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.
23
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, deposit and
cash management activities. The results for 2003 reflect the results of our
acquisitions of Whitehall and BIC as well as the growth in equipment financing,
middle market and commercial real estate loans. These additions significantly
added to the segment's net interest income and noninterest income as compared to
June 2002. The results for 2002 include a $7.3 million, net of tax, charge for
the adoption of SFAS No. 142.
Wealth and Investment Services
- ------------------------------
During 2002, Wealth 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 Wealth 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 allowance 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.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS
-----------------------------------------
At June 30, 2003, Webster had outstanding interest rate swaps with a notional
amount of $1.2 billion. These swaps are to hedge FHLB advances and subordinated
debt and qualify for fair value hedge accounting under SFAS No. 133. The swaps
are used to transform FHLB advances and subordinated debt from fixed rate to
floating rate. Of the total, $200 million of the interest rate swaps mature in
2003, $650 million in 2004, $200 million in 2007 and $100 million in 2013, and
an equivalent amount of the hedged debt matures on these dates. See Note 13 for
additional derivative information related to Webster's issuance of subordinated
debt in the first quarter.
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 largely 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 $103.3 million at June 30, 2003.
The Bank currently utilizes certain derivative instruments, primarily forward
sales of mortgage-backed securities ("MBSs"), in its efforts to manage risk of
loss associated with its mortgage loan commitments and mortgage loans held for
sale. Prior to the closing and funds disbursement on a single-family residential
mortgage loan, the Bank generally extends an interest-rate locked commitment to
the borrower. At June 30, 2003, the Company had rate locks of approximately
$680.8 million and its residential mortgage held for sale portfolio totaled
$320.5 million. During such time, the Bank is subject to risk that market rates
of interest may change. If market rates rise, investors generally will pay less
to purchase such loans resulting in a reduction in the Bank's gain on sale of
the loans or, possibly, a loss. In an effort to mitigate such risk, the Bank
enters into forward delivery sales commitments pursuant to which it agrees to
deliver whole mortgage loans to various investors or issue MBSs. These forward
sales, which include mandatory forward commitments of approximately $694.0
million, and best efforts forward commitments of approximately $88.2 million at
June 30, 2003, establish the price the Bank will receive upon the sale of the
related mortgage loan, thereby mitigating certain interest rate risk. The Bank
will still have certain execution risk, that is, risk related to its ability to
close and deliver to its investors the mortgage loans it has committed to sell.
The derivative activities associated with the Bank's loans held for sale
portfolio qualify as a fair value hedge under SFAS No. 133. The Bank has
established a highly effective relationship between its loans held for sale
portfolio and certain of its forward sales commitments.
The interest rate locked loan commitments are recorded at fair value, with
changes in fair value recorded in current period earnings. To the extent that
loans held for sale are not allocated to the previously discussed forward sales
commitments, the changes in the fair value of the forward sales commitments are
also recorded to current period earnings. The value of the interest rate locked
commitments and forward sales commitments will be adjusted monthly based upon
market interest rates and the level of locked loan commitments and unallocated
forward sales commitments. Generally, the value of the locked loan commitment
will increase in a falling rate environment and decrease in a rising interest
rate environment. The opposite is true for the forward loan sale commitment. The
goal of the Bank is to offset the change in the market value of the locked loan
commitments with the change in the market value of the forward loan sales
commitments.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and (4) amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts as either derivatives or
hybrid instruments.
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
This Statement is effective for contracts entered into or modified after June
30, 2003, with certain exceptions and for hedging relationships designated after
June 30, 2003. All provisions of this Statement should be applied prospectively
with certain exceptions. Webster will adopt the provisions of this Statement
effective July 1, 2003 and does not expect any material impact on its financial
statements.
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.
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.
During the second quarter 2003, Webster purchased $11.0 million of its capital
securities that were issued by Trusts I and II. Of the $11.0 million purchased,
$6.0 million had been issued by Trust I and, as of June 30, 2003, Trust I had
remaining capital securities of $75.3 million and $5.0 million had been issued
by Trust II and, as of June 30, 2003, had remaining capital securities of $35.0
million. Refer to Webster's 2002 Annual Report filed on Form 10-K for further
information concerning Trusts I and II.
Expense of the securities, including amortization of issuance costs, for the
three months ended June 30, 2003 and 2002 was $2.8 million and $3.5 million,
respectively, and for the six months ended June 30, 2003 and 2002, was $5.7
million and $7.2 million, respectively.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
is effective for all freestanding financial instruments entered into or modified
after May 31, 2003. For all other freestanding financial instruments, it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. SFAS No. 150 applies to three categories of free standing
financial instruments (mandatorily redeemable instruments, instruments with
repurchase obligations and instruments with obligations to issue a variable
number of shares). Instruments within the scope of SFAS No. 150 must be
classified as liabilities in the Statement of Condition. This statement also
requires detailed information on each instrument covered by its provisions. An
adjustment for the cumulative effect of a change in accounting principle should
be reported as of the beginning of the quarter of adoption for outstanding
contracts entered prior to June 1, 2003. Therefore, as of July 1, 2003, Webster
is required to classify its Corporation-obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trusts as liabilities. 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, as of June 30, 2003 is included in noninterest expenses
on the Consolidated Statements of Income will be classified as interest expense
on borrowings under this ruling. The adoption of this Statement by Webster will
not impact net earnings but will affect financial measurements that use interest
expense as a component.
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 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 June 30, 2003 and 2002 was $215,000 and for six months ended June
30, 2003 and 2002 was $431,000.
NOTE 18: NEW ACCOUNTING STANDARDS
- ---------------------------------
FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51" establishes accounting guidance for
consolidation of variable interest entities ("VIE") that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE is the
entity that absorbs a majority of the VIE's expected losses, receives a majority
of the VIE's expected residual returns, or both, as a result of ownership,
controlling interest, contractual relationship or other business relationship
with a VIE. Prior to the implementation of FIN 46, VIEs were generally
consolidated by an enterprise when the enterprise had a controlling financial
interest through ownership of a majority of voting interest in the entity. The
provisions of FIN 46 were effective immediately for all arrangements entered
into after January 31, 2003, and are otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Corporation will adopt
FIN 46 on July 1, 2003. In its current form, FIN 46 may require the Corporation
to deconsolidate its investment in Trust I and II in future financial
statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The amendments (i) reflect
decisions of the Derivatives Implementation Group; (ii) reflect decision made by
FASB in conjunction with other projects dealing with the financial instruments;
and (iii) addresses implementation issues related to the application of the
definition of a derivative. SFAS No. 149 also modifies various other existing
pronouncements to conform with the changes made to SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003, with all provisions
applied prospectively. Adoption of SFAS 149 on July 1, 2003 did not have a
significant impact on the Company's financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS 150 establishes standards for how an
issuer clarifies, measures and discloses in its financial statements certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify financial instruments that are within its
scope as liabilities, in most circumstances. Such financial instruments include
(i) financial instruments that are issued in the form of shares that are
mandatorily redeemable; (ii) financial instruments that embody an obligation to
repurchase the issuer's equity shares, or are indexed to such obligation, and
that require the issuer to settle the obligation by transferring assets; (iii)
financial instruments that embody an obligation that the issuer may settle by
issuing a variable number of its equity shares if, at inception, the monetary
value of the obligation is predominantly based on a fixed amount, variations in
something other than the fair value of the issuer's equity shares or variations
inversely related to changes in the fair value of the issuer's equity shares;
and (iv) certain freestanding financial instruments. SFAS 150 is effective for
contracts entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. Adoption of SFAS 50 on July 1, 2003 is not expected to have a significant
impact on the Company's results of operations.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19: SUBSEQUENT EVENTS
- --------------------------
On July 22, 2003, Webster announced that its Board of Directors authorized the
repurchase of up to approximately 2.3 million shares of its common stock. These
shares represent 5% of Webster's 45.6 million common shares outstanding at June
30, 2003.
On July 23, 2003, Webster Insurance, a wholly-owned subsidiary of Webster,
announced the acquisition of LJF Insurance Services, Inc., ("LJF"), a full
service insurance agency with offices in Southport and Norwalk, Connecticut. LJF
has served the Fairfield County of Connecticut for more than 100 years. This
acquisition will serve to further expand Webster's insurance services to the
lower Fairfield County area.
28
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. Since October 17, 2002,
Webster's common stock has traded on the New York Stock Exchange under the
symbol of "WBS". Prior to that 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. Webster
believes that its 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 "Allowance
for Loan Losses" section within Management's Discussion and Analysis of
Financial Condition and Results of Operations in 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 Statements of Condition. The Company must also assess the
likelihood that any deferred tax assets will be recovered from taxes previously
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
paid or from future taxable income and establish a valuation allowance for those
assets determined to not likely be recoverable. Management judgment is required
in determining the amount and timing of recognition of the resulting deferred
tax assets and liabilities. These judgments and estimates are reviewed on a
regular basis as regulation and business factors change. The 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.
GOODWILL AND INTANGIBLE ASSETS
Webster, in part, has increased its market share through acquisitions accounted
for under the purchase 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 Webster's 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 June 30, 2003 and December 31, 2002, had
total assets of $14.5 billion and $13.5 billion, including total securities of
$4.4 billion and $4.1 billion, and total loans of $8.7 billion and $7.9 billion,
respectively. At June 30, 2003 and December 31, 2002, total deposits were $8.1
billion and $7.6 billion, borrowings were $5.0 billion and $4.5 billion, and
shareholders' equity totaled $1.1 billion and $1.0 billion, respectively.
Total assets increased $984.6 million, or 7.3%, at June 30, 2003 from December
31, 2002. The overall increase is primarily due to increases in loans of $797.3
million and securities of $274.3 million, partially offset by a decrease of
$84.1 million in loans held for sale. The increase in loans was due primarily to
growth in residential mortgage loans of $155.7 million, home equity loans of
$320.9 million, commercial loans of $211.2 million and commercial real estate
loans of $115.1 million.
Total liabilities rose $931.7 million or 7.6% at June 30, 2003 from December 31,
2002 primarily due to increases in borrowings of $536.8 million and deposits of
$479.6 million. The increase in deposits was primarily the result of increases
in NOW, regular savings and MMDA accounts of $550.0 million that was partially
offset by a decrease in certificates of deposits of $70.4 million. The net
increase in total equity of $63.9 million is primarily due to net income of
$80.5 million, and $3.7 million in stock option exercise proceeds, partially
offset by $5.8 million in repurchases of common stock and $18.3 million in
common stock dividend payments.
During the first quarter 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 within
this report for further information concerning these acquisitions.
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The Bank also completed an offering of $200 million of subordinated notes during
the first quarter this year. The subordinated notes constitute new funding and
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 June 30, 2003 and December 31,
2002, total loans were $8.7 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
June 30, 2003 and December 31, 2002, residential loans represented 41% and 43%
of Webster's loan portfolio and commercial loans (including commercial real
estate) represented 37% and 36% respectively. 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 complement of residential mortgage loan
products that meet the financial needs of its customers. For the three and six
months ending June 30, Webster originated residential mortgage loans of $1.2
billion and $2.1 billion in 2003 and $480.4 million and $929.2 million, in 2002,
respectively. As a result of the low interest rate environment during the later
half of 2002 and first half of 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. A majority of all this originated loan
volume, including servicing, is sold in the secondary market. Webster sells
these residential mortgage loans in a manner consistent with its asset/liability
management objectives. At June 30, 2003 and December 31, 2002, Webster had
$320.5 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 $3.5 billion and $3.4 billion at
June 30, 2003 and December 31, 2002, respectively. At June 30, 2003,
approximately $1.0 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 June 30,
2003, approximately $2.5 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's
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 June 30, 2003 and
December 31, 2002, Middle Market loans, including commercial and owner-occupied
commercial real estate, totaled $619.3 million and $538.9 million, respectively,
an increase of 14.9%. The increase resulted from a combination of increased
utilization of lines of credit and newly developed relationships. Originations
for the second quarter and six months of 2003 totaled $63.2 million and $128.3
million and for the same 2002 periods totaled $52.7 million and $60.9 million,
respectively.
31
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 outstanding loans totaling $108.9 million 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. At June 30, 2003 and December 31, 2002, total
asset-based loans were $560.0 million and $465.4 million respectively, an
increase of 20.3%. Similar to Middle Market, the increase resulted from a
combination of increased utilization of lines of credit and newly developed
relationships. The Asset-Based Lending Division directly originates, 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 direct originations, it generally establishes depository
relationships with the borrower in the form of cash management accounts. At June
30, 2003 and December 31, 2002, the total of these deposits was $38.7 million
and $35.0 million, respectively. During the second quarter of 2003, Whitehall
funded $92.9 million against new commitments of $136.8 million. During the first
six months of 2003, Whitehall funded $133.0 million against new commitments of
$228.2 million.
Specialized Lending
- -------------------
Webster participates in the syndicated loan market through a diversified
portfolio of loans, which represent transactions with large national borrowers
whose businesses command significant market share. These loans generally consist
of participations in revolving lines of credit or term loans with maturities up
to 7 years. Corporate utilization of the syndicated market has grown
dramatically in the last 10 years as a means of providing large credit
facilities to companies through consortiums of banks and other financial service
companies. Webster initially entered this market as a means of providing
geographic and industry diversification to the Bank's commercial loan portfolio.
It has staffed this function with highly knowledgeable individuals with
extensive experience in credit and leveraged lending at major banks and
insurance companies.
At June 30, 2003 and December 31, 2002, the Specialized Lending portfolio
totaled $254.4 million and $299.8 million, respectively, a decrease of 15.1% of
funded loans against commitments of $413.6 million and $500.5 million,
respectively. During 2002 and in the first quarter of 2003, the Bank was able to
further reduce its exposure to the telecommunications sector by combination of
redirected cash flows from maturities, amortization and sales of loans. During
the second quarter of 2003 due to the improvement in the telecommunications
sector, Specialized Lending reduced its exposure to the sector by 20% through
voluntary customer prepayments at par, regularly scheduled amortization and the
sale of selected loans. None of these loans were classified. At June 30, 2003,
December 31, 2002 and June 30, 2002, cable, wireless communications and other
telecommunications loans totaled $95.6 million, $105.1 million and $131.3
million, respectively, less than 1% of the Webster total loan portfolio. At June
30, 2003, none of these loans were classified as nonperforming. See "Asset
Quality" and "Allowance for Loan Losses" sections contained elsewhere within
this report for additional information.
Additionally, the portfolio contained $85.9 million and $84.9 million of funded
Collateralized Loan Obligations ("CLOs") at June 30, 2003 and December 31, 2002,
respectively, and commitments of $91.7 million, for both periods. All of the
outstandings 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 $482.3 million of loans that are also monitored by the Shared
National Credit ("SNC") program against commitments of $1.1 billion at June 30,
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.
32
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 June 30, 2003 and December 31, 2002, the SBB portfolio, which
includes both commercial and commercial real estate loans, was approximately
$330.7 million and $326.3 million, respectively. The second quarter showed a
slight increase over 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 $34.0 million and $59.3 million, for the
second quarter and six months, respectively, of 2003 as compared to $17.6
million and $33.6 million, respectively, during the same periods in 2002.
Equipment Financing
- -------------------
Center Capital Corporation ("Center Capital"), a nationwide equipment financing
subsidiary of the Bank, transacts loan 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 $465.9 million at June 30, 2003 compared
with $420.0 million at December 31, 2002, an increase of 10.9%. Center Capital
originated $68.3 million and $124.1 million in loans during the second quarter
and six months of 2003, respectively, compared to $64.0 million and $109.2
million during the same periods 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 City and Northern New Jersey areas. Loans originated
for the second quarter and six months of 2003, totaled $35.7 million and $56.8
million, respectively. At June 30, 2003, total loans outstanding were $47.1
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
from the property and its tenants is the primary repayment source. The Bank also
makes acquisitions, development and construction loans to residential builders.
At June 30, 2003 and December 31, 2002, outstanding commercial real estate loans
totaled $1.1 billion and $1.0 billion, respectively, an increase of 11.2%
primarily attributable to new relationships. Included in these loans are
owner-occupied loans originated by the Middle Market and Small Business Banking
Divisions of $352.4 million and $336.4 million at June 30, 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 borrowers
for repeat business, for cross selling opportunities, and to diversify its
portfolio by geographic location. During the second quarter and first six months
of 2003, Webster originated $108.0 million and $171.0 million of commercial real
estate loans, an increase of $18.3 million, or 12.0 %, from the six month period
a year earlier.
CONSUMER
At June 30, 2003 and December 31, 2002, consumer loans totaled $2.0 billion and
$1.7 billion, respectively. Consumer loan volume increased significantly in 2002
and, at December 31, represented 21.8% of the total loan portfolio. This growth
continued during the first six months of 2003, as loans grew $315.3 million or
18.6% to $2.0 billion, or 23.5% of the loan portfolio at June 30, 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
33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
regional offices. Originations during the second quarter and six months of 2003
totaled $347.9 million and $676.8 million, compared to $259.5 million and $518.5
million for the same periods a year earlier.
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 June 30, 2003 and December 31, 2002, the investment portfolio
totaled $4.4 billion and $4.1 billion, respectively. The increase in the
portfolio was a result of the investment of a portion of the proceeds from the
$200 million subordinated note issuance. At both June 30, 2003 and December 31,
2002, the portfolio consisted primarily of mortgage-backed securities. See Note
4 of Notes to Consolidated Interim Financial Statements 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 $479.6 million, or 6.3%, to $8.1 billion at June 30,
2003 from December 31, 2002 and $748.1 million or 10.2% from June 30, 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 67.6% at June 30, 2003 from 64.6% at December 31, 2002 and
from 61.9% at June 30 a year ago. The growth in first six months of 2003
compared to December 31, 2002 can also be attributed to the continued success
with High Performance Checking products, (for Consumer and Small Business
customers), de novo branch activity and the Bank's marketing efforts.
BORROWED FUNDS
- --------------
FHLB advances and other borrowings increased $336.8 million, or 7.8% to $4.7
billion at June 30, 2003 from December 31, 2002. As growth in loan and security
balances outpaced the growth in deposits, Webster increased its wholesale
borrowing balances. See Notes 11 and 12 of Notes to Consolidated Interim
Financial Statements for additional information.
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 June 30, 2003
represents a reasonable level of risk.
34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table summarizes the estimated economic value of Webster's assets,
liabilities and hedges at June 30, 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
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003
- -------------
Assets $ 14,452,572 14,331,600 157,230 (197,807)
Liabilities 13,353,263 13,482,692 330,483 (279,670)
Off-balance sheet contracts -- 26,096 22,537 (20,523)
----------------------------------------------------------------------------
Net equity 1,099,309 875,004 (150,716) 61,340
Net change as % of Tier 1 Capital (17.2)% 7.0%
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 June 30, 2003
and December 31, 2002 because the equity at risk model assigns no value to
goodwill and other intangible assets, which totaled $317.0 million and $297.4
million, respectively.
As noted in the table above, the estimated volatility in economic value of
equity has changed modestly from year end. The yield curve between December 31,
2002 and June 30, 2003 remained relatively constant, but the duration of assets
and liabilities shortened 0.1 years.
The estimated impact on Webster's net income, as of June 30, 2003, for the
subsequent twelve month period, if interest rates instantaneously increase or
decrease by 100 basis points was an increase of 7.2% and a decrease of 10.3%,
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 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.
35
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 June 30, 2003 and December 31, 2002, the Bank had FHLB advances outstanding
of $2.2 billion. The Bank is a member of the FHLB system and had additional
borrowing capacity from the FHLB of approximately $1.3 billion at June 30, 2003.
In addition, the Bank had approximately $858 million billion of unpledged
securities at June 30, 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 June 30, 2003, the Bank had $146.5 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 June 30, 2003,
Webster has repurchased 1,712,238 shares of its common stock under the buyback
program with 687,762 remaining shares to be repurchased. During the second
quarter of 2003, 28,400 shares were repurchased at a total cost of $1.0 million
with an average per share cost of $35.72.
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.
36
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 June 30, 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 pages 34-36 of Webster's 2002 Annual Report on Form
10-K for additional information.
NONPERFORMING ASSETS
The amount of nonperforming assets increased to $57.0 million, or 0.39% of total
assets, at June 30, 2003 from $50.0 million, or 0.37% of total assets, at
December 31, 2002 and $51.6 million, or 0.41% of total assets, at June 30, 2002.
Nonperforming loans, including loans 90 days past due and accruing, increased
$9.0 million from the prior year end. This increase occurred primarily due to an
asset-based lending relationship involving potential fraud. The decrease in
nonaccruing loans held for sale of $3.7 million was the result of cash payments
received reducing the carrying value of the loan to zero. Decreases in
nonperforming commercial real estate and residential loans were partially offset
by an increase in nonperforming equipment financing.
The following table details Webster's nonperforming assets:
- -----------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31, JUNE 30,
(In thousands) 2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Commercial:
Commercial banking $26,551 15,486 20,727
Specialized lending 3,399 3,399 3,399
Equipment financing 8,697 6,586 6,531
- -----------------------------------------------------------------------------------------------------
Total commercial 38,647 25,471 30,657
Commercial real estate 4,920 9,109 9,385
Residential 6,596 7,263 5,991
Consumer 767 894 1,409
- -----------------------------------------------------------------------------------------------------
Total nonaccruing loans 50,930 42,737 47,442
- -----------------------------------------------------------------------------------------------------
Nonaccruing loans held for sale:
Commercial -- 3,706 --
- -----------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial 1,355 515 899
Commercial real estate -- -- 121
- -----------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing 1,355 515 1,020
Foreclosed Properties:
Residential and consumer 529 509 805
Commercial 4,224 2,568 2,294
- -----------------------------------------------------------------------------------------------------
Total foreclosed property 4,753 3,077 3,099
- -----------------------------------------------------------------------------------------------------
Total nonperforming assets $57,038 50,035 51,561
- -----------------------------------------------------------------------------------------------------
37
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The allowance for loan losses at June 30, 2003 was $119.2 million and
represented 228% of nonperforming loans and 1.37% 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 $99.7 million
or 206% of nonperforming loans and 1.36% of total loans at June 30, 2002. For
additional information on the allowance, see Note 7 of Notes to Consolidated
Interim Financial Statements.
PAST DUE LOANS
The following table sets forth information as to loans past due 30-89 days.
JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 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 $12,409 0.14% $13,318 0.17% $14,233 0.19%
Commercial 8,899 0.10 21,894 0.28 12,320 0.17
Commercial real estate 10,667 0.12 21,324 0.27 3,456 0.05
Consumer 4,080 0.05 6,757 0.08 3,617 0.05
- --------------------------------------------------------------------------------------------------------------------------------
Total $36,055 0.41% $63,293 0.80% $33,626 0.46%
- --------------------------------------------------------------------------------------------------------------------------------
The overall decrease in loans past due 30-89 days of $27.2 million at June 30,
2003 from December 31, 2002 is primarily due to a reduction of $10.7 million in
commercial real estate loans as a result of three loan relationships totaling
$8.6 million that were current at June 30, 2003, but past due at December 31,
2002. A reduction of $13.0 million in commercial loans is primarily due to four
loan relationships totaling $8.7 million that were current at June 30, 2003, but
past due at December 31, 2002.
TROUBLED DEBT RESTRUCTURINGS
At June 30, 2003 and December 31, 2002, the Bank had total accruing troubled
debt restructurings of approximately $590,000 and $1.0 million, respectively.
This compares to $3.1 million at June 30, 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 and six
months ended June 30, 2003 under the restructured terms totaled $7,846 and
$21,254, respectively, as compared to $12,113 and $30,045, respectively, that
would have been booked under their original terms. At June 30, 2003, the
$590,000 of debt restructurings were performing in accordance with their
restructured terms and not included in nonperforming loans.
38
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CLASSIFIED LOANS
The following table summarizes Webster's classified loans, including
nonperforming loans at June 30, 2003, December 31, 2002 and June 30, 2002.
Commercial
--------------------------
Commercial
(In thousands) Total Residential Banking* Specialized CRE** Consumer
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2003
Substandard:
Accruing $ 62,064 1,085 39,148 21,746 -- 85
Nonaccruing 44,313 6,573 37,117 -- -- 623
- -------------------------------------------------------------------------------------------------------------------------
Total substandard 106,377 7,658 76,265 21,746 -- 708
Doubtful:
Nonaccruing 6,617 23 3,051 3,399 -- 144
Loss -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total classified loans $112,994 7,681 79,316 25,145 -- 852
- -------------------------------------------------------------------------------------------------------------------------
Classified as a percent of loans 1.3% 0.2 4.8 7.4 -- 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
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002
Substandard:
Accruing $106,281 1,562 48,847 55,776 -- 96
Nonaccruing 43,634 5,826 36,542 -- -- 1,266
- -------------------------------------------------------------------------------------------------------------------------
Total substandard 149,915 7,388 85,389 55,776 -- 1,362
Doubtful:
Accruing 6 -- -- -- -- 6
Nonaccruing 3,808 165 101 3,399 -- 143
- -------------------------------------------------------------------------------------------------------------------------
Total doubtful 3,814 165 101 3,399 -- 149
Loss -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Total classified loans $153,729 7,553 85,490 59,175 -- 1,511
- -------------------------------------------------------------------------------------------------------------------------
Classified as a percent of loans 2.1% 0.2 6.0 14.0 -- 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.
39
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 prolonged weakness in the business sector
of the economy has continued to impact the level of classified loans. At both
June 30, 2003 and December 31, 2002, classified loans, including nonperforming
loans, totaled $113.0 million. Total classified loans decreased $13.7 million
from $126.7 million at March 31, 2003. Total classified loans as a percentage of
total loans decreased to 1.3% at June 30, 2003 from 1.5% at March 31, 2003,
principally due to reduced levels of classified loans in the commercial
portfolios.
The total of nonperforming loans included in classified loans at June 30, 2003
was $50.9 million, up $8.2 million from year end and $3.5 million from June 30,
2002. The remaining classified loans of $62.1 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 AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002.
GENERAL
Net income for the three and six months ended June 30, 2003, was $40.6 million,
or $.88 per diluted share and $80.5 million or $1.74 per diluted share
respectively, compared to $40.6 million, or $.82 per diluted share and $72.9
million or $1.47 per diluted share respectively, for the same periods ended a
year earlier.
Net interest income for the current year quarter and six month periods was
driven by a growth in revenues. Total revenue, consisting of net interest income
and total noninterest income, rose approximately 11.8% and 13.1%, respectively
for the current year periods as compared to a year ago. The growth for the
current year periods was due primarily to increases in noninterest income of
$18.7 million and $30.3 million, respectively. These increases were the direct
result of higher fee based revenues, which increased 28.9% and 30.8%,
respectively, over the same periods a year ago, and gains on the sale of
investment securities. The Mathog and BIC acquisitions completed in January 2003
and the Whitehall and Fleming acquisitions completed in the latter half of 2002,
contributed approximately $5.3 million and $10.6 million, respectively to the
current periods' increases. Deposit fees, loan fees, net gains on the sale of
loans and servicing and net gains on the sale of securities were significant
factors for the increase noninterest income revenues.
Net interest income for the current quarter and six month periods remained
relatively unchanged from the same periods a year ago as the positive effect of
a larger volume of interest-earning assets was offset by lower rates on earning
assets and higher volumes of interest-bearing liabilities.
Noninterest expenses for the current quarter and six month periods were higher
as compared to the same periods a year ago primarily due to acquisitions that
were completed during the first quarter of 2003 and second half of 2002 and
continued investment in strategic initiatives to grow revenues. 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 six months of 2002 net income would have been $80.2
million or $1.62 per diluted share.
NET INTEREST INCOME
Net interest income declined for both the three and six months ended June 30,
2003 from the same period in the previous year. The declines resulted from
significantly lower interest rates during the 2003 periods as reflected in
Webster's net interest margin. The net interest margin declined to 3.10% from
3.61% for the second quarter and to 3.20% from 3.56% for the first six months.
Income generated from increased earning assets was insufficient to offset the
decline caused by the declining net interest margin.
40
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
With a continued low interest rate environment, the Company will continue to
experience downward pressure on earning asset yields and there will be further
compression of the net interest margin. Webster has redeployed cash flows into
investments with shorter maturities, at significantly reduced yields, in
anticipation of rising interest rates.
INTEREST INCOME
Total interest income for the second quarter of 2003 decreased $8.6 million, or
5.0%, from the second quarter of the prior year. The decline is primarily due to
a decrease in the yield, which declined by 103 basis points. Declines occurred
in both the loan and investment portfolios, where yields dropped 93 and 132
basis points, respectively, compared to the second 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. This repayment in the mortgage security
portfolio resulted in incremental acceleration of premium amortization and
reduced investment yields. 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.
Total interest income for the six months of 2003 decreased $10.3 million, or
3.0%, from the first six months of the prior year. This decline is similarly due
chiefly to a decrease in the yield, which declined by 96 basis points. Declines
occurred in both the loan and investment portfolios, where yields dropped 90 and
114 basis points, respectively, compared to the first six months a year ago. The
decline in yields resulted from the same factors that affected the second
quarter of 2003. The impact on interest income of lower yields was partially
offset by an increase in the volume of average earnings assets of approximately
$1.7 billion for the first six months of 2003.
INTEREST EXPENSE
Total interest expense for the second quarter of 2003 decreased $6.7 million, or
9.4%, from the second quarter of 2002. The decrease was primarily due to a 57
basis point decline in the overall cost of interest-bearing liabilities. The
cost of deposits and borrowings decreased 60 and 68 basis points, respectively,
compared to the second 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.
Total interest expense for the first six months of 2003 decreased $16.5 million,
or 11.4%, from the first six months of 2002. The decrease was primarily due to a
65 basis point decline in the overall cost of interest-bearing liabilities. The
cost of deposits and borrowings decreased 66 and 81 basis points, respectively,
compared to the first six months 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.
As previously discussed, SFAS No. 150 requires the classification of capital
securities as liabilities and the interest cost of these securities, which as of
June 30, 2003 is included in noninterest expenses, as interest expenses on
borrowings. While the adoption of this Statement will not impact net earnings,
interest expense will increase over the second half of the year.
41
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following tables show 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 JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 8,951,987 $ 118,965 5.30% $ 7,300,691 $ 114,027 6.23%
Securities and short-term investments 4,170,243 46,142 (a) 4.52 4,135,496(a) 59,637 5.84(a)
------------- ----------- ---- -------------- --------- -----
Total interest-earning assets 13,122,230 165,107 5.06 11,436,187 173,664 6.09
----------- ---------
Noninterest-earning assets 949,376 816,046
------------- --------------
TOTAL ASSETS $ 14,071,606 $ 12,252,233
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,915,498 28,750 1.46% $ 7,219,978 37,005 2.06%
Borrowings 4,866,506 35,368 2.88 3,759,431 33,797 3.56
------------- ----------- ---- -------------- --------- -----
Total interest-bearing liabilities 12,782,004 64,118 2.00 10,979,409 70,802 2.57
Noninterest-bearing liabilities 83,574 72,719
------------- --------------
TOTAL LIABILITIES 12,865,578 11,052,128
Capital securities and preferred stock of
subsidiary corporation 123,475 155,950
Shareholders' equity 1,082,553 1,044,155
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,071,606 $ 12,252,233
============= ----------- ============= ---------
Fully-taxable net interest income 100,989 102,862
Less: Fully-taxable equivalent adjustments (370) (297)
----------- ---------
Net interest income $ 100,619 $ 102,565
=========== =========
Interest-rate spread 3.06% 3.52%
==== ======
Net interest margin 3.10% 3.61%
==== =====
(a) For purposes of this computation, unrealized gains of $90.0 million and
$54.0 million for 2003 and 2002, respectively, are excluded from the
average balance for rate calculations.
(b) On a fully tax-equivalent basis.
42
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002
Fully Tax- Fully Tax-
Average Equivalent Average Equivalent
(Dollars in thousands) Balance Interest (d) Yield Balance Interest (d) Yield
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans and loans held for sale $ 8,753,421 $ 236,667 5.41% $ 7,149,701 $ 225,522 6.31%
Securities and short-term investments 4,202,817 98,231 4.77(c) 4,090,213 119,539 5.91(c)
------------- ----------- ---- ------------- ----------- ----
Total interest-earning assets 12,956,238 334,898 5.20 11,239,914 345,061 6.16
----------- -----------
Noninterest-earning assets 942,439 845,076
------------- -------------
TOTAL ASSETS $ 13,898,677 $ 12,084,990
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,757,401 58,168 1.51% $ 7,122,317 76,618 2.17%
Borrowings 4,872,451 70,721 2.89 3,697,055 68,794 3.70
------------- ----------- ---- ------------- ----------- ----
Total interest-bearing liabilities 12,629,852 128,889 2.04 10,819,372 145,412 2.69
Noninterest-bearing liabilities 75,137 79,751
------------- -------------
TOTAL LIABILITIES 12,704,989 10,899,123
Capital securities and preferred stock of
subsidiary corporation 127,133 157,754
Shareholders' equity 1,066,555 1,028,113
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,898,677 $ 12,084,990
============= ----------- ============== -----------
Fully-taxable net interest income 206,009 199,649
Less: Fully-taxable equivalent adjustments (714) (601)
----------- -----------
Net interest income $ 205,295 $ 199,048
=========== ===========
Interest-rate spread 3.16% 3.47%
==== ====
Net interest margin 3.20% 3.56%
==== ====
(c) For purposes of this computation, unrealized gains of $88.3 million and
$46.5 million for 2003 and 2002, respectively, are excluded from the
average balance for rate calculations.
(d) On a fully tax-equivalent basis.
43
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 JUNE 30 SIX MONTHS ENDED JUNE 30,
2003 V. 2002 2003 V. 2002
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
(In thousands) Rate Volume Total Rate Volume Total
- ------------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans and loans held for sale $(18,488) 23,426 4,938 (35,003) 46,148 11,145
Securities and short-term investments (13,990) 495 (13,495) (24,470) 3,162 (21,308)
- -----------------------------------------------------------------------------------------------------------------------
Total (32,478) 23,921 (8,557) (59,473) 49,310 (10,163)
- -----------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (11,587) 3,332 (8,255) (24,924) 6,474 (18,450)
Borrowings (7,135) 8,706 1,571 (16,949) 18,876 1,927
- -----------------------------------------------------------------------------------------------------------------------
Total (18,722) 12,038 (6,684) (41,873) 25,350 (16,523)
- -----------------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $(13,756) 11,883 (1,873) (17,600) 23,960 6,360
- -----------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $5.0 million and $10.0 million for the three
and six month periods ended June 30, 2003 compared to $4.0 million and $8.0
million for the same periods 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 low level of economic activity. At June 30, 2003 and December
31, 2002, the allowance for loan losses totaled $119.2 million and $116.8
million, or 1.37% and 1.48% of total loans, and represented 228% 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 36 through 40 of this report.
NONINTEREST INCOME
Noninterest income for both the three and six months ended June 30, 2003
increased from the same period a year earlier. Deposit fees increased for both
periods as a result of increased insufficient funds fees, cash management fees
and ATM fees. The increases in insurance revenue are primarily attributable to
the Mathog acquisition and increased premiums. Loan fees increased primarily due
to the acquisitions of Whitehall in August 2002 and BIC, offset by writedowns of
mortgage servicing rights. The writedowns of mortgage servicing rights totaled
$1.8 million and $2.6 million for the three and six months ended June 30, 2003,
respectively. The increases in financial advisory services revenue resulted from
increased business valuation revenues at Duff & Phelps. Wealth and investment
services revenue increases resulted principally from the acquisition of Fleming
in October of 2002. Gains on sales of loans and loan servicing increased
substantially in 2003 over the same periods in 2002. The increases resulted from
the increase in Webster's mortgage banking business in 2003 as a result of the
low interest rate environment during the current year and the expansion of
Webster's National Wholesale Lending Group. Gains on sale of securities also
increased substantially during the second quarter and first half of 2003 over
the same periods a year earlier. On a linked quarter basis, the $6.1 million
increase in security gains offset the $6.0 million reduction of interest income
in the securities portfolio.
44
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NONINTEREST EXPENSES
Noninterest expense increased for the second quarter of 2003 to $93.2 million,
up from $78.8 million a year earlier and flat from the first quarter of 2003,
which totaled $92.8 million. Noninterest expense for the first six months of
2003 increased to $186.0 million from $155.0 million a year earlier. The effect
of recent acquisitions accounted for significant portions of the growth in
expenses; $5.8 million during the second quarter and $11.2 million during the
first half of 2003. A majority of the remaining increases occurred in salaries
and benefits expense. The growth in salaries largely reflect the effects of
annual merit increases and strategic growth initiatives made to support the
expansion of the mortgage banking business, the addition of four de novo
branches and an increase in the equipment financing division staff. The
increases in benefits resulted from the higher cost of medical and pension
plans.
During 2002, Webster began to expense the cost of employee and non-employee
director stock options 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 stock option compensation costs. By electing to use
the fair value method provisions of SFAS No. 123, compensation expense has been
recorded for employee and non-employee director stock option grants, commencing
with grants made from January 1, 2002. For the second quarter and six months of
2003, compensation expense recognized for stock options granted during 2002 and
2003 was $1.1 million and $2.0 million before taxes, respectively. Refer to Note
2 of Notes to Consolidated Interim Financial Statements for further information
on stock-based compensation.
INCOME TAXES
Tax expense for the three and six month periods ended June 30, 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 and six months ended June 30, 2003 and 2002 were approximately 33.1%
and 33.3% and 31.6% and 31.2%, 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 34 and 35 under the caption
"Asset/Liability Management and Market Risk".
45
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------
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-15(e)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of the end of the period covered by this report. Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to any material information relating to the
Company and its subsidiaries required to be included in the Company's Exchange
Act filings.
There were no significant changes made in the Company's internal controls over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected or is reasonably likely to materially
affect, the Company's internal controls over financial reporting 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.
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) Not applicable.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------------
Not applicable.
46
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on April 24, 2003.
(b) The following individuals were elected as directors at the annual
meeting Roger A. Gelfenbien, a new director and directors Robert
A. Finkenzeller and Michael G. Morris were re-elected for three
year terms. The other continuing directors are: Joel S. Becker,
William T. Bromage, George T. Carpenter, John J. Crawford, C.
Michael Jacobi, John F. McCarthy, and James C. Smith.
(c) The following matters were voted upon and approved by the
Registrant's shareholders at the 2003 Annual Meeting of
Shareholders on April 24, 2003: (i) the election of three
directors to serve for three-year terms (Proposal 1) and (ii) the
amendment of Webster Financial Corporation's 1992 Stock Option
Plan to increase the number of shares of common stock available
for issuance thereunder by 2,200,000 shares and to extend the term
of the 1992 Stock Option Plan to March 20, 2013 (Proposal 2);
(iii) the approval of the Qualified Performance-Based Compensation
Plan for an additional five year term (Proposal 3); and (iv) the
ratification of the appointment of KPMG LLP as independent
auditors of the Company for the Fiscal Year ending December 31,
2003 (Proposal 4).
The votes for the above-listed proposals were as follows:
Proposal 1
----------
Robert A. Finkenzeller received 38,024,309 votes for election and
909,517 votes were withheld; Roger A. Gelfenbien received
38,254,214 votes for election and 679,611 votes were withheld; and
Michael G. Morris received 37,927,046 votes for election and
906,780 votes were withheld; There were no abstentions or broker
non-votes for any of the nominees.
Proposal 2
----------
Shareholders cast 26,015,261 votes for, 4,670,559 votes against
and 306,652 abstentions.
Proposal 3
----------
Shareholders cast 34,520,183 votes for, 4,151,464 votes against
and 262,164 abstentions.
Proposal 4
----------
Shareholders cast 37,496,818 votes for, 1,290,503 votes against
and 146,499 abstentions.
(d) Not applicable.
47
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
- -------------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------------
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, signed by the Company's Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, signed by the Company's Chief Financial Officer.
32.1 Written Statement pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by the Company's Chief Executive Officer.
32.2 Written Statement pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by the Company's Chief Financial Officer.
(b) Reports on Form 8-K
None
48
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: August 12, 2003 By: /s/ William J. Healy
-------------------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
49