The following is a discussion of commercial loans by each of Webster’s commercial lending divisions.
At September 30, 2003 and December 31, 2002, the Specialized Lending portfolio totaled $198.2 million and $299.8 million, respectively, a decrease of 33.9% of funded loans against commitments of $351.4 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 a 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. During the third quarter, specialized loans further decreased 22% primarily due to payments and sales that totaled approximately $50.0 million. At September 30, 2003, December 31, 2002 and September 30, 2002, cable, wireless communications and other telecommunications loans totaled $68.8 million, $105.1 million and $126.8 million, respectively, less than 1% of the Webster total loan portfolio. At September 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.
Webster Financial Corporation and Subsidiaries
Additionally, the portfolio contained $85.3 million and $84.9 million of funded Collateralized Loan Obligations (“CLOs”) at September 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 $492.8 million of loans that are also monitored by the Shared National Credit (“SNC”) program against commitments of $1.1 billion at September 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.
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 September 30, 2003 and December 31, 2002, the SBB portfolio, which includes both commercial and commercial real estate loans, was approximately $337.3 million and $326.3 million, respectively. The third quarter showed an increase of 3.4% over year end; this reflects an improved trend over the prior seven quarters due principally to improved retention efforts and more focused calling activity. Originations totaled $47.8 million and $107.1 million, for the third quarter and nine months of 2003, respectively, as compared to $36.4 million and $94.9 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 $488.9 million at September 30, 2003 compared with $420.0 million at December 31, 2002, an increase of 16.4%. Center Capital originated $70.6 million and $194.7 million in loans during the third quarter and nine months of 2003, respectively, compared to $58.5 million and $167.7 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 Long Island, New York City and Northern New Jersey areas. At September 30, 2003, total loans outstanding were $52.5 million. Loans originated for the third quarter and nine months of 2003, totaled $37.5 million and $94.3 million, respectively.
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 acquisition, development and construction loans to residential builders. At September 30, 2003 and December 31, 2002, outstanding commercial real estate loans totaled $1.2 billion and $1.0 billion, respectively, an increase of 15.3% primarily attributable to new relationships. Included in these loans are owner-occupied loans originated by the Middle Market and Small Business Banking Divisions of $353.2 million and $336.4 million at September 30, 2003 and December 31, 2002, respectively.
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Webster Financial Corporation and Subsidiaries
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 third quarter and first nine months of 2003, Webster originated $91.7 million and $262.7 million of commercial real estate loans, an increase of $6.1 million, or 2.4%, from the nine months period a year earlier.
Consumer Lending
At September 30, 2003 and December 31, 2002, consumer loans totaled $2.1 billion and $1.7 billion, respectively. Consumer loan volume increased significantly in 2002 and, at December 31, 2002 represented 21.8% of the total loan portfolio. This growth continued during the first nine months of 2003, as loans grew $433.7 million or 25.5% to $2.1 billion, and comprised 23.4% of the loan portfolio at September 30, 2003. The growth occurred in home equity credit lines and fixed rate loans and is attributable to the lower interest rate environment and the expansion of lending into states contiguous to Connecticut and other targeted states using the National Wholesale Mortgage network of regional offices as a distribution channel. Originations during the third quarter and nine months of 2003 totaled $336.2 million and $1.0 billion, compared to $198.0 million and $716.5 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 September 30, 2003 and December 31, 2002, the investment portfolio totaled $4.3 billion and $4.1 billion, respectively. The increase in the portfolio was primarily the result of the investment of a portion of the proceeds from the $200 million subordinated note issuance. At both September 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 $527.4 million, or 6.9%, to $8.1 billion at September 30, 2003 from December 31, 2002 and $780.1 million or 10.6% from September 30, 2002. The increases primarily occurred in the lower cost deposits. These changes reflect the success of Webster’s strategic plan, which calls for increasing these lower cost deposits, as a percentage of total deposits. The percentage of lower cost deposits increased to 66.9% at September 30, 2003 from 64.6% at December 31, 2002 and from 63.0% at September 30 a year ago. The growth in the first nine 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. See Note 10 of Notes to Consolidated Interim Financial Statements for additional information.
Borrowed Funds
Total borrowed funds increased $552.0 million, or 12.4%, to $5.0 billion at September 30, 2003 from December 31, 2002. As growth in loan and security balances outpaced the growth in deposits, Webster increased its wholesale borrowing balances to fund its growth. See Notes 11, 12 and 13 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
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Webster Financial Corporation and Subsidiaries
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 September 30, 2003 represents a reasonable level of risk.
The following table summarizes the estimated economic value of Webster’s assets, liabilities and hedges at September 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 |
|
| September 30, 2003 | | | | | | | | | | |
| Assets | $ | 14,608,783 | | 14,488,194 | | 223,052 | | | (322,301 | ) |
| Liabilities | | 13,505,341 | | 13,586,935 | | 300,613 | | | (252,013 | ) |
| Off-balance sheet contracts | | — | | 16,610 | | 27,419 | | | (25,668 | ) |
| |
|
| Net equity | | 1,103,442 | | 917,869 | | (50,142 | ) | | (95,956 | ) |
| Net change as % of Tier 1 Capital | | | | | | (5.6 | )% | | (10.7 | )% |
| | | | | | | | | | | |
| December 31, 2002 | | | | | | | | | | |
| Assets | $ | 13,468,004 | | 13,397,462 | | 120,111 | | | (224,521 | ) |
| Liabilities | | 12,432,546 | | 12,612,250 | | 316,798 | | | (262,972 | ) |
| Off-balance sheet contracts | | — | | 24,957 | | 16,461 | | | (15,942 | ) |
| |
|
| Net equity | | 1,035,458 | | 810,169 | | (180,226 | ) | | 22,509 | |
| Net change as % of Tier 1 Capital | | | | | | (22.1 | )% | | 2.8 | % |
The book value of assets exceeded the estimated market value at September 30, 2003 and December 31, 2002 because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $315.6 million and $297.4 million, respectively.
As noted in the table above, the estimated volatility in economic value of equity has changed favorably from year end. The yield curve between December 31, 2002 and September 30, 2003 remained relatively constant, but the duration of assets extended 0.7 years while liabilities shortened 0.4 years.
The estimated impact on Webster’s net income, as of September 30, 2003, for the subsequent twelve month period, if interest rates instantaneously increase or decrease by 100 basis points was an increase of 0.2% and a decrease of 2.1%, respectively. The estimated impact, as of December 31, 2002, was an increase of 7.1% and a decrease of 12.8%, respectively.
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Webster Financial Corporation and Subsidiaries
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, however, 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 prepared to respond to changing conditions.
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 September 30, 2003 and December 31, 2002, the Bank had FHLB advances outstanding of $2.1 billion and $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 September 30, 2003. In addition, the Bank had unpledged securities that, if necessary, could have been used to increase borrowing capacity at the FHLB by $861 million or used 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 September 30, 2003, the Bank had $164.4 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 September 30, 2003, Webster has repurchased 1,849,638 shares of its common stock under the buyback program with 550,362 remaining shares to be repurchased. During the third quarter of 2003, 137,400 shares were repurchased at a total cost of $5.2 million, for an average per share cost of $37.77.
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.
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.
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Webster Financial Corporation and Subsidiaries
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 September 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 through 36 of Webster’s 2002 Annual Report on Form 10-K for additional information.
Nonperforming Assets
The amount of nonperforming assets decreased to $46.1 million, or 0.32% of total assets, at September 30, 2003 from $50.0 million, or 0.37% of total assets, at December 31, 2002 and $72.2 million, or 0.54% of total assets, at September 30, 2002. During 2003, nonperforming assets declined $4.0 million. The primary cause of the decline occurred in commercial loans held for sale, as the result of cash payments received. Declining commercial real estate nonperformers were replaced with new commercial loan credits added as a result of the recent annual review of syndicated portfolio.
The decline in nonperforming assets at September 30, 2003 from a year earlier occurred primarily in the specialized lending area. During the fourth quarter of 2002, five substandard syndicated telecommunication credits totaling $25.8 million were sold or written down to current market and transferred to held for sale. As a result of this action, the nonperforming loan balance was reduced and nonperforming commercial loan held for sale balance was increased. As of September 30, 2003, all five loans have been sold or charged off with the last two held for sale loans sold during the third quarter at a gain of $4.2 million.
The following table details Webster’s nonperforming assets:
|
| | | September 30, | | December 31, | | September 30, |
| (In thousands) | | 2003 | | 2002 | | 2002 |
|
| Loans accounted for on a nonaccrual basis: | | | | | | | |
| Commercial: | | | | | | | |
| Commercial banking | | $ | 15,676 | | 15,486 | | 17,380 |
| Specialized lending | | | 6,493 | | 3,399 | | 27,231 |
| Equipment financing | | | 8,241 | | 6,586 | | 5,493 |
|
| Total commercial | | | 30,410 | | 25,471 | | 50,104 |
| Commercial real estate | | | 1,940 | | 9,109 | | 9,207 |
| Residential | | | 7,087 | | 7,263 | | 5,521 |
| Consumer | | | 718 | | 894 | | 1,062 |
|
| Total nonaccruing loans | | | 40,155 | | 42,737 | | 65,894 |
|
| Nonaccruing loans held for sale: | | | | | | | |
| Commercial | | | — | | 3,706 | | — |
|
| Loans past due 90 days or more and accruing: | | | | | | | |
| Commercial | | | 995 | | 515 | | 1,620 |
| Commercial real estate | | | 353 | | — | | 917 |
| Equipment financing | | | — | | — | | 66 |
|
| Total loans past due 90 days or more and accruing | | | 1,348 | | 515 | | 2,603 |
| Foreclosed Properties: | | | | | | | |
| Residential and consumer | | | 541 | | 509 | | 698 |
| Commercial | | | 4,019 | | 2,568 | | 3,007 |
|
| Total foreclosed property | | | 4,560 | | 3,077 | | 3,705 |
|
| Total nonperforming assets | | $ | 46,063 | | 50,035 | | 72,202 |
|
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Webster Financial Corporation and Subsidiaries
The allowance for loan losses at September 30, 2003 was $117.7 million and represented 284% of nonperforming loans and 1.29% 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 $116.1 million or 170% of nonperforming loans and 1.45% of total loans at September 30, 2002. For additional information on the allowance, see Note 7 of Notes to Consolidated Interim Financial Statements on page 15 elsewhere in this report.
Other Past Due Loans
The following table sets forth information as to loans past due 30–89 days.
| | September 30, 2003 | | December 31, 2002 | | September 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 | $ | 10,916 | | .12 | % | | $ | 13,318 | | 0.17 | % | | $ | 14,865 | | 0.18 | % |
| Commercial | | 6,854 | | .08 | | | | 21,894 | | 0.28 | | | | 13,238 | | 0.17 | |
| Commercial real estate | | 3,014 | | .03 | | | | 21,324 | | 0.27 | | | | 2,916 | | 0.04 | |
| Consumer | | 4,719 | | .05 | | | | 6,757 | | 0.08 | | | | 5,128 | | 0.06 | |
|
| Total | $ | 25,503 | | .28 | % | | $ | 63,293 | | 0.80 | % | | $ | 36,147 | | 0.45 | % |
|
The overall decrease in loans past due 30-89 days of $37.8 million at September 30, 2003 from December 31, 2002 is primarily due to a reduction of $18.3 million in commercial real estate loans as a result of five loan relationships totaling $14.4 million that were current at September 30, 2003, but were past due at December 31, 2002. A reduction of $15.0 million in commercial loans is primarily due to six loan relationships totaling $11.9 million that were current at September 30, 2003, but were past due at December 31, 2002.
Troubled Debt Restructurings
At September 30, 2003 and December 31, 2002, the Bank had total accruing troubled debt restructurings of approximately $579,000 and $1.0 million, respectively. This compares to $3.0 million at September 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 nine months ended September 30, 2003 under the restructured terms totaled $6,449 and $22,906, respectively, as compared to $8,865 and $30,075, respectively, that would have been booked under their original terms. At September 30, 2003, the $579,000 of debt restructurings were performing in accordance with their restructured terms and are not included in nonperforming loans.
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Webster Financial Corporation and Subsidiaries
Classified Loans
Webster Bank employs a dynamic risk rating system, designed to reflect the changes in the credit risk profile of each loan. The credit risk profile assesses the risks associated with both the borrower and the related loan facility. The Bank’s rating system includes Classified rating categories which correspond directly to the regulatory definitions for Substandard, Doubtful, and Loss rated loans.
The following table summarizes Webster’s classified loans, including nonperforming loans at September 30, 2003, December 31, 2002 and September 30, 2002.
| | | | | | | | Commercial | | | | |
| | | | | | | |
| | | | |
| | | | | | | | Commercial | | | | | | |
| (In thousands) | | Total | | | Residential | | Banking* | | Specialized | | CRE** | | Consumer |
|
| September 30, 2003 | | | | | | | | | | | | | |
| Substandard: | | | | | | | | | | | | | |
| Accruing | $ | 69,216 | | | 802 | | 50,401 | | 18,013 | | — | | — |
| Nonaccruing | | 36,365 | | | 7,058 | | 23,551 | | 5,133 | | — | | 623 |
|
| Total substandard | | 105,581 | | | 7,860 | | 73,952 | | 23,146 | | — | | 623 |
| Doubtful: | | | | | | | | | | | | | |
| Nonaccruing | | 3,792 | | | 30 | | 2,307 | | 1,360 | | — | | 95 |
| Loss | | — | | | — | | — | | — | | — | | — |
|
| Total classified loans | $ | 109,373 | | | 7,890 | | 76,259 | | 24,506 | | — | | 718 |
|
| Classified as a percent of loans | | 1.2 | % | | 0.2 | | 4.4 | | 8.6 | | — | | — |
|
| 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 |
|
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Webster Financial Corporation and Subsidiaries
| | | | | | | Commercial | | | | |
| | | | | | |
| | | | |
| | | | | | | Commercial | | | | | | |
| (In thousands) | | Total | | Residential | | Banking* | | Specialized | | CRE** | | Consumer |
|
| September 30, 2002 | | | | | | | | | | | | |
| Substandard: | | | | | | | | | | | | |
| Accruing | $ | 102,436 | | 1,478 | | 65,682 | | 35,227 | | — | | 49 |
| Nonaccruing | | 62,170 | | 5,408 | | 31,979 | | 23,832 | | — | | 951 |
|
| Total substandard | | 164,606 | | 6,886 | | 97,661 | | 59,059 | | — | | 1,000 |
| Doubtful: | | | | | | | | | | | | |
| Accruing | | 3 | | — | | — | | — | | — | | 3 |
| Nonaccruing | | 3,724 | | 113 | | 101 | | 3,399 | | — | | 111 |
|
| Total doubtful | | 3,727 | | 113 | | 101 | | 3,399 | | — | | 114 |
| Loss | | — | | — | | — | | — | | — | | — |
|
| Total classified loans | $ | 168,333 | | 6,999 | | 97,762 | | 62,458 | | — | | 1,114 |
|
| Classified as a percent of loans | | 2.1 | % | 0.2 | | 6.7 | | 14.4 | | — | | 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.
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. At September 30, 2003 and December 31, 2002, classified loans, including nonperforming loans, totaled $109.4 million and $113.0 million, respectively. Total classified loans decreased $3.6 million from $113.0 million at June 30, 2003. Total classified loans as a percentage of total loans decreased to 1.2% at September 30, 2003 from 1.3% at June 30, 2003, principally due to reduced levels of classified loans in the commercial portfolios.
The decline in classified loans at September 30, 2003 from a year earlier was $59.0 million. $25.8 million of the decline was the result of the previously mentioned telecommunication syndicated credit sale and writedown. As discussed in the syndicated lending area in the Financial Condition section of this report, Webster further reduced its exposure in this area. See page 34 for details.
The total of nonperforming loans included in classified loans at September 30, 2003 was $40.2 million, down $2.6 million from year end and $25.7 million from September 30, 2002. The remaining classified loans of $69.2 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.
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Webster Financial Corporation and Subsidiaries
RESULTS OF OPERATIONS
A comparison of the three and nine months periods ended September 30, 2003 and 2002.
General
Net income for the three and nine months ended September 30, 2003, was $41.3 million, or $.89 per diluted share and $121.9 million or $2.63 per diluted share respectively. This compares to $40.4 million, or $.84 per diluted share and $113.3 million or $2.31 per diluted share respectively, for the same periods a year earlier. During the second quarter of 2002, the Company completed a review of the carrying value of 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 nine months of 2002 net income would have been $120.6 million or $2.46 per diluted share.
Net income for the current quarter and nine months was driven by a growth in total revenues. Total revenue, consisting of net interest income and total noninterest income, rose approximately 11.3% and 12.4%, 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 $18.4 million and $48.7 million, respectively. These increases were the direct result of higher fee-based revenues, which increased 45.5% and 35.9%, respectively, over the same periods a year ago, and gains on the sale of investment securities that increased for the current nine month period. The LJF acquisition completed in July 2003, the Mathog and BIC acquisitions completed in January 2003 and the Whitehall and Fleming acquisitions completed in the latter half of 2002 contributed 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 in noninterest income revenues.
Net interest income for the current quarter and nine month period 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 nine month period 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.
Net Interest Income
Net interest income declined slightly for the three months ended September 30, 2003 and increased slightly for the nine months from the same periods in the previous year. The net interest margin declined to 2.99% from 3.52% for the third quarter and to 3.13% from 3.55% for the first nine months. The declines in net interest margin resulted from significantly lower interest rates during the 2003 periods as reflected in Webster’s net interest margin. Income generated from increased earning assets was insufficient to offset the decline caused by the declining interest rates.
Webster anticipates that the decline in net interest margin has ended and will begin to rise in the fourth quarter and 2004. 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 third quarter of 2003 decreased $12.3 million, or 7.1%, from the third quarter of the prior year. The decline is primarily due to a decrease in the yield on earning assets, which declined by 118 basis points. Declines occurred in both the loan and loans held for sale portfolios, where yields dropped 92 and 51 basis points, respectively, compared to the third quarter a year ago. The yield on loans declined as a result of the low interest rate environment during 2003, which resulted in an accelerated level of mortgage prepayments and new loans were priced at significantly lower yields. Declines also occurred in both the securities and short-term investments portfolio, where yields decreased 175 and 12 basis points, respectively compared to the same quarter in the previous year. The investment
43
Webster Financial Corporation and Subsidiaries
portfolio was similarly impacted by the low interest rate environment as mortgage related securities prepaid and proceeds were reinvested at significantly lower rates. This prepayment in the mortgage security portfolio resulted in incremental acceleration of premium amortization as amortization in the third quarter was $6.2 million, compared to $600,000 in the same period a year ago, 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 $1.8 billion.
Total interest income for the nine months of 2003 decreased $22.6 million, or 4.4%, from the first nine months of the prior year. This decline is similarly due to a decrease in the yield, which declined by 103 basis points. Declines occurred in both the loan and loans held for sale portfolios, where yields dropped 91 and 24 basis points, respectively, compared to the first nine months a year ago. Declines also occurred in the securities portfolio, where yields decreased 135 basis points, respectively, compared to the same period in the previous year. The decline in yields resulted from the same factors that affected the third quarter of 2003. Premium amortization in the investment portfolio was $14.3 million for the first nine months of 2003 compared to $1.1 million in the same period a year earlier. 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 nine months of 2003.
Interest Expense
Total interest expense for the third quarter of 2003 decreased $10.6 million, or 14.9%, from the third quarter of 2002. The decrease was primarily due to a 68 basis point decline in the overall cost of interest-bearing liabilities. The cost of deposits and borrowings decreased 64 and 85 basis points, respectively, compared to the third quarter a year ago. The low interest rate environment was the primary factor for this decline as existing and new deposits 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 nine months of 2003 decreased $27.2 million, or 12.5%, from the first nine months of 2002. The decrease was primarily due to a 66 basis point decline in the overall cost of interest-bearing liabilities. The cost of deposits and borrowings decreased 66 and 83 basis points, respectively, compared to the first nine 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.
44
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 September 30, |
|
| | | 2003 | | 2002 |
| (Dollars in thousands) | | Average Balance | | Interest (a) | | Fully Tax- Equivalent Yield/Rate | | Average Balance | | Interest (a) | | Fully Tax- Equivalent Yield |
|
Assets | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | |
| Loans | | $ | 8,953,970 | | 114,792 | | | 5.09 | % | | $ | 7,636,246 | | | 115,846 | | | 6.01 | % |
| Loans held for sale | | | 385,059 | | 4,854 | | | 5.04 | | | | 190,867 | | | 2,646 | | | 5.55 | |
| Securities | | | 4,201,679 | | 42,408 | | | 4.04 | (b) | | | 3,946,460 | | | 55,758 | | | 5.79 | (b) |
| Short-term investments | | | 18,593 | | 56 | | | 1.18 | | | | 14,712 | | | 49 | | | 1.30 | |
| | | |
| |
| | |
| | | |
| | |
| | |
| |
Total interest-earning assets | | | 13,559,301 | | 162,110 | | | 4.75 | | | | 11,788,285 | | | 174,299 | | | 5.93 | |
| | | | | |
| | | | | | | | | |
| | | | |
| Noninterest-earning assets | | | 1,017,648 | | | | | | | | | 857,424 | | | | | | | |
| | | |
| | | | | | | | |
| | | | | | | |
Total assets | | $ | 14,576,949 | | | | | | | | $ | 12,645,709 | | | | | | | |
| | | |
| | | | | | | | |
| | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | $ | 1,042,556 | | — | | | — | % | | $ | 923,065 | | | — | | | — | % |
| Savings, Now & money market deposits | | | 4,393,262 | | 9,851 | | | 0.89 | | | | 3,617,743 | | | 13,190 | | | 1.45 | |
| Time deposit | | | 2,642,488 | | 16,973 | | | 2.55 | | | | 2,769,955 | | | 22,979 | | | 3.29 | |
| | | |
| |
| | |
| | | |
| | |
| | |
| |
Total interest-bearing deposits | | | 8,078,306 | | 26,824 | | | 1.32 | | | | 7,310,763 | | | 36,169 | | | 1.96 | |
| | | |
| |
| | | | | | |
| | |
| | | | |
| Federal Home Loan Bank advances | | | 2,319,927 | | 22,127 | | | 3.73 | | | | 2,312,409 | | | 25,348 | | | 4.29 | |
| Fed funds and repurchase agreements | | | 2,576,065 | | 7,486 | | | 1.14 | | | | 1,619,238 | | | 7,102 | | | 1.72 | |
| Other long-term debt | | | 326,000 | | 4,330 | | | 5.31 | | | | 126,000 | | | 2,790 | | | 8.86 | |
| | | |
| |
| | |
| | | |
| | |
| | |
| |
Total borrowings | | | 5,221,992 | | 33,943 | | | 2.55 | | | | 4,057,647 | | | 35,240 | | | 3.40 | |
| | | |
| |
| | |
| | | |
| | |
| | |
| |
Total interest-bearing liabilities | | | 13,300,298 | | 60,767 | | | 1.80 | | | | 11,368,410 | | | 71,409 | | | 2.48 | |
| Noninterest-bearing liabilities | | | 81,836 | | | | | | | | | 76,724 | | | | | | | |
| | | |
| | | | | | | | |
| | | | | | | |
Total liabilities | | | 13,382,134 | | | | | | | | | 11,445,134 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Capital securities and preferred stock of subsidiary corporation | | | 131,220 | | | | | | | | | 144,041 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Shareholders’ equity | | | 1,063,595 | | | | | | | | | 1,056,534 | | | | | | | |
| | | |
| | | | | | | | |
| | | | | | | |
Total liabilities and shareholders’ equity | | $ | 14,576,949 | | | | | | | | $ | 12,645,709 | | | | | | | |
| | | |
| | | | | | | | |
| | | | | | | |
| Fully tax-equivalent net interest income | | | | | 101,343 | | | | | | | | | | 102,890 | | | | |
Less: tax equivalent adjustments | | | | | (414 | ) | | | | | | | | | (300 | ) | | | |
| | | | | |
| | | | | | | | | |
| | | | |
Net interest income | | | | | 100,929 | | | | | | | | | | 102,590 | | | | |
| | | | | |
| | | | | | | | | |
| | | | |
Interest-rate spread | | | | | | | | 2.95 | % | | | | | | | | | 3.45 | % |
| | | | | | | | |
| | | | | | | | | |
| |
Net interest margin | | | | | | | | 2.99 | % | | | | | | | | | 3.52 | % |
| | | | | | | | |
| | | | | | | | | |
| |
| (a) | On a fully tax-equivalent basis. |
| |
| (b) | For purposes of this computation, unrealized loss of $561,000 for 2003 and unrealized gain of $54.0 million for 2002, are excluded from the average balance for rate calculations. |
45
Webster Financial Corporation and Subsidiaries
| | Nine months ended September 30, |
|
| | | | | 2003 | | | | | | | | | 2002 | | | | |
| | | | | | | | | Fully Tax- | | | | | | | | | Fully Tax- |
| | | Average | | | | | | Equivalent | | | Average | | | | | | Equivalent |
| (Dollars in thousands) | | Balance | | Interest(a) | | Yield/Rate | | | Balance | | Interest(a) | | Yield |
| | | | | | | | | | | | | | | | | | | | | | |
|
| Assets | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | |
| Loans | $ | 8,608,235 | | | 342,793 | | | | 5.29 | % | | $ | 7,254,589 | | | 338,927 | | | | 6.20 | % |
| Loans held for sale | | 342,533 | | | 13,520 | | | | 5.26 | | | | 123,397 | | | 5,087 | | | | 5.50 | |
| Securities | | 4,185,538 | | | 140,521 | | | | 4.54 | (b) | | | 4,024,696 | | | 175,048 | | | | 5.89 | (b) |
| Short-term investments | | 23,161 | | | 174 | | | | 0.99 | | | | 22,031 | | | 298 | | | | 1.78 | |
| | |
| | |
| | | |
| | | |
| | |
| | | |
| |
Total interest-earning assets | | 13,159,467 | | | 497,008 | | | | 5.05 | | | | 11,424,713 | | | 519,360 | | | | 6.08 | |
| | | | | |
| | | | | | | | | | |
| | | | | |
| Noninterest-earning assets | | 967,783 | | | | | | | | | | | 849,422 | | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
Total assets | $ | 14,127,250 | | | | | | | | | | $ | 12,274,135 | | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | $ | 994,803 | | | — | | | | — | % | | $ | 880,540 | | | — | | | | — | % |
| Savings, Now & money market deposits | | 4,218,937 | | | 32,403 | | | | 1.03 | | | | 3,458,844 | | | 36,725 | | | | 1.42 | |
| Time deposit | | 2,651,806 | | | 52,589 | | | | 2.56 | | | | 2,846,438 | | | 76,062 | | | | 3.57 | |
| | |
| | |
| | | |
| | | |
| | |
| | | |
| |
Total interest-bearing deposits | | 7,865,546 | | | 84,992 | | | | 1.44 | | | | 7,185,822 | | | 112,787 | | | | 2.10 | |
| | |
| | |
| | | | | | | |
| | |
| | | | | |
| Federal Home Loan Bank advances | | 2,428,287 | | | 69,204 | | | | 3.76 | | | | 2,324,385 | | | 77,626 | | | | 4.40 | |
| Fed funds and repurchase agreements | | 2,245,481 | | | 20,521 | | | | 1.21 | | | | 1,368,187 | | | 18,038 | | | | 1.74 | |
| Other long-term debt | | 316,476 | | | 14,939 | | | | 6.29 | | | | 126,000 | | | 8,370 | | | | 8.86 | |
| | |
| | |
| | | |
| | | |
| | |
| | | |
| |
Total borrowings | | 4,990,244 | | | 104,664 | | | | 2.77 | | | | 3,818,572 | | | 104,034 | | | | 3.60 | |
| | |
| | |
| | | |
| | | |
| | |
| | | |
| |
Total interest-bearing liabilities | | 12,855,790 | | | 189,656 | | | | 1.96 | | | | 11,004,394 | | | 216,821 | | | | 2.62 | |
| Noninterest-bearing liabilities | | 77,393 | | | | | | | | | | | 78,913 | | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
Total liabilities | | 12,933,183 | | | | | | | | | | | 11,083,307 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Capital securities and preferred stock of subsidiary corporation | | 128,510 | | | | | | | | | | | 153,132 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ equity | | 1,065,557 | | | | | | | | | | | 1,037,696 | | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
Total liabilities and shareholders’ equity | $ | 14,127,250 | | | | | | | | | | $ | 12,274,135 | | | | | | | | |
| | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Fully tax-equivalent net interest income | | | | | 307,352 | | | | | | | | | | | 302,539 | | | | | |
Less: tax equivalent adjustments | | | | | (1,128 | ) | | | | | | | | | | (901 | ) | | | | |
| | | | | |
| | | | | | | | | | |
| | | | | |
| Net interest income | | | | | 306,224 | | | | | | | | | | | 301,638 | | | | | |
| | | | | |
| | | | | | | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Interest-rate spread | | | | | | | | | 3.09 | % | | | | | | | | | | 3.46 | % |
| | | | | | | | | |
| | | | | | | | | | |
| |
| Net interest margin | | | | | | | | | 3.13 | % | | | | | | | | | | 3.55 | % |
| | | | | | | | | |
| | | | | | | | | | |
| |
| (a) | | On a fully tax-equivalent basis. |
| | | |
| (b) | | For purposes of this computation, unrealized gains of $58.4 million and $46.5 million for 2003 and 2002, respectively, are excluded from the average balance for rate calculations. |
46
Webster Financial Corporation and Subsidiaries
Net interest income can be understood in terms of the impact of changing rates and changing volumes. The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.
| | Three months ended September 30, | | Nine months ended September 30, |
| | 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 | $ | (19,110 | ) | | 18,056 | | | (1,054 | ) | | (53,724 | ) | | 57,590 | | 3,866 | |
| Loans held for sale | | (263 | ) | | 2,471 | | | 2,208 | | | (231 | ) | | 8,664 | | 8,433 | |
| Securities and short-term investments | | (17,125 | ) | | 3,782 | | | (13,343 | ) | | (41,662 | ) | | 7,011 | | (34,651 | ) |
|
| Total | | (36,498 | ) | | 24,309 | | | (12,189 | ) | | (95,617 | ) | | 73,265 | | (22,352 | ) |
|
| Interest on interest-bearing liabilities: | | | | | | | | | | | | | | | | | |
| Deposits | | (12,763 | ) | | 3,418 | | | (9,345 | ) | | (37,823 | ) | | 10,028 | | (27,795 | ) |
| Borrowings | | (858 | ) | | (439 | ) | | (1,297 | ) | | (26,874 | ) | | 27,504 | | 630 | |
|
| Total | | (13,621 | ) | | 2,979 | | | (10,642 | ) | | (64,697 | ) | | 37,532 | | (27,165 | ) |
|
| Net change in fully taxable-equivalent net interest income | $ | (22,877 | ) | | 21,330 | | | (1,547 | ) | | (30,920 | ) | | 35,733 | | 4,813 | |
|
Provision for Loan Losses
The provision for loan losses was $10.0 million and $20.0 million for the three and nine month periods ended September 30, 2003 compared to $5.0 million and $13.0 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. Net charge-offs in the third quarter of 2003 were $11.5 million, compared to $4.9 million in the same period a year earlier. The annualized net charge-off ratio for the current quarter was 0.52% of total loans, up from 0.26% a year earlier. The increase in net charge-offs is entirely attributable to a single commercial nonperforming loan. At September 30, 2003 and December 31, 2002, the allowance for loan losses totaled $117.7 million and $116.8 million, or 1.29% and 1.48% of total loans, and represented 284% 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 38 through 42 of this report.
Noninterest Income
Noninterest income for both the three and nine months ended September 30, 2003 increased from the same period a year earlier. Deposit fees increased for both periods as a result of higher insufficient funds fees, cash management fees and ATM fees. The year to date increase in insurance revenue is primarily attributable to the Mathog acquisition. Loan fees increased primarily due to the acquisitions of Whitehall and BIC, as well as an increase in prepayment penalties, offset by writedowns of mortgage servicing rights. The writedowns of mortgage servicing rights decreased in the three months ended September 30, 2003 by $509,000 and increased for the nine months ended September 30, 2003 by $1.6 million. 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
47
Webster Financial Corporation and Subsidiaries
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. See Financial Condition section elsewhere within this report for more information on Webster’s residential lending function. Also impacting the gain on loan sales was $4.2 million of gains on the sale of syndicated telecommunication loans that were held for sale. Gains on sale of securities also increased substantially during the first nine months of 2003 over the same periods a year earlier.
Noninterest Expenses
Noninterest expenses increased for the third quarter of 2003 to $93.7 million, up from $84.1 million a year earlier. Noninterest expenses for the first nine months of 2003 increased to $279.7 million from $239.2 million a year earlier. A majority of the increase occurred in salaries and benefits expense. Recent acquisitions accounted for $3.5 million of the third quarter increase and $11.2 million of the nine month increase. The remaining growth in salaries largely reflects the effects of annual merit increases and strategic growth initiatives made to support the expansion of the mortgage banking business, the addition of five 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.
The previously mentioned acquisitions also accounted for a major portion of the non-salary and benefits increase in noninterest expense. These acquisitions added $1.1 million in the third quarter and $3.9 million for the first nine months of 2003.
Also contributing to the increase in compensation expense was the adoption of SFAS No. 123. 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”. For the third quarter and first nine months of 2003, compensation expense recognized for stock options granted was $831,000 and $2.4 million before taxes, respectively, as compared to $31,000 and $542,000 for the same period a year earlier. Refer to Note 2 of Notes to Consolidated Interim Financial Statements within this report for further information on stock-based compensation.
Income Taxes
Tax expense for the three and nine month periods ended September 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 nine months ended September 30, 2003 and 2002 were approximately 33.1% and 33.2% and 32.1% and 31.5%, 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 36 through 38 under the caption “Asset/Liability Management and Market Risk”.
48
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) and 15d-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 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
49
Webster Financial Corporation and Subsidiaries
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| | (a) | | Not applicable. |
| | | | |
| | (b) | | Not applicable. |
| | | | |
| | (c) | | Not applicable. |
| | | | |
| | (d) | | Not applicable. |
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| | (a) | | Exhibits | | |
| | | | | | |
| | | | | | |
| | | | Exhibit 31.1 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer. |
| | | | | | |
| | | | Exhibit 31.2 | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Company’s Chief Financial Officer. |
| | | | | | |
| | | | Exhibit 32.1 | | Written Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer. |
| | | | | | |
| | | | Exhibit 32.2 | | Written Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Company’s Chief Financial Officer. |
| | | | | | |
| | (b) | | Reports on Form 8-K | | |
| | | | | | |
| | | | | | Current report on Form 8-K filed with the Securities and Exchange Commission on September 19, 2003. |
50
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: November 13, 2003 | | By: | | /s/ | | William J. Healy |
| | | | |
|
| | | | | | | William J. Healy |
| | | | | | | Executive Vice President and |
| | | | | | | Chief Financial Officer |
| | | | | | | Principal Financial Officer |
51
