UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
_________________________to_______________.
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
(Address of principal executive offices) (Zip Code)
(203) 753-2921
(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 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) 49,263,445
- ------------------------------ ------------------------------------------
Class Issued and Outstanding at October 31, 2001
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Statements of Condition at September 30, 2001 (unaudited) and December 31, 2000 3
Consolidated Statements of Income for the three and nine months ended September 30, 2001
and 2000 (unaudited) 4
Consolidated Statements of Shareholders' Equity for the nine month period ended September 30, 2001
(unaudited) and the year ended December 31, 2000 5
Consolidated Statements of Comprehensive Income for the three and nine months ended
September 30, 2001 and 2000 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001
and 2000 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
EXHIBIT DESCRIPTION (None for the third quarter period) 31
SIGNATURE 32
EXHIBIT INDEX 33
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL INFORMATION
- ------------------------------
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
- ---------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------- --------
ASSETS:
Cash and due from depository institutions $ 255,620 $ 265,035
Interest-bearing deposits 1,782 1,751
Securities: (Note 2 &3)
Trading, at fair value 147 6
Available for sale, at fair value 3,743,350 3,143,327
Held to maturity (fair value: $ 248,215 at December 31, 2000) -- 261,747
Loans:
Residential mortgages 3,755,401 4,146,780
Commercial and industrial 1,358,904 1,078,028
Commercial real estate 952,914 986,403
Consumer 833,998 698,807
----------- -----------
Total loans 6,901,217 6,910,018
Allowance for loan losses (96,654) (90,809)
----------- -----------
Loans, net 6,804,563 6,819,209
----------- -----------
Intangible assets 326,396 326,142
Cash surrender value of life insurance 161,690 174,295
Premises and equipment, net 84,511 94,263
Accrued interest receivable 61,808 69,733
Prepaid expenses and other assets 182,384 94,000
----------- -----------
TOTAL ASSETS $11,622,251 $11,249,508
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Checking and NOW $ 1,568,905 $ 1,603,671
Savings and MMDAs 2,291,726 1,916,543
Certificates of deposit 2,917,210 3,244,412
----------- -----------
Total retail deposits 6,777,841 6,764,626
Treasury deposits 169,741 176,896
----------- -----------
Total deposits 6,947,582 6,941,522
Federal Home Loan Bank advances 2,204,763 2,380,074
Securities sold under agreements to repurchase and other borrowings (Note 3) 1,063,240 650,151
Advance payments by borrowers for taxes and insurance 17,421 39,606
Accrued expenses and other liabilities (Note 4) 211,839 148,204
----------- -----------
Total liabilities 10,444,845 10,159,557
----------- -----------
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trusts holding solely junior subordinated debentures of
the corporation (Note 9) 150,000 150,000
Preferred stock of subsidiary corporation 9,577 49,577
Shareholders' Equity:
Common stock, $.01 par value:
Authorized - 200,000,000 shares
Issued - 49,502,742 shares at September 30, 2001 and
49,502,843 at December 31, 2000 495 495
Paid-in capital 415,967 416,334
Retained earnings 561,959 490,078
Less treasury stock at cost, 176,795 shares at September 30, 2001
and 563,417 shares at December 31, 2000 (4,604) (13,361)
Unearned compensation (3,239) (1,640)
Less Employee Stock Ownership Plan shares purchased with debt (286) (642)
Accumulated other comprehensive income (loss) 47,537 (890)
----------- -----------
Total shareholders' equity 1,017,829 890,374
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,622,251 $11,249,508
=========== ===========
See accompanying notes to consolidated interim financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME:
Loans $ 127,991 $ 139,867 $ 401,321 $ 377,000
Securities and interest-bearing deposits 60,572 57,733 178,311 165,189
------- ------- -------- --------
Total interest income 188,563 197,600 579,632 542,189
------- ------- -------- --------
INTEREST EXPENSE:
Deposits 53,627 60,376 170,765 162,445
Borrowings 41,385 51,414 137,161 138,631
------- ------- -------- --------
Total interest expense 95,012 111,790 307,926 301,076
------- ------- -------- --------
Net Interest Income 93,551 85,810 271,706 241,113
Provision for loan losses 4,000 3,200 10,400 8,600
------- ------- -------- --------
Net interest income after provision for loan
losses 89,551 82,610 261,306 232,513
------- ------- -------- --------
NONINTEREST INCOME:
Deposit service fees 14,142 13,259 41,699 35,146
Loan and loan servicing fees 5,131 5,288 13,698 11,105
Trust and investment services 4,984 4,837 13,969 13,566
Financial advisory services 3,942 -- 12,239 --
Insurance commissions 5,806 3,685 16,393 10,909
Gain on sale of securities, net 2,566 1,871 8,609 7,829
Increase in cash surrender value of life insurance 2,211 2,271 6,926 6,233
Other 1,709 1,958 8,547 6,629
------- ------- -------- --------
Total noninterest income 40,491 33,169 122,080 91,417
------- ------- -------- --------
NONINTEREST EXPENSES:
Compensation and benefits 35,827 31,235 107,506 90,751
Occupancy 6,057 6,573 19,463 17,651
Furniture and equipment 7,032 6,090 20,903 18,830
Intangible amortization 7,888 6,907 23,338 15,065
Marketing 2,045 1,778 6,428 6,577
Professional services 2,896 1,688 7,008 5,171
Branch reconfiguration -- -- 3,703 --
Capital securities (Note 9) 3,616 3,477 10,847 10,708
Other 11,840 10,853 32,529 30,001
------- ------- -------- --------
Total noninterest expenses 77,201 68,601 231,725 194,754
------- ------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of change in method of accounting 52,841 47,178 151,661 129,176
Income taxes 17,810 15,595 51,516 42,675
------- ------- -------- --------
Income before extraordinary item and cumulative effect
of change in method of accounting 35,031 31,583 100,145 86,501
Extraordinary item - early extinguishment of debt (net
of taxes) (Note 6) -- -- (1,209) --
Cumulative effect of change in method of accounting (net
of taxes) (Note 7) -- -- (2,418) --
------- ------- --------- --------
NET INCOME $ 35,031 $ 31,583 $ 96,518 $ 86,501
======= ======= ======== ========
Net Income Per Common Share: (Note 8)
Basic $0.71 $0.65 $1.97 $1.92
Diluted 0.70 0.64 1.94 1.90
Dividends paid per common share 0.17 0.16 0.50 0.46
See accompanying notes to consolidated interim financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Employee
Stock
Ownership
Unearned Plan Shares
Common Paid-in Retained Treasury Compen- Purchased
(In thousands) Stock Capital Earnings Stock sation With Debt
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 452 301,336 400,413 (3,274) -- (1,127)
- --------------------------------------------------------------------------------------------------------------------
Net income for 2000 -- -- 118,291 -- -- --
Dividends paid:
$.62 per common share -- -- (28,645) -- -- --
Allocation of ESOP shares -- 814 -- -- -- 485
Exercise of stock options 9 13,299 -- -- -- --
Common stock repurchased -- -- -- (110,797) -- --
Consideration granted for
purchase acquisitions 34 104,274 -- 99,758 -- --
Restricted stock grants, net
of amortization -- (23) (35) 952 (1,640) --
Net unrealized gain on
securities available for
sale, net of taxes -- -- -- -- -- --
Common stock retired for
purchase acquisitions -- (3,603) -- -- -- --
Other, net -- 237 54 -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642)
- --------------------------------------------------------------------------------------------------------------------
Net income for the nine months ended
September 30, 2001 -- -- 96,518 -- -- --
Dividends paid:
$.50 per common share -- -- (24,628) -- -- --
Allocation of ESOP shares -- 440 -- -- -- 356
Exercise of stock options -- (1,305) -- 9,931 -- --
Common stock repurchased -- -- -- (3,881) -- --
Consideration granted for purchase
acquisitions -- 221 -- 1,181 -- --
Restricted stock grants, net of
amortization -- 176 -- 1,311 (1,336) --
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- --
Director fee retainer plan -- 63 -- 215 (263) --
Other, net -- 38 (9) -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 $ 495 415,967 561,959 (4,604) (3,239) (286)
- --------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Compre-
hensive
Income
(In thousands) (Loss) Total
- -------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (62,133) $ 635,667
- -------------------------------------------------------------------
Net income for 2000 -- 118,291
Dividends paid:
$.62 per common share -- (28,645)
Allocation of ESOP shares -- 1,299
Exercise of stock options -- 13,308
Common stock repurchased -- (110,797)
Consideration granted for
purchase acquisitions -- 204,066
Restricted stock grants, net
of amortization -- (746)
Net unrealized gain on
securities available for
sale, net of taxes 61,243 61,243
Common stock retired for
purchase acquisitions -- (3,603)
Other, net -- 291
- -------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (890) $ 890,374
- -------------------------------------------------------------------
Net income for the nine months ended
September 30, 2001 -- 96,518
Dividends paid:
$.50 per common share (24,628)
Allocation of ESOP shares -- 796
Exercise of stock options -- 8,626
Common stock repurchased -- (3,881)
Consideration granted for purchase
acquisitions -- 1,402
Restricted stock grants, net of
amortization -- 151
Net unrealized gain on securities
available for sale, net of taxes 48,427 48,427
48,427
Director fee retainer plan -- 15
Other, net -- 29
- -------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 47,537 $ 1,017,829
- -------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended September 30,
--------------------------------
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 35,031 $ 31,583
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
the period (net of income tax effect of $31,045
and $17,502 for 2001 and 2000, respectively) 46,811 26,390
Reclassification adjustment for net gain included in
net income (net of income tax effect of $974
and $881 for 2001 and 2000, respectively) (1,468) (1,328)
- ------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 45,343 25,062
- ------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 80,374 $ 56,645
- ------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 96,518 $ 86,501
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
the period (net of income tax effect of $35,291
and $19,194 for 2001 and 2000, respectively) 53,381 28,940
Reclassification adjustment for net gain included in
net income (net of income tax effect of $3,283
and $3,708 for 2001 and 2000, respectively) (4,954) (5,590)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 48,427 23,350
- ---------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 144,945 $ 109,851
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30,
-------------------------------
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 96,518 $ 86,501
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 10,400 8,600
Provision for depreciation on premises and equipment 13,777 13,868
(Accretion) amortization of securities discounts/premiums (1,051) 657
(Accretion) amortization of loan premiums, net (2,667) 102
Amortization of intangible assets 23,338 15,065
Amortization of stock-based compensation 996 345
Amortization of hedging costs -- 2,995
Implementation of change in accounting method (Note 10) 3,614 --
Amortization of mortgage servicing rights 1,243 1,378
Gains on sale of foreclosed properties, net (674) (805)
Gains on sale of securities, net (8,237) (9,298)
Gains on the sale of loans and servicing, net (2,694) (3,503)
(Gains) losses on trading securities, net (372) 1,469
Decrease in trading securities 6 4,928
Loans originated for sale (560,226) (128,259)
Proceeds from sale of loans, originated for sale 502,033 123,745
Decrease (increase) in interest receivable 7,925 (6,871)
Increase in prepaid expenses and other assets, net (119,668) (10,614)
(Decrease) increase in interest payable (17,519) 2,580
Increase (decrease) in accrued expenses and other liabilities, net 90,388 (12,954)
Increase in cash surrender value of life insurance (6,926) (5,618)
Proceeds from life insurance contract surrender 19,531 --
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49,735 84,311
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (1,512,045) (2,111,635)
Principal collected on securities 429,485 236,371
Maturities of securities 54,993 980,179
Proceeds from sale of securities, available for sale 775,398 867,683
Decrease in interest-bearing deposits, net 7 39,598
Decrease (increase) in loans, net 307,373 (135,148)
Proceeds from sale of foreclosed properties 5,690 7,574
Purchases of premises and equipment, net (3,747) (10,398)
Net cash (paid) received for purchase acquisitions (17,263) 230,847
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 39,891 105,071
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net 6,060 (29,101)
Net (decrease) increase of FHLB advances (175,311) 25,053
Net increase (decrease) of securities sold under agreement to repurchase and
other borrowings 152,278 (54,939)
Cash dividends paid to common shareholders (24,628) (20,813)
Redemption of Series A preferred stock of subsidiary corporation (40,000) --
Decrease in advance payments for taxes and insurance, net (22,185) (25,485)
Exercise of stock options 8,626 12,259
Common stock repurchased (3,881) (109,845)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (99,041) (202,871)
- -----------------------------------------------------------------------------------------------------------------------------
Continued on next page.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
Nine months ended September 30,
-------------------------------
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (9,415) (13,489)
Cash and cash equivalents at beginning of period 265,035 245,783
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 255,620 $ 232,294
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Income taxes paid $ 30,069 $ 33,508
Interest paid 325,444 300,897
Supplemental schedule of noncash operating, investing and
financing activities:
Transfer of loans to foreclosed properties $ 4,182 $ 4,970
Reclassification of held to maturity securities to available for sale (fair
value of $248,215 at January 1, 2001) 261,747 --
- ---------------------------------------------------------------------------------------------------------------------------
Assets acquired and liabilities assumed in purchase business combinations were
as follows:
Nine months ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of noncash assets acquired in purchase acquisitions $ 247,040 $ 1,008,102
Fair value of liabilities assumed in purchase acquisitions 251,842 1,228,214
Common stock issued in purchase business combination 1,402 199,425
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
- --------------------------------------------------------------
The Consolidated Financial Statements include the accounts of Webster Financial
Corporation ("Webster" or the "Company") and its subsidiaries. The Consolidated
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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. All significant intercompany transactions have been eliminated in
consolidation. Amounts in prior period financial statements are reclassified
whenever necessary to conform to current period presentations. The results of
operations for the three and nine month periods ended September 30, 2001 are not
necessarily indicative of the results which may be expected for the year as a
whole.
The preparation of the Consolidated 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 Financial Statements and the
reported amounts of revenues and expenses for the periods presented. The actual
results of Webster could differ from those estimates. These Consolidated
Financial Statements should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2000. Material estimates that are
susceptible to near-term changes include the determination of the allowance for
loan losses and the valuation allowance for the deferred tax asset.
NOTE 2 - SECURITIES
- -------------------
Securities are classified as available for sale, held to maturity or trading.
Management determines the appropriate classification of securities at the time
of purchase. Securities are classified as held to maturity when the Company has
the intent and ability to hold the securities to maturity. Held to maturity
securities are stated at amortized cost. Securities classified as trading are
carried at fair value, with net unrealized gains and losses recognized currently
in the income statement. Securities not classified as held to maturity or
trading are classified as available for sale and are stated at fair value.
Unrealized gains and losses, net of tax, on available for sale securities are
included in accumulated other comprehensive income (loss), as a separate
component of shareholders' equity. The values at which held to maturity and
available for sale securities are reported are adjusted for amortization of
premiums or accretion of discounts over the estimated terms of the securities
using a method which approximates the level yield method. Such amortization and
accretion is included in interest income from securities. Unrealized losses on
securities are charged to earnings when the decline in fair value of a security
is judged to be other than temporary. The specific identification method is used
to determine realized gains and losses on sales of securities.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of securities follows:
(In thousands) SEPTEMBER 30, 2001 DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
------------- ------- ------ ------- --------- ------- ------ --------
TRADING SECURITIES:
Securities (a) $ -- $ 147 $ -- $ 147 $ 6 $ -- $ -- $ 6
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 2,008 3 2,011 11,042 3 -- 11,045
U.S. Government Agency -- -- -- -- 46,246 3 (353) 45,896
Municipal bonds and notes 79,572 2,047 (108) 81,511 34,401 530 (47) 34,884
Corporate bonds and notes 174,972 181 (15,614) 159,539 73,265 -- (15,379) 57,886
Equity securities (b) 167,087 5,993 (4,246) 168,834 177,061 4,501 (5,877) 175,685
Mortgage-backed securities (c) 3,240,648 91,227 (420) 3,331,455 2,796,365 29,852 (11,571) 2,814,646
Purchased interest-rate contracts -- -- -- -- 6,317 -- (3,032) 3,285
--------- ------- ------- --------- --------- ------- -------- ---------
$ 3,664,287 $99,451 $ (20,388) $3,743,350 $3,144,697 $ 34,889 $(36,259) $3,143,327
--------- ------- ------- --------- --------- ------- -------- ---------
HELD TO MATURITY PORTFOLIO (d):
U.S. Treasury Notes $ -- $ -- $ -- $ -- $ 3,786 $ 5 $ (2) $ 3,789
Municipal bonds and notes -- -- -- -- 23,267 173 (31) 23,409
Corporate bonds and notes -- -- -- -- 135,404 -- (12,879) 122,525
Mortgage-backed securities (c) -- -- -- -- 99,290 558 (1,356) 98,492
--------- ------- ------- -------- -------- ------- -------- ---------
-- -- -- -- 261,747 736 (14,268) 248,215
--------- ------- ------- -------- -------- ------- -------- ---------
Total $ 3,664,287 $99,598 $ (20,388) $3,743,497 $3,406,450 $ 35,625 $(50,527) $3,391,548
========= ======= ======== ========= ========= ======= ======== =========
(a) Stated at fair value, including the effect of option and futures positions.
(b) As of September 30, 2001, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $125.3 million, preferred stock of
$6.7 million and common stock of $36.8 million. The fair value of equity
securities at December 31, 2000 consisted of FHLB stock of $125.3 million,
preferred stock of $8.2 million and common stock of $42.2 million.
(c) Includes mortgage-backed securities, which are guaranteed by FannieMae,
Federal Home Loan Mortgage Corporation and Government National Mortgage
Association and represent participating interests in direct pass-through
pools of mortgage loans originated and serviced by the issuers of the
securities.
(d) On January 1, 2001, as permitted by the provisions of SFAS No. 133,
Webster reclassified all held to maturity securities to available for
sale securities.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- -------------------------------------------------------
At September 30, 2001, short-term borrowings through securities sold under
agreements to repurchase ("repurchase agreements") totaled $658.3 million.
Short-term borrowings through repurchase agreements averaged approximately $1.1
billion during the third quarter and the maximum amount outstanding at a
month-end during the third quarter was $1.2 billion. Repurchase agreements are
primarily collateralized by U.S. Government Agency mortgage-backed securities.
Information concerning short-term borrowings sold under agreements to repurchase
as of September 30, 2001 is summarized below:
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED AMORTIZED COST MARKET VALUE
BALANCE AT AVERAGE AVERAGE OF OF
9/30/01 INTEREST RATE MATURITY DATE COLLATERAL COLLATERAL
------------- ------------- ------------- ------------------- ----------------
$ 658,254 2.88% Less than 1 month $ 651,810 $ 666,490
NOTE 4 - ACQUISITION-RELATED EXPENSES
- -------------------------------------
The following table presents a summary of remaining acquisition-related accrued
liabilities for acquisitions that have been completed and accounted for under
the pooling of interests method. These acquisitions include DS Bancor, Inc.
("Derby") acquired January 31, 1997, People's Savings Financial Corp.
("Peoples") acquired July 31, 1997, Eagle Financial Corp. ("Eagle") acquired
April 15, 1998 and New England Community Bancorp, Inc. ("NECB") acquired
December 1, 1999.
(In thousands) Derby People's Eagle NECB Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance of acquisition-related accrued liabilities at December 31, 1999 $ 3,000 $ 400 $ 775 $ 3,300 $ 7,475
- ------------------------------------------------------------------------------------------------------------------------------------
Payments and charges against the liabilities:
Data processing contract termination (689) -- -- -- (689)
Transaction costs (includes investment bankers, attorneys & accountants) -- -- -- (193) (193)
Lease payments and other facilities costs (1,764) (205) (462) (238) (2,669)
Acquisition-related miscellaneous expenses -- -- (22) (1,202) (1,224)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance of acquisition-related accrued liabilities at December 31, 2000 $ 547 $ 195 $ 291 $ 1,667 $ 2,700
- ------------------------------------------------------------------------------------------------------------------------------------
Payments and charges against the liabilities:
Data processing contract termination (292) -- -- -- (292)
Lease payments and other facilities costs (48) (94) (291) (242) (675)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE OF ACQUISITION-RELATED ACCRUED LIABILITIES AT SEPTEMBER 30, 2001 $ 207 $ 101 $ -- $ 1,425 $ 1,733
- ------------------------------------------------------------------------------------------------------------------------------------
The remaining total accrued liability balance of $1.7 million at September 30,
2001 consists of reserves for remaining lease payments and other expenses of
closed facilities. Disposition efforts for these closed facilities are ongoing.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - BUSINESS SEGMENTS
- --------------------------
Webster has three segments for purposes of business segment reporting. These
segments are retail banking, business banking and treasury. The organizational
hierarchies that define the business segments are periodically reviewed and
revised. Results may be restated when necessary to reflect changes in the
organizational structure. The following table presents the statement of
operations and total assets for Webster's reportable segments. All segments
include the effect of funds transfer pricing.
Operating income and total assets by business segment are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS TOTAL
(IN THOUSANDS) BANKING BANKING TREASURY SEGMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 56,131 $ 16,622 $ 20,798 $ 93,551
Provision for loan losses 363 3,637 -- 4,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 55,768 12,985 20,798 89,551
Noninterest income 26,420 7,522 6,549 40,491
Noninterest expenses 52,816 13,941 6,828 73,585
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 29,372 6,566 20,519 56,457
Income taxes 9,900 2,213 6,916 19,029
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 19,472 $ 4,353 $ 13,603 $ 37,428
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,436,437 $ 1,973,351 $ 4,212,463 $ 11,622,251
THREE MONTHS ENDED SEPTEMBER 30, 2000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS TOTAL
(IN THOUSANDS) BANKING BANKING TREASURY SEGMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 67,152 $ 14,242 $ 4,416 $ 85,810
Provision for loan losses 572 2,628 -- 3,200
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 66,580 11,614 4,416 82,610
Noninterest income 23,496 2,242 7,431 33,169
Noninterest expenses 53,840 7,499 2,748 64,087
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 36,236 6,357 9,099 51,692
Income taxes 11,978 2,101 3,008 17,087
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 24,258 $ 4,256 $ 6,091 $ 34,605
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,695,757 $ 1,648,778 $ 3,912,015 $ 11,256,550
NINE MONTHS ENDED SEPTEMBER 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS TOTAL
(IN THOUSANDS) BANKING BANKING TREASURY SEGMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 178,972 $ 49,158 $ 43,576 $ 271,706
Provision for loan losses 3,452 6,948 -- 10,400
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 175,520 42,210 43,576 261,306
Noninterest income 76,482 22,321 23,277 122,080
Noninterest expenses 161,582 39,371 19,925 220,878
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item and cumulative effect of
change in method of accounting 90,420 25,160 46,928 162,508
Income taxes 30,712 8,547 15,941 55,200
- ---------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item and
cumulative effect of change in method
of accounting $ 59,708 $ 16,613 $ 30,987 $ 107,308
Extraordinary item-early extinguishment
of debt (net of taxes) -- -- (1,209) (1,209)
Cumulative effect of change in method
of accounting (net of taxes) -- -- (2,418) (2,418)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 59,708 $ 16,613 $ 27,360 $ 103,681
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,436,437 $ 1,973,351 $ 4,212,463 $ 11,622,251
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS TOTAL
(IN THOUSANDS) BANKING BANKING TREASURY SEGMENTS
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 191,744 $ 36,591 $ 12,778 $ 241,113
Provision for loan losses 1,851 6,749 -- 8,600
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 189,893 29,842 12,778 232,513
Noninterest income 58,137 12,808 20,472 91,417
Noninterest expenses 146,440 27,522 6,971 180,933
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 101,590 15,128 26,279 142,997
Income taxes 33,563 5,001 8,677 47,241
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 68,027 $ 10,127 $ 17,602 $ 95,756
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,695,757 $ 1,648,778 $ 3,912,015 $ 11,256,550
The retail banking segment includes investment and insurance services, consumer
lending and Webster Bank's (the "Bank") deposit generation and direct banking
activities, which include the operation of automated teller machines and
telebanking customer support, sales and small business banking. The retail
banking segment also includes the Bank's investment in residential real estate
loan origination, servicing, secondary marketing activities and Webster
Investment Services. The business banking segment includes the Bank's investment
in commercial and industrial loans and commercial real estate loans. The
business banking segment also includes business deposits, cash management
activities for business banking, trust activities, financial advisory services
and lease financing. The treasury segment includes the Bank's investment in
assets and liabilities managed by Treasury, which include interest-bearing
deposits, investment securities, FHLB advances, repurchase agreements and other
borrowings and government finance. During 2001, government finance was
transferred to the "treasury" segment from the "business banking" segment. For
the nine month period ended September 30, 2001, Webster recorded a $1.8 million
($1.2 million, net of taxes) charge to earnings for an extraordinary item for
the early extinguishment of debt and a $3.6 million charge ($2.4 million, net of
taxes) to earnings for the cumulative effect of a change in method of accounting
both of which occurred in the first quarter. These charges are included in the
Treasury segment.
During the 2000 period, as part of a management reorganization, Webster
consolidated its consumer banking and mortgage lending segments with its
investment and insurance services, which were previously included within the
"all other" segment category. This segment is now referred to as "retail
banking". The trust and government finance activities that were previously
included within the "all other" segment category were transferred into the
"business banking" segment.
Management allocates indirect expenses to its business segments. These expenses
include administration, finance, operations and other support related functions.
The allocations are subject to periodic adjustment as the internal management
accounting system is revised and business or product lines within the segments
change. Also, because the development and application of these methodologies is
a dynamic process, the financial results presented are periodically revised.
Net income after income taxes for the segments for the 2001 and 2000 periods
does not include expense categories that do not directly relate to the segments.
For the three and nine month periods ended September 30, 2001, expenses on the
capital securities were excluded that before taxes were $3.6 million and $10.8
million, respectively, and net after taxes were $2.4 million and $7.2 million,
respectively. For the three and nine month periods ended September 30, 2000,
expenses on the capital securities and preferred stock of subsidiary corporation
were excluded that aggregated before taxes $4.5 million and $13.8 million,
respectively, and net after taxes were $3.0 million and $9.3 million,
respectively.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
- ----------------------------------------------------------
In January 2001, Webster recorded a $1.8 million charge ($1.2 million, net of
taxes) to earnings for the early extinquishment of debt. The prepayment penalty
was incurred on seven Federal Home Loan Bank advances totaling $155.3 million
with rates between 6.30% and 8.20% and remaining maturity dates ranging from 1
month to 20 months.
NOTE 7 - CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING
- ------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. Under this Statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
SFAS No. 133, as amended by SFAS No. 137, is now effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities, an amendment to SFAS No. 133." This Statement amended the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. Upon adoption, hedging relationships must be
designated anew and documented pursuant to the provisions of this Statement. The
Company implemented SFAS No. 133 as of January 1, 2001. The implementation of
SFAS No. 133 resulted in a $3.6 million (net of tax, $2.4 million) charge to
earnings for derivatives that were deemed as "ineffective" hedges. Webster also
reclassified all held to maturity securities to available for sale as permitted
under SFAS No. 133, as amended.
NOTE 8 - NET INCOME PER COMMON SHARE
- ------------------------------------
The following tables reconcile the components of basic and diluted earnings per
share.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- -------------------------------
(In thousands, except per share data) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $ 35,031 $ 31,583 $ 96,518 $ 86,501
- -------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 49,223 48,870 49,095 44,947
- -------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ .71 $ .65 $ 1.97 $ 1.92
- -------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income $ 35,031 $ 31,583 $ 96,518 $ 86,501
- -------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 49,223 48,870 49,095 44,947
Potential common stock:
Options 706 568 666 513
- -------------------------------------------------------------------------------------------------------------------------------
Total weighted-average diluted shares 49,929 49,438 49,761 45,460
- -------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .70 $ .64 $ 1.94 $ 1.90
- -------------------------------------------------------------------------------------------------------------------------------
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At September 30, 2001 and 2000, options to purchase 434,500 and 1,132,459 shares
of common stock at exercise prices between $33.75 and $36.69 and $24.19 and
$35.38, respectively, were not considered in the computation of potential common
stock for the quarterly periods since the options' exercise prices were greater
than the average market price of Webster common stock. The average market prices
for 2001 and 2000 third quarter periods were $33.30 and $23.97, respectively.
At September 30, 2001 and 2000, options to purchase 722,505 and 1,166,253 shares
of common stock at exercise prices between $31.10 and $36.69 and $22.82 and
$35.38, respectively, were also not considered in the computation of potential
common stock for the year-to-date periods since the options' exercise prices
were greater than the average market price for Webster common stock. The average
market prices for the 2001 and 2000 year-to-date periods were $31.08 and $22.71,
respectively.
NOTE 9 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
- ---------------------------------------------------------------------------
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
- ----------------------------------------------------------------------
CORPORATION
- -----------
In 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Corporation. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997. On April 1, 1997, Eagle Financial Capital Trust I, subsequently
renamed Webster Capital Trust II ("Trust II"), completed a $50 million private
placement of 10.00% capital securities. Proceeds from the issue were invested by
Trust II in junior subordinated deferrable debentures issued by Eagle due in
2027. These debentures represent the sole assets of Trust II. The subordinated
debt securities are unsecured obligations of Webster and are subordinate and
junior in right of payment to all present and future senior indebtedness of
Webster. Webster has entered into guarantees, which together with Webster's
obligations under the subordinated debt securities and the declarations of trust
governing Trust I and Trust II, including its obligations to pay costs,
expenses, debts and liabilities (other than trust securities), provides a full
and unconditional guarantee of amounts on the capital securities. Expense on the
securities before taxes including amortization of issuance costs, for the three
month periods ended September 30, 2001 and 2000, was $3.6 and $3.5 million,
respectively, for each period and for the nine month periods ended September 30,
2001 and 2000, was $10.8 and $10.7 million, respectively, for each period.
NOTE 10 - ACCOUNTING STANDARDS
- ------------------------------
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This Statement also
supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The provisions of this Statement are to be
applied prospectively. Webster does not expect any material impact on its
financial statements when this Statement is adopted.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On August 16, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Under this Statement, the liability is discounted and the
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. The FASB issued this
Statement to provide consistency for the accounting and reporting of liabilities
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Earlier application is
permitted. Webster does not expect any material impact on its financial
statements when this Statement is adopted.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. Statement 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted the provisions of Statement 141 effective July 1, 2001 and
will adopt the provisions of Statement 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting guidance. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period. Because of the extensive effort needed to comply with
adopting Statement 142, it is not practicable at this time to reasonably
estimate whether any transitional impairment losses on the valuation of goodwill
will be required to be recognized as the cumulative effect of a change in
accounting principle. However, absent any impairment losses, it is estimated at
this time that diluted earnings per share for the 2002 fiscal year will be
favorably impacted by approximately $.30 per share since under this new
Statement commencing on January 1, 2002, goodwill will no longer be required to
be amortized and recognized as an expense in the financial statements.
Impairment losses, if any, whether transitional or subsequent to adoption of
Statement 142, may offset some or all of this favorable impact. Identifiable
intangibles, such as core deposit intangibles, will continue to be amortized and
recognized as an expense.
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
GENERAL
Webster through its subsidiaries, Webster Bank, Damman Associates, Inc.
("Damman") and Webster D&P Holdings, Inc. ("Duff & Phelps"), delivers financial
services to individuals, families and businesses primarily in Connecticut and
financial advisory services to public and private companies throughout the
United States. Webster provides business and consumer banking, mortgage lending,
trust and investment services and insurance services through 105 banking and
other offices, over 210 ATM's and the internet (www.websterbank.com). Webster's
online mortgage subsidiary Nowlending, LLC, at www.nowlending.com originates
residential mortgages throughout the United States.
Webster, as a holding company, and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision (the
"OTS"), as its primary federal regulator. Webster is also subject to regulation,
examination and supervision by the Federal Deposit Insurance Corporation
("FDIC") as to certain matters. The Bank's deposits are federally insured by the
FDIC, through its Bank Insurance Fund ("BIF"). The Bank conducts trust
activities through its wholly owned nationally-chartered trust company
subsidiary which is subject to regulation, examination and supervision by the
Office of the Comptroller of the Currency. Webster's corporate headquarters is
located at Webster Plaza, Waterbury, Connecticut 06702. Its telephone number is
(203) 753-2921. Webster's internet website is: www.websterbank.com.
FINANCIAL CONDITION
- -------------------
Webster on a consolidated basis at September 30, 2001 and December 31, 2000, had
total assets of $11.6 billion and $11.2 billion, including total securities of
$3.7 billion and $3.4 billion, respectively, and net loans of $6.8 billion for
both respective periods. At September 30, 2001 and December 31, 2000, total
deposits were $6.9 billion, borrowings were $3.3 billion and $3.0 billion,
respectively, and shareholders' equity totaled $1.0 billion and $890.4 million,
respectively.
Total assets increased $372.7 million or 3.3% at September 30, 2001 from
December 31, 2000. The overall increase is primarily due to increases in
securities of $338.4 million and a net increase in other assets of $89.2
million. The net increase in other assets is primarily due to an increase in
unsettled sale trades of $86.8 million at the end of the period. These asset
increases were partially offset by decreases in net loans, life insurance,
premises and equipment and cash.
Total liabilities rose $285.3 million primarily due to increases in borrowings
of $237.8 million, deposits of $6.1 million and other liabilities of $63.6
million, partially offset by a decrease in advance payments by borrowers for
taxes and insurance of $22.2 million. In January 2001, $40.0 million of
preferred stock issued by one of the Bank's subsidiaries matured. The net
increase in total equity of $127.5 million is primarily due to net income of
$96.5 million, a favorable change of $48.4 million, net of tax, in unrealized
gains on the available for sale securities portfolio, stock option exercise
proceeds of $8.6 million and $1.4 million for stock issued for acquisitions,
which was partially offset by $3.9 million for repurchases of Webster common
stock and $24.6 million for common stock dividend payments.
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table provides information for the Webster Bank's capital ratios
as of September 30, 2001 and December 31, 2000. At September 30, 2001, the Bank
was in full compliance with all applicable regulatory capital requirements.
OTS Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2001
Total capital (to risk-weighted assets) $ 888,158 12.70% $ 559,416 8.00% $ 699,270 10.00%
Tier 1 capital (to risk-weighted assets) 800,675 11.45 279,708 4.00 419,562 6.00
Tier 1 capital (to adjusted total assets) 800,675 7.21 444,252 4.00 555,314 5.00
Tangible capital (to adjusted total assets) 798,394 7.19 222,080 2.00 No Requirement
AT DECEMBER 31, 2000
Total capital (to risk-weighted assets) $ 773,773 11.45% $ 540,672 8.00% $ 675,839 10.00%
Tier 1 capital (to risk-weighted assets) 689,234 10.20 270,336 4.00 405,504 6.00
Tier 1 capital (to adjusted total assets) 689,234 6.39 431,200 4.00 539,000 5.00
Tangible capital (to adjusted total assets) 686,166 6.37 215,539 2.00 No Requirement
LENDING ACTIVITIES
- ------------------
GENERAL
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total gross loans before the
allowance for loan losses were $6.9 billion for the periods ending September 30,
2001 and December 31, 2000. The Bank offers commercial and residential permanent
and construction mortgage loans, commercial and industrial loans, lease
financing and various types of consumer loans including home equity lines of
credit, home equity loans and other types of small business loans. At September
30, 2001 and December 31, 2000, residential loans represented 54% and 60% of
Webster's loan portfolio, respectively and commercial loans represented 34% and
30%, respectively. Currently, the Bank has no direct credit exposure to the
airline and tourism industries.
The Bank's middle market lending unit has lending relationships with companies
located primarily in Connecticut with annual revenues ranging from $5 to
$250 million. The Bank provides these customers with a complete array of
traditional commercial credit facilities such as lines of credit, term loans,
owner occupied commercial mortgages, asset based lending and interest-rate
protection products. In addition, the Bank provides state of the art cash
management services including automated investments, lock box and account
reconciliation services. In support of customer's international business, the
Bank provides letters of credit and offers various export programs of the Ex-Im
Bank.
Webster Bank originates construction, construction-to-permanent, and permanent
commercial real estate loans primarily throughout the New England region. At
September 30, 2001, outstanding commercial real estate loans totaled $952.9
million, compared to $986.4 million as of December 31, 2000. The Bank's strategy
is to originate loans with income producing real estate as collateral. The Bank
develops relationships with regional developers and participates in loans with
selected banks.
Small Business Banking ("SBB") provides a full compliment of loan and deposit
products to small businesses located throughout Connecticut. Webster's SBB
target market is businesses with annual revenues of up to $5 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. In addition to personal customer contact, SBB utilizes
a variety of direct mail and telemarketing programs to increase market
penetration. SBB also plays a major role in supporting the Bank's Community
Reinvestment Act goals by providing credit facilities for numerous local
not-for-profit organizations. SBB
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
uses the Fair-Isaac credit scoring model to assist in loan approvals of up to
$250,000 and offers a $50,000 same day line of credit approval program. SBB
provides all commercial loan products including lines of credit, letters of
credit, term loans and mortgages on owner occupied real estate. The unit has a
fully staffed portfolio management function to monitor credit quality. As a
result of its expansion efforts, SBB serves as a referral source for other Bank
products including cash management, insurance, international products and
investments. 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 provided through the Connecticut Development Authority.
The Bank, as part of its strategy to expand its commercial loan portfolio, has a
specialized lending unit. The specialized lending unit's objective is to obtain
geographic and industry diversification within the overall commercial loan
portfolio by participating in the national syndicated lending market. The loans
administered by the specialized lending unit are monitored by the Shared
National Credit Program ("SNCP"). The SNCP is designed to provide consistent
review and classification by bank regulatory agencies of any loan or loan
commitment that totals $20 million or more and is shared by three or more
supervised institutions. These bank regulatory agencies include the Board of
Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation.
At September 30, 2001 and December 31, 2000, the specialized lending unit
administered $419.6 million and $439.9 million, respectively, of funded loans
against commitments of $612.9 million and $637.9 million. The funded loans
represented approximately 6.1% and 6.4% of the total loan portfolio at September
30, 2001 and December 31, 2000, respectively.
A summary of loans administered by the specialized lending unit by type of
industry follows:
(In thousands)
PRINCIPAL BALANCES OUTSTANDING AT
--------------------------------------------------
INDUSTRY SEPTEMBER 30, 2001 DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------
Manufacturing $ 111,994 $ 128,704
Wireless and wire-line communications 107,791 106,012
Cable 58,800 56,163
Collateralized debt obligations 44,280 45,480
Radio/TV broadcasting 22,421 33,146
Advertising/Publishing 46,688 33,067
All other (a) 27,662 37,372
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 419,636 $ 439,944
- ---------------------------------------------------------------------------------------------------------------------------
(a) Includes Service, Leisure and Environmental services
In addition to the loans administered by the specialized lending unit, Webster
had $131.1 million of loans that are also monitored by the SNCP against
commitments of $221.3 million at September 30, 2001. These loans are located
primarily in the Northeast region and are commercial and industrial loans and
real estate loans. The loans are managed by the Bank's commercial divisions,
whose focus is primarily middle market lending. The SNCP loans are distinguished
from the specialized lending unit SNCP loans by being relatively smaller
transactions where the Bank, in most cases, has a direct relationship with the
borrower.
In March 2001, Webster acquired Center Capital Corporation ("Center Capital"), a
Farmington, Connecticut-based equipment financing company. Center Capital
finances commercial and industrial equipment including trucks, tractors,
trailers, machine tools and other heavy equipment through leasing programs to
customers throughout the United States. Through the acquisition, Webster
purchased approximately $243.7 million of net lease financing loans. Since the
acquisition, Webster has grown this portfolio to $299.2 million, an increase of
22.8%.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 aggressive
management of nonperforming assets. The allowance for loan losses is maintained
at a level estimated by management to provide adequately for probable losses
inherent in the 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 Webster's nonaccrual loans, classified loans and watch list loans
including an analysis of the collateral for the loans.
Webster's methodology for assessing the appropriateness of the allowance
consists of several key elements. The loan portfolio is segmented into pools of
loans that are similar in type and risk characteristic. These homogeneous pools
are tracked over time and historic delinquency, nonaccrual and loss information
is collected and analyzed. In addition, problem loans are identified and
analyzed individually on a periodic basis to detect specific probable losses.
Webster collects industry delinquency, nonaccrual and loss data using the same
portfolio segments for comparison purposes.
Webster analyzes the data and estimates its probable losses in the portfolio by
calculating formula and specific allowances for loans. The formula allowance is
calculated by applying loss factors to the loan pools and certain unused
commitments, based on the historic default and loss rates, internal risk
ratings, and other risk-based characteristics. Changes in risk ratings, and
other risk factors, from period to period for both performing and nonperforming
loans affect the calculation of the allowance formula. Loss factors are based on
Webster's loss experience, and may be adjusted for significant factors that, in
management's judgment, affect the collectibility of the portfolio as of the
evaluation date. Among the items Webster considers when determining probable
losses are the following:
o Webster utilizes migration models, which track the dynamic business
characteristics inherent in the specific portfolios. The assumptions are
updated periodically to match changes in the business cycle.
o Pooled loan loss factors (not individually graded loans) are based on
expected net charge-offs. Pooled loans are loans that are homogeneous in
nature, such as residential and consumer loans.
o The loan portfolios are characterized by historical statistics such as
default rates, cure rates, loss in event of default rates and internal risk
ratings.
o Webster statistically evaluates the impact of larger concentrations in the
commercial loan portfolio.
o Comparable industry charge-off statistics by line of business, broadly
defined as residential, consumer, home equity & second mortgages, commercial
real estate and commercial & industrial lending, are utilized as factors in
calculating loss estimates in the Webster loan portfolios.
o Webster reviews actual losses by portfolio segment to validate estimated
future probable losses.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ASSET QUALITY
- -------------
NONPERFORMING ASSETS
The aggregate amount of nonperforming assets increased to $60.2 million at
September 30, 2001 from $44.3 million at December 31, 2000 and increased as a
percentage of total assets to 0.52% at September 30, 2001 from 0.39% at December
31, 2000. Nonaccrual loans increased $13.2 million and foreclosed properties
decreased $344,000 during the current year third quarter period and for the nine
month period nonaccrual loans increased $16.7 million and foreclosed properties
decreased $806,000. The increase in nonaccrual loans from December 31, 2000 to
September 30, 2001 is due to the combination of $6.7 million of nonaccrual
leases held by Center Capital that was acquired in the current year first
quarter period and a $13.7 million increase in nonaccrual commercial and
industrial loans, approximately half due to one new nonaccrual credit. The
allowance for loan losses at September 30, 2001 was $96.7 million and
represented 167.4% of nonaccrual loans and 1.4 % of total gross loans. The
following table details nonperforming assets for the periods presented.
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis:
Residential $ 7,745 $ 8,842
Commercial 48,533 29,868
Consumer 1,474 2,324
Foreclosed Properties:
Residential and Consumer 1,950 2,284
Commercial 539 1,011
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 60,241 $ 44,329
- ---------------------------------------------------------------------------------------------------------------------------
The following table provides a summary of the activity in the allowance for loan
losses for the indicated periods:
FOR THE THREE MONTH PERIODS ENDED, FOR THE NINE MONTH PERIODS ENDED,
-------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 96,135 $ 86,199 $ 90,809 $ 72,658
CHARGE-OFFS:
Residential (325) (334) (847) (1,190)
Commercial (3,404) (56) (5,897) (1,975)
Consumer (281) (674) (1,106) (1,921)
- --------------------------------------------------------------------------------------------------------------------------------
(4,010) (1,064) (7,850) (5,086)
RECOVERIES:
Residential 120 120 301 293
Commercial 361 76 969 951
Consumer 48 386 173 522
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (3,481) (482) (6,407) (3,320)
Provisions charged to operations 4,000 3,200 10,400 8,600
Allowances acquired through purchase transactions -- -- 1,852 10,979
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 96,654 $ 88,917 $ 96,654 $ 88,917
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans outstanding
during the period (annualized) .20% .03% .12% .07%
- --------------------------------------------------------------------------------------------------------------------------------
Net charge-offs for the current year three and nine month periods totaled $3.5
million and $6.4 million, increasing $3.0 million and $3.1 million as compared
to the previous year periods ended September 30, 2000. The increase in net
charge-offs for the current year three month period as compared to the previous
year same period is primarily due to
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
commercial loan net charge-offs that increased $3.1 million. This increase
primarily involved loans within the specialized lending portfolio. The increase
in net charge-offs of $3.1 million when the current year nine month period is
compared to the previous year same period is primarily the result of net
commercial loan charge-offs of $3.0 million that occurred in the third quarter
period. The increase in the allowance for loan losses of $7.7 million when the
current year balance is compared to one year earlier is primarily due to the
incorporation of a $1.9 million allowance for loan losses related to the Center
Capital acquisition, provisions of $13.6 million recorded since September 30,
2000, less net charge-offs. Management believes that the allowance for loan
losses at September 30, 2001 is adequate to cover expected losses in the
portfolio.
PAST DUE LOANS
The following table sets forth information as to the Bank's loans past due 30-89
days.
SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------------------------------------------------
PRINCIPAL PERCENT OF LOANS PRINCIPAL PERCENT OF LOANS
(Dollars in thousands) BALANCES OUTSTANDING BALANCES OUTSTANDING
- ------------------------------------------------------------------------------------------------------------------------------
PAST DUE 30-89 DAYS:
Residential $ 16,558 0.24% $ 20,974 0.30%
Commercial and Industrial 10,836 0.16 10,883 0.16
Commercial Real Estate 2,505 0.03 16,101 0.23
Consumer 5,488 0.08 6,135 0.09
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 35,387 0.51% $ 54,093 0.78%
- ------------------------------------------------------------------------------------------------------------------------------
TROUBLED DEBT RESTRUCTURINGS
At September 30, 2001 and December 31, 2000, the Bank had total accruing
troubled debt restructurings of approximately $5.4 million and $5.5 million,
respectively. Interest income for the three and nine month periods ended
September 30, 2001 under the restructured terms totaled $109,000 and $288,000 as
compared to $192,000 and $504,000 that would have been booked under their
original terms. Interest income for the three and nine month periods ended
September 30, 2000 totaled $111,000 and $343,000 as compared to $195,000 and
$594,000 that would have been booked had the loans been under their original
terms.
POTENTIAL PROBLEM LOANS
At September 30, 2001, the Bank had $30.3 million of potential problem loans or
commitments in its commercial loan portfolio for which management has doubts as
to the ability of the borrowers to comply in the future with present repayment
terms or commitment conditions. At December 31, 2000, the Bank had $17.3 million
of potential problem loans or commitments in its commercial loan portfolio.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- ------------------------------------------
Interest-rate risk is the sensitivity of the market value of Webster's
interest-sensitive assets and liabilities and the sensitivity of Webster's
earnings to changes in interest rates over short-term and long-term time
horizons. The primary goal of interest-rate risk management is to manage risk
within limits approved by the Board of Directors. Webster's Asset & Liability
Management Committee manages interest-rate risk to maximize net interest income
and net market value over time in changing interest-rate environments.
Management measures interest-rate risk using simulation analyses with particular
emphasis on measuring changes in net market value and net interest income in
different rate environments. 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.
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Interest-rate risk simulation analyses cannot precisely estimate 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. Management
believes that Webster's interest-rate risk position at September 30, 2001,
represents a reasonable level of risk.
The following table summarizes the estimated market value of Webster's
interest-sensitive assets and interest-sensitive liabilities at September 30,
2001 and December 31, 2000, and the projected change to market values if
interest rates instantaneously increase or decrease by 100 basis points.
BOOK MARKET ESTIMATED MARKET VALUE IMPACT
(Dollars in thousands) VALUE VALUE -100 BP +100 BP
- ---------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2001
- ------------------
Interest-sensitive Assets:
Trading $ 147 $ 147 $ -- $ --
Non-trading 10,428,943 10,579,426 182,957 (266,094)
Interest-sensitive Liabilities 10,392,583 10,498,754 (270,199) 210,236
Net Impact (87,242) (55,858)
Net Impact as % of interest-sensitive assets (.82)% (.53)%
DECEMBER 31, 2000
- -----------------
Interest-sensitive Assets:
Trading $ 6 $ 6 $ -- $ --
Non-trading 10,111,134 10,166,579 197,377 (232,838)
Interest-sensitive Liabilities 10,011,353 10,033,507 (175,746) 165,869
Net Impact 21,631 (66,969)
Net Impact as % of interest-sensitive assets .21% (.66)%
- ---------------------------------------------------------------------------------------------------------------------------
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $168.8
million at September 30, 2001 and $175.7 million at December 31, 2000 and
nonaccrual loans of $57.8 million at September 30, 2001 and $41.0 million at
December 31, 2000. See "Asset Quality" included in Management's Discussion and
Analysis of Financial Condition and Results of Operations within this report for
further information. Values for mortgage servicing rights have been included in
the table above as movements in interest rates affect the valuation of the
servicing rights. Equity securities and nonaccrual loans are not included in the
above table, however, they are subject to fluctuations in market value based on
other criteria. The equity securities at September 30, 2001 and December 31,
2000 included $125.3 million of FHLB stock which is insensitive to interest rate
fluctuations.
Interest-sensitive assets, net of interest-sensitive liabilities, when impacted
by an instantaneous 100 basis point rate decrease results in a projected
decrease in net market value of $87.2 million at September 30, 2001 compared to
a projected increase in net market value of $21.6 million at December 31, 2000.
These changes in net market value represent 0.82% of interest-sensitive assets
at September 30, 2001 and 0.21% of interest-sensitive assets at December 31,
2000. Interest-sensitive assets, net of interest-sensitive liabilities, when
impacted by an instantaneous 100 basis point rate increase results in a
projected decrease in net market value of $55.9 million at September 30, 2001
compared to a projected decrease in net market value of $67.0 million at
December 31, 2000. These changes in net market value represent 0.53% of
interest-sensitive assets at September 30, 2001 and 0.66% of interest-sensitive
assets at December 31, 2000.
Based on Webster's asset/liability mix at September 30, 2001, simulation
analyses project that an instantaneous 100 basis point increase in interest
rates would decrease net interest income over the next twelve months by
approximately 0.2%. An instantaneous 100 basis point decrease in interest rates
would decrease net interest income by approximately 2.8%.
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank is required to maintain sufficient liquidity to ensure its safe and
sound operation. As required by recent legislation, the OTS recently deleted its
requirement that federal savings associations maintain a certain minimum level
of liquid assets. Instead, adequate liquidity is assessed by the OTS on a
case-by-case basis by reviewing such factors as the institution's overall
asset/liability structure, market conditions, competition and the nature of the
institution's activities. The OTS considers both an institution's liquidity
ratio as well as safety and soundness issues in assessing whether an institution
has sufficient liquidity.
Liquidity management allows Webster to meet cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable cost effective funding to support the balance sheet.
Liquidity comes from a variety of sources such as the cash flow from operating
activities including principal and interest payments on loans and investments,
unpledged securities which can be sold or utilized to secure funding and by
maintaining the ability to attract new deposits. Webster's goal is to maintain a
strong base of core deposits to support its growing balance sheet.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Webster has a detailed liquidity contingency plan, which is designed
to respond to liquidity concerns in a prompt and comprehensive manner. It is
designed to provide early detection of potential problems and details specific
actions required to address liquidity risks.
Webster is a member of the FHLB system and had additional borrowing capacity
from the FHLB of approximately $442.0 million at September 30, 2001. In
addition, Webster had approximately $2.1 billion of unencumbered securities at
September 30, 2001 that, if necessary, could have been used to increase
borrowing capacity at the FHLB or to collateralize other borrowings such as
repurchase agreements. At September 30, 2001, Webster had FHLB advances
outstanding of $2.2 billion compared to $2.4 billion at December 31, 2000.
On January 15, 2001, Webster Preferred Capital Corporation ("WPCC"), a
subsidiary of the Bank, redeemed all outstanding shares of its Series A
Preferred Stock, which had a redemption value of $40.0 million. WPCC had
sufficient cash to redeem the stock without outside funding. WPCC expects
sufficient cash flow from mortgage loan payments to replenish its cash.
Webster's main sources of liquidity at the holding company level are dividends
from the Bank, investment income and net proceeds from capital offerings and
borrowings. The main uses of liquidity are purchases of investment securities,
the payment of dividends to common stockholders, repurchases of Webster's common
stock, and the payment of interest on borrowings and capital securities. There
are certain regulatory restrictions on the payment of dividends by the Bank to
Webster. At September 30, 2001, Webster also maintained $100.0 million in
available revolving lines of credit with correspondent banks.
As announced on September 14, 2001, Webster has initiated a stock buyback
program of up to 2.5 million shares, or approximately 5 percent of Webster's
49.5 million shares of outstanding common stock. Webster plans to purchase these
shares in the open market and via unsolicited negotiated transactions, including
block purchases, over the next year. During the third quarter of 2001, Webster
repurchased a total of 94,120 shares of its common stock. The total cost of the
repurchased shares was $2.7 million with an average per share cost of
approximately $28.57. The total common stock repurchased for the nine month
period ending September 30, 2001 was 136,680 shares at a total cost of $3.9
million with an average per share cost of $28.39.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Applicable OTS regulations require the Bank, as a federal savings bank, to
satisfy certain minimum capital requirements, including a core capital
requirement and risk-based capital requirements. As an OTS regulated savings
institution, the Bank is also subject to a minimum tangible capital requirement.
At September 30, 2001, the Bank was in full compliance with all applicable
capital requirements and exceeded the capital requirements for a "well
capitalized" institution as displayed in the table included in the "Financial
Condition" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations within this Report.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND
2000.
GENERAL
Net income for the three month period ended September 30, 2001, was $35.0
million or $.70 per diluted share compared to $31.6 million or $.64 per diluted
share for the same period ended September 30, 2000. Net income for the nine
month period ended September 30, 2001 was $96.5 million or $1.94 per diluted
share compared to $86.5 million or $1.90 per diluted share for the same period
ended September 30, 2000. In general, increased net income for the current year
three and nine month periods was the result of higher levels of net interest
income and noninterest income that were partially offset by increased
noninterest expenses. Included in the net income for the current nine month
period are a $2.4 million (net of taxes) expense related to the cumulative
effect of a change in the method of accounting (SFAS No. 133 implementation)
and an extraordinary expense of $1.2 million which represents costs incurred
for the early extinguishment of debt related to borrowings from the Federal
Home Loan Bank.
NET INTEREST INCOME
Net interest income for the three and nine month periods ended September 30,
2001, amounted to $93.6 million and $271.7 million, respectively, compared to
$85.8 million and $241.1 million for the same periods in 2000. Net
interest-rate spread for the three and nine month periods ended September 30,
2001 was 3.43% and 3.34%, respectively, as compared to 3.18% and 3.15% for the
same respective periods in the previous year. The increase in net interest
income in the current three and nine month periods is due primarily to the
declining interest rate environment throughout 2001, as seen in the Federal
Reserve's Fed Fund total rate reduction of 350 basis points in 8 steps during
the year.
Interest income and interest expense both declined during the three month
period ending September 30, 2001 as compared to the same period in the previous
year. This decline resulted from the lower interest rate environment in the
current year. Interest income and interest expense both rose during the current
nine month period as compared to the same period last year. The increase
resulted primarily from asset and liability increases through acquisitions
completed throughout 2000, which impacted all of 2001 but only a portion of
2000.
INTEREST INCOME
Total interest income for the three and nine month periods ended September 30,
2001 was $188.6 million and $579.6 million respectively, compared to $197.6
million and $542.2 million in the same periods of the previous year. When the
three month periods are compared, the yield realized on interest-earning assets
decreased by 50 basis points for the current year period primarily due to a
lower yield on loans that decreased 73 basis point. The impact of a lower
realized yield on interest-earning assets was partially offset by a higher
volume of average earnings assets of $333.7 million. When the nine month
periods are compared, the volume of average interest-earning assets increased
$902.9 million for the current period, however the yield on interest-earning
assets decreased by 7 basis points over the same period one year earlier. A
higher rate on securities for the current year period of 16 basis points was
more than offset by a lower yield realized on loans. The yield on
interest-earning assets for the three month periods ended September 30, 2001
and 2000 were 7.06 % and 7.56%, respectively and for the nine month periods
ended September 30, 2001 and 2000 were 7.30% and 7.37%, respectively.
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Total interest expense for the three and nine month periods ended September 30,
2001 of $95.0 million and $307.9 million, respectively, compared to $111.8
million and $301.1 million for the same periods one year earlier. The decrease
in interest expense for the current year three month period was primarily due to
a 75 basis point decrease in the overall cost of interest-bearing liabilities.
The cost of deposit and borrowing liabilities decreased 38 and 164 basis points,
respectively when compared to the previous year same period. The increase in
interest expense for the current year nine month period of $6.9 million was
primarily due to an increase in average interest-bearing liabilities of $790.1
million. The overall cost on interest-bearing liabilities for the current year
nine month period decreased 26 basis point to 3.96% from the previous year same
period. Lower costs on borrowings and deposits partially offset the impact of a
higher volume of interest-bearing funds for the period. The rates on
interest-bearing liabilities for the three month periods ended September 30,
2001 and 2000 were 3.63% and 4.38%, respectively and for the nine month periods
ended September 30, 2001 and 2000 were 3.96% and 4.22%.
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned and paid by Webster.
THREE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
FULLY TAX FULLY TAX
AVERAGE EQUIVALENT AVERAGE EQUIVALENT
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ---------- ------- -------- ----------
ASSETS
INTEREST-EARNING ASSETS:
Loans $ 6,932,448 $ 127,994 7.33% $ 6,927,869 $ 139,867 8.06%
Securities 3,742,996 60,883 6.57(a) 3,413,888 57,733 6.58(a)
----------- -------- ---- ----------- -------- ----
TOTAL INTEREST-EARNING ASSETS 10,675,444 188,877 7.06 10,341,757 197,600 7.56
-------- --------
Noninterest-earning assets 878,582 889,849
----------- -----------
TOTAL ASSETS $ 11,554,026 $11,231,606
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits $ 6,951,678 $ 53,627 3.06% $ 6,977,832 $ 60,376 3.44%
Borrowings 3,385,331 41,385 4.79 3,180,944 51,414 6.43
----------- -------- ---- ----------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 10,337,009 95,012 3.63 10,158,776 111,790 4.38
-------- --------
Noninterest-bearing liabilities 81,153 91,865
----------- -----------
TOTAL LIABILITIES 10,418,162 10,250,641
Capital securities and preferred stock of
subsidiary corporation 159,577 199,577
SHAREHOLDERS' EQUITY 976,287 781,388
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,554,026 $11,231,606
=========== ===========
LESS: FULLY-TAXABLE EQUIVALENT ADJUSTMENTS (314) --
--------- --------
NET INTEREST INCOME $ 93,551 $ 85,810
======== ========
INTEREST-RATE SPREAD 3.43% 3.18%
==== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.54% 3.30%
==== ====
(a) For purposes of this computation, unrealized gains (losses) are excluded
from the average balance calculations.
- --------------------------------------------------------------------------------
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
FULLY TAX FULLY TAX
AVERAGE EQUIVALENT AVERAGE EQUIVALENT
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ---------- ------- -------- ----------
ASSETS
INTEREST-EARNING ASSETS:
Loans $ 6,978,408 $ 401,330 7.64% $ 6,406,198 $ 377,000 7.85%
Securities 3,624,762 179,114 6.62(a) 3,294,119 165,189 6.46(a)
----------- -------- ---- ---------- -------- ----
TOTAL INTEREST-EARNING ASSETS 10,603,170 580,444 7.30 9,700,317 542,189 7.37
-------- --------
Noninterest-earning assets 905,852 774,288
----------- ----------
TOTAL ASSETS $ 11,509,022 $10,474,605
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits $ 6,914,972 $ 170,765 3.30% $ 6,521,504 $ 162,445 3.33%
Borrowings 3,410,818 137,161 5.31 3,014,174 138,631 6.14
----------- -------- ---- ----------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 10,325,790 307,926 3.96 9,535,678 301,076 4.22
-------- -------
Noninterest-bearing liabilities 84,035 76,970
----------- -----------
TOTAL LIABILITIES 10,409,825 9,612,648
Capital securities and preferred stock of
subsidiary corporation 161,775 199,577
SHAREHOLDERS' EQUITY 937,422 662,380
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,509,022 $10,474,605
=========== ===========
LESS: FULLY-TAXABLE EQUIVALENT ADJUSTMENTS (812) --
-------- --------
NET INTEREST INCOME $ 271,706 $ 241,113
======== ========
INTEREST-RATE SPREAD 3.34% 3.15%
==== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.43% 3.27%
==== ====
(a) For purposes of this computation, unrealized gains (losses) are excluded
from the average balance calculations.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.0 million and $10.4 million, respectively,
for the three and nine month periods ended September 30, 2001 compared to
$3.2 million and $8.6 million for the respective periods in 2000. Management
performs a quarterly review of the loan portfolio and based on this review
sets the level of provision necessary to maintain an adequate loan loss
allowance. Based upon management's quarterly review the provision for the third
quarter of 2001 was increased to $4.0 million. Several factors influenced the
increase, including the increase in net charge-offs during the quarter ($3.5
million as compared to $2.0 million in the previous quarter), the increase in
nonaccrual loans ($57.7 million at September 30, 2001 as compared to $44.6
million at June 30, 2001), an increasing commercial portfolio and the slowing of
growth in the general economy. For further information see the "Loan Portfolio
Review and Allowance for Loan Loss Methodology" included in the "Lending
Activities" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations within this Report. At September 30, 2001,
the allowance for loan losses totaled $96.7 million and represented 167% of
nonaccrual loans as compared to $90.8 million and 221% respectively, at
December 31, 2000. At September 30, 2001 and December 31, 2000, the allowance
for loan losses represented 1.40% and 1.31% of outstanding loans, respectively.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Total noninterest income for the three and nine month periods ended September
30, 2001 totaled $40.5 million and $122.1 million, respectively, compared to
$33.2 million and $91.4 million for the respective periods in 2000. When the
three month periods are compared, increased noninterest income for the current
period of $7.3 million is primarily due to an increase of $883,000 in deposit
service fees, $3.9 million in financial advisory services and $2.1 million in
insurance commissions. When the nine month periods are compared, an increase in
noninterest income for the current period of $30.7 million is primarily due to
an increase of $6.6 million in deposit service fees, $2.6 million of loan and
loan servicing fees, $12.2 million in financial advisory services and $5.5
million in insurance commissions. Other noninterest income for the current and
previous year nine month periods includes $1.9 million and $1.1 million,
respectively, of bank-owned life insurance benefit payouts. The increase in
noninterest fees, service charges and commission income for the current year
periods reflects the effect of the purchase acquisitions of Mechanics Savings
Bank in June 2000, Duff & Phelps in November 2000, Center Capital in March 2001
and three insurance agencies between the period of January and April 2001.
NONINTEREST EXPENSES
Total noninterest expenses for the three and nine month periods ended September
30, 2001 totaled $77.2 million and $231.7 million respectively, compared to
$68.6 million and $194.8 million, respectively, for the same periods in 2000.
The increase in noninterest expenses of $8.6 million for the current three month
period as compared to the same period in the previous year is primarily due to
increases in expenses for compensation and benefits of $4.6 million, intangible
amortization of $1.0 million, professional services of $1.2 million and other
operating expenses of $1.8 million. When the nine month periods ended September
30, 2001 and 2000 are compared, the increase in noninterest expenses of $37.0
million is primarily due to an increase of compensation and benefits of $16.8
million, intangible amortization of $8.3 million, branch reconfiguration of $3.7
million, occupancy of $1.8 million, furniture and equipment of $2.1 million and
other operating expense of $4.9 million. The overall increase in noninterest
expenses for the current year periods reflects the effect of the purchase
acquisitions of Mechanics Savings Bank in June 2000, Duff & Phelps in November
2000, Center Capital in March 2001 and three insurance agencies between the
period of January 2001 and April 2001.
INCOME TAXES
Total income tax expense for the three and nine month periods ended September
30, 2001 was $17.8 million and $51.5 million, respectively, compared to $15.6
million and $42.7 million, respectively, for the same periods in 2000. The tax
expense for the nine month period ended September 30, 2001 excludes tax benefits
totaling $1.8 million for the tax effect of the extraordinary item and the
cumulative effect of change in the method of accounting. The effective tax rates
for the three and nine month periods ended September 30, 2001 and 2000 were
approximately 34% and 33%, respectively. Tax expense for the current year
periods are higher than the corresponding prior year periods primarily due to a
higher level of income before taxes. During the first quarter of 1999, Webster
formed a Connecticut Passive Investment Company ("PIC"). PICs are exempt from
state income taxation in Connecticut, and the dividends paid from a PIC to a
related financial service company are also exempt from inclusion in Connecticut
taxable income. Webster Bank qualifies as a financial service company under the
Connecticut statute. The exemption is effective for tax years beginning on or
after January 1, 1999.
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
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 22 through 24 under the caption
"Asset/Liability Management and Market Risk".
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) Not Applicable
Item 2. Changes in Securities
----------------------
(a) Not Applicable
Item 3. Defaults upon Senior Securities
-------------------------------
(a) Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) Not Applicable
Item 5. Other Information
-----------------
(a) Not Applicable
Item 6. Exhibits and Report on Form 8-K
--------------------------------
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Current Report on Form 8-K, filed with the Securities and Exchange
Commission ("SEC") on September 14, 2001 (announcing commencement of
stock repurchase program).
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT NO. EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
Exhibits:
No exhibits for the third quarter period.
31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: November 14, 2001 By: /s/ William J. Healy
- ------------------------------- ---------------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
Exhibits:
No exhibits for the third quarter period.
33