UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended MARCH 31, 2002.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________to_______________.
Commission File Number: 0-15213.
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
(State or other jurisdiction of 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) 48,893,132
- ------------------------------ -----------------------------
Class Outstanding at April 30, 2002
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
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PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Statements of Condition at March 31, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income for the three months ended March 31, 2002
and 2001 (unaudited) 4
Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2002
and 2001 (unaudited) 5
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2002
and 2001 (unaudited) 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2002
and 2001 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
EXHIBIT INDEX AND DESCRIPTION 35
SIGNATURE 36
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL INFORMATION
- -----------------------------
CONSOLIDATED STATEMENTS OF CONDITION
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
MARCH 31, DECEMBER 31,
(In thousands, except share and per share data) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 167,160 218,908
Short-term investments 33,472 35,937
Securities: (Note 2)
Trading, at fair value 527 --
Available for sale, at fair value 4,221,800 3,999,133
Loans receivable, net (Notes 3 and 4) 7,140,331 6,869,911
Goodwill (Note 13) 223,562 222,699
Other intangible assets (Note 13) 93,040 97,352
Cash surrender value of life insurance 165,225 163,023
Premises and equipment, net 82,209 82,808
Accrued interest receivable 58,928 54,288
Deferred tax asset, net (Note 5) 42,812 33,158
Prepaid expenses and other assets 113,034 80,165
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 12,342,100 11,857,382
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 8) $ 7,169,346 7,066,471
Federal Home Loan Bank advances (Note 6) 2,399,579 2,531,179
Securities sold under agreements to repurchase and other borrowings (Note 7) 1,503,647 1,002,185
Accrued expenses and other liabilities 98,459 91,503
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 11,171,031 10,691,338
- -------------------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trusts 150,000 150,000
Preferred stock of subsidiary corporation 9,577 9,577
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized - 200,000,000 shares
Issued - 49,502,742 shares at March 31, 2002 and
at December 31, 2001 495 495
Paid-in capital 414,906 415,194
Retained earnings 621,336 590,254
Less: Treasury stock at cost, 623,387 shares at March 31, 2002
and 353,325 shares at December 31, 2001 (19,404) (10,141)
Unearned compensation (4,090) (3,998)
Less: Employee Stock Ownership Plan shares purchased with debt -- (286)
Accumulated other comprehensive (loss) income (1,751) 14,949
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,011,492 1,006,467
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,342,100 11,857,382
===================================================================================================================
See accompanying notes to consolidated interim financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands, except per share data) 2002 2001
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $111,495 138,628
Securities and short-term investments (Note 2) 59,598 57,984
- ---------------------------------------------------------------------------------------------------
Total interest income 171,093 196,612
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 8) 39,613 59,436
Borrowings 34,997 49,465
- ---------------------------------------------------------------------------------------------------
Total interest expense 74,610 108,901
- ---------------------------------------------------------------------------------------------------
Net interest income 96,483 87,711
Provision for loan losses (Note 4) 4,000 3,200
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 92,483 84,511
- ---------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Fees and service charges 18,636 16,035
Insurance revenue 7,436 5,014
Trust and investment services 4,387 4,394
Financial advisory services 3,959 4,505
Increase in cash surrender value of life insurance 2,202 2,324
Gain on sale of securities, net 3,405 4,249
Gain on sale of loans, net 393 94
Other 1,784 2,871
- ---------------------------------------------------------------------------------------------------
Total noninterest income 42,202 39,486
- ---------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Compensation and benefits 40,148 35,617
Occupancy 6,285 6,880
Furniture and equipment 6,568 6,711
Intangible asset amortization (Note 13) 4,313 7,564
Marketing 2,424 2,090
Professional services 2,327 1,570
Capital securities 3,616 3,616
Branch reconfiguration -- 3,703
Other 11,512 10,469
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 77,193 78,220
- ---------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
Cumulative effect of change in method of accounting 57,492 45,777
Income taxes 18,056 15,167
- ---------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative effect
of change in method of accounting 39,436 30,610
Extraordinary item - early extinguishment of debt (net
of taxes) (Note 10) -- (1,209)
cumulative effect of change in method of accounting (net
of taxes) (Note 11) -- (2,418)
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 39,436 26,983
===================================================================================================
Net Income Per Common Share: (Notes 12 and 13)
Basic $ 0.81 0.55
Diluted 0.80 0.54
Dividends paid per common share 0.17 0.16
See accompanying notes to consolidated interim financial statements
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
Common Paid-in Retained Treasury Compen- Purchased Income
(In thousands, except per share data) Stock Capital Earnings Stock sation With Debt (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642) (890) 890,374
- ---------------------------------------------------------------------------------------------------------------------------------
Net income for the three months
ended March 31, 2001 -- -- 26,983 -- -- -- -- 26,983
Dividends paid -- -- (7,852) -- -- -- -- (7,852)
Allocation of ESOP shares -- 440 -- -- -- 356 -- 796
Exercise of stock options -- (767) -- 3,601 -- -- -- 2,834
Common stock repurchased -- -- -- (1,191) -- -- -- (1,191)
Consideration granted for
purchase acquisitions -- 137 -- 680 -- -- -- 817
Restricted stock grants, net
of amortization -- -- -- -- 129 -- -- 129
Net unrealized gain on
securities available for
sale, net of taxes -- -- -- -- -- -- 12,029 12,029
Other, net -- -- (8) -- -- -- -- (8)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $ 495 416,144 509,201 (10,271) (1,511) (286) 11,139 924,911
=================================================================================================================================
THREE MONTHS ENDED MARCH 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
- ---------------------------------------------------------------------------------------------------------------------------------
Net income for the three months
ended March 31, 2002 -- -- 39,436 -- -- -- -- 39,436
Dividends paid -- -- (8,337) -- -- -- -- (8,337)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (694) -- 2,496 -- -- -- 1,802
Common stock repurchased -- -- -- (12,477) -- -- -- (12,477)
Restricted stock grants, net
of amortization -- -- (17) 718 (92) -- -- 609
Net unrealized loss on
securities available for
sale, net of taxes -- -- -- -- -- -- (16,700) (16,700)
Other, net -- (165) -- -- -- -- -- (165)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 $ 495 414,906 621,336 (19,404) (4,090) -- (1,751) 1,011,492
=================================================================================================================================
See accompanying notes to consolidated interim financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------
Net income $ 39,436 26,983
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities available for sale arising
during the period (net of income tax effect of ($9,764)
and $7,944 for 2002 and 2001, respectively) (14,428) 14,753
Reclassification adjustment for net gains included in
net income (net of income tax effect of $1,224
and $1,466 for 2002 and 2001, respectively) (2,272) (2,724)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (16,700) 12,029
- -------------------------------------------------------------------------------------------------------------
Comprehensive income $ 22,736 39,012
=============================================================================================================
See accompanying notes to consolidated interim financial statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 39,436 26,983
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,000 3,200
Depreciation and amortization 5,287 5,118
Amortization (accretion) of securities premiums/discounts, net 18 (159)
Amortization (accretion) of loan premiums/discounts, net 2,708 (929)
Amortization of intangible assets 4,313 7,564
Cumulative effect of change in accounting method (Note 11) -- 3,614
Gains on sale of foreclosed properties, net (141) (262)
Gains on sale of securities, net (3,496) (4,190)
Gains on the sale of loans, net (393) (94)
Losses (gains) on trading securities, net 91 (59)
(Increase) decrease in trading securities (618) 35
Loans originated for sale (208,597) (76,370)
Proceeds from sale of loans, originated for sale 250,167 57,267
(Increase) decrease in interest receivable (4,640) 835
(Increase) decrease in prepaid expenses and other assets, net (33,149) 4,904
Increase (decrease) in interest payable 9,231 (19,186)
(Decrease) increase in accrued expenses and other liabilities, net (2,074) 123,326
Increase in cash surrender value of life insurance (2,202) (2,324)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,941 129,273
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (766,842) (736,592)
Principal collected on securities 387,000 74,977
Maturities of securities 2,570 84,919
Proceeds from sale of securities, available for sale 130,655 310,698
Decrease in short-term investments, net 2,465 1,441
(Increase) decrease in loans, net (319,283) 55,370
Proceeds from sale of foreclosed properties 2,131 1,504
Net cash from (purchase) sale of premises and equipment (3,682) 1,958
Net cash paid for purchase acquisitions -- (10,066)
Other, net (428) --
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (565,414) (215,791)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net 102,875 (27,064)
Net decrease of FHLB advances (131,600) (590,881)
Net increase in securities sold under agreement to repurchase and
other borrowings 501,462 722,778
Cash dividends paid to common shareholders (8,337) (7,852)
Redemption of Series A preferred stock of subsidiary corporation -- (40,000)
Exercise of stock options 1,802 2,834
Common stock repurchased (12,477) (1,191)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 453,725 58,624
- ---------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (51,748) (27,894)
Cash and cash equivalents at beginning of period 218,908 265,035
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 167,160 237,141
=====================================================================================================================
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
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THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 2,236 19
Interest paid 65,379 128,087
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties $ 977 1,233
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:
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THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------
Fair value of noncash assets acquired in purchase acquisitions $ -- 244,405
Fair value of liabilities assumed in purchase acquisitions -- 249,152
Common stock issued in purchase business combinations -- 817
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See accompanying notes to consolidated interim financial statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. All significant
intercompany transactions have been eliminated in consolidation. Amounts in
prior period financial statements are reclassified whenever necessary to conform
to current period presentations. The results of operations for the three month
period ended March 31, 2002 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. Material estimates that
are susceptible to near-term changes include the determination of the allowance
for loan losses and the valuation allowance for the deferred tax asset. These
Consolidated 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, 2001.
NOTE 2 - SECURITIES
- -------------------
A summary of securities follows:
MARCH 31, 2002 DECEMBER 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost (a) Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
TRADING SECURITIES:
Municipal securities $ 527 -- -- 527 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes -- -- -- -- 2,014 -- -- 2,014
Municipal bonds and notes 82,039 1,216 (586) 82,669 78,349 1,266 (536) 79,079
Corporate bonds and notes 196,637 228 (17,276) 179,589 207,024 786 (18,428) 189,382
Equity securities (b) 159,814 9,811 (2,622) 167,003 166,351 7,649 (4,114) 169,886
Mortgage-backed securities (c) 3,784,410 33,331 (25,202) 3,792,539 3,519,067 50,008 (10,303) 3,558,772
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,222,900 44,586 (45,686) 4,221,800 3,972,805 59,709 (33,381) 3,999,133
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 4,223,427 44,586 (45,686) 4,222,327 3,972,805 59,709 (33,381) 3,999,133
===========================================================================================================================
(a) For trading securities, this value represents book value, which includes
recognized gains and losses.
(b) As of March 31, 2002, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $127.5 million, preferred stock of
$5.4 million and common stock of $34.1 million. The fair value of equity
securities at December 31, 2001 consisted of FHLB stock of $126.6 million,
preferred stock of $5.4 million and common stock of $37.9 million.
(c) Includes mortgage-backed securities, which are guaranteed by Fannie Mae,
Freddie Mac and Government National Mortgage Association and represent
participating interests in direct pass-through pools of mortgage loans
originated and serviced by the issuers of the securities.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3: LOANS RECEIVABLE, NET
- -----------------------------
A summary of loans, net follows:
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MARCH 31, DECEMBER 31,
(Dollars in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------
Amount % Amount %
------ --- ------ ---
Residential mortgage loans:
1-4 family units $ 3,265,105 45.8% $ 3,058,662 44.5%
Multi-family units 102,418 1.4 104,038 1.5
Construction 194,463 2.7 223,583 3.3
Loans held for sale 102,348 1.4 143,918 2.1
- ----------------------------------------------------------------------------------------------------
Total residential mortgage loans 3,664,334 51.3 3,530,201 51.4
- ----------------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,046,296 14.7 1,046,874 15.2
Lease financing 338,980 4.7 320,704 4.7
- ----------------------------------------------------------------------------------------------------
Total commercial loans 1,385,276 19.4 1,367,578 19.9
- ----------------------------------------------------------------------------------------------------
Commercial real estate:
Commercial mortgage 865,198 12.1 892,145 13.0
Commercial construction 87,355 1.2 82,831 1.2
- ----------------------------------------------------------------------------------------------------
Total commercial real estate 952,553 13.3 974,976 14.2
- ----------------------------------------------------------------------------------------------------
Consumer loans:
Home equity credit lines 1,186,523 16.7 1,038,350 15.1
Other consumer 50,575 0.7 56,113 0.8
- ----------------------------------------------------------------------------------------------------
Total consumer loans 1,237,098 17.4 1,094,463 15.9
- ----------------------------------------------------------------------------------------------------
Gross loans 7,239,261 101.4 6,967,218 101.4
Less: allowance for loan losses (98,930) (1.4) (97,307) (1.4)
- ----------------------------------------------------------------------------------------------------
Loans receivable, net $ 7,140,331 100.0% $ 6,869,911 100.0%
====================================================================================================
At March 31, 2002, net loans included $14.1 million of net discounts and $19.7
million of net deferred costs. At December 31, 2001, net loans included $17.2 of
net discounts and $19.0 million of net deferred costs. The unadvanced portions
of closed loans totaled $67.2 million and $78.2 million at March 31, 2002 and
December 31, 2001, respectively.
As of March 31, 2002 and December 31, 2001, residential mortgage origination
commitments totaled $215.0 million and $158.2 million, respectively. Residential
commitments outstanding at March 31, 2002 consisted of adjustable rate and fixed
rate mortgages of $62.8 million and $152.2 million, respectively, at rates
ranging from 5.0% to 7.8%. Residential commitments outstanding at December 31,
2001 consisted of adjustable rate and fixed rate mortgages of $46.5 million and
$111.7 million, respectively, at rates ranging from 5.4% to 7.5%. Commitments to
originate loans generally expire within 60 days. Webster also had outstanding
commitments to sell residential mortgage loans of $192.4 million and $195.4
million at March 31, 2002 and December 31, 2001, respectively. At March 31, 2002
and December 31, 2001, unused portions of home equity credit lines extended were
$851.8 million and $754.7 million, respectively. Unused commercial lines of
credit, letters of credit, standby letters of credit, lease financing
commitments and outstanding new commercial loan commitments totaled $839.5
million and $800.3 million at March 31, 2002 and December 31, 2001,
respectively.
At March 31, 2002 and December 31, 2001, Webster serviced, for the benefit of
others, mortgage loans aggregating approximately $1.1 billion and $1.2 billion,
respectively.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The allowance for loan losses is maintained at a level to absorb probable losses
inherent in the loan portfolio. The allowance is increased by provisions charged
to operating expense and by recoveries on loans previously charged-off, and
reduced by charge-offs on loans.
The following table provides a summary of the activity in the allowance for loan
losses for the indicated periods:
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------
Balance at beginning of period $ 97,307 90,809
Provisions charged to operations 4,000 3,200
Allowance acquired through purchase transaction -- 1,852
- -------------------------------------------------------------------------------------
101,307 95,861
CHARGE-OFFS:
Residential 362 388
Commercial (a) 1,902 581
Commercial real estate -- --
Consumer 377 454
- -------------------------------------------------------------------------------------
Total charge-offs 2,641 1,423
RECOVERIES:
Residential 48 115
Commercial (a) 178 342
Commercial real estate -- --
Consumer 38 75
- -------------------------------------------------------------------------------------
Net charge-offs 2,377 891
- -------------------------------------------------------------------------------------
Balance at end of period $ 98,930 94,970
=====================================================================================
Ratio of net charge-offs to average loans outstanding
during the period (annualized) .14% .05
=====================================================================================
(a) All small business loans, both commercial and commercial real estate, are
considered commercial for purposes of charge-offs and recoveries.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5: DEFERRED TAX ASSET, NET
- -------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 2002 and
December 31, 2001 are summarized below. A 100% valuation allowance has been
applied to the gross State of Connecticut income tax assets since Webster does
not expect to have any Connecticut income tax liability for the foreseeable
future.
- ---------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss and other allowances, net $ 39,253 39,839
Loan discounts 9,646 10,214
Net operating loss carryforwards 9,372 9,767
Accrued compensation and benefits 8,525 6,163
Intangibles 7,965 8,023
Other accrued expenses 2,052 3,073
Lease financing costs 1,122 1,709
Net unrealized loss on securities 491 --
Other 820 916
- ---------------------------------------------------------------------------------------------
Total gross deferred tax assets 79,246 79,704
Less: state tax valuation allowance, net of federal benefit (10,924) (10,959)
- ---------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 68,322 68,745
- ---------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Intangibles 15,349 15,744
Loan premiums 3,378 3,915
Compensation and benefits 2,026 2,026
Mortgage servicing rights 1,879 1,815
Accrued dividends 501 570
Depreciation and amortization 334 402
Net unrealized gain on securities -- 10,498
Other 2,043 617
- ---------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 25,510 35,587
- ---------------------------------------------------------------------------------------------
Net deferred tax asset $ 42,812 33,158
=============================================================================================
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
- ---------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
- ---------------------------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
Total Total
(Dollars in thousands) Outstanding Callable Outstanding Callable
- ---------------------------------------------------------------------------------------------------------------
FIXED RATE:
1.25% to 6.87% due in 2002 $ 252,000 -- 883,000 --
4.24% to 6.67% due in 2003 313,200 -- 313,440 --
1.99% to 6.78% due in 2004 850,290 100,000 550,320 100,000
5.91% to 6.25% due in 2005 102,600 100,000 102,802 100,000
4.68% to 6.31% due in 2006 52,427 -- 52,558 --
4.88% to 6.98% due in 2007 702,339 500,000 502,362 500,000
4.49% to 5.93% due in 2008 29,680 27,000 29,773 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 510 -- 521 --
6.60% due in 2011 2,156 -- 2,200 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------------------
2,320,202 742,000 2,451,976 742,000
VARIABLE RATE:
5.76% and 6.81% due in 2004 80,000 -- 80,000 --
- ---------------------------------------------------------------------------------------------------------------
2,400,202 742,000 2,531,976 742,000
Unamortized discount on FHLB advances (623) -- (797) --
- ---------------------------------------------------------------------------------------------------------------
Total advances, net $ 2,399,579 742,000 2,531,179 742,000
===============================================================================================================
Webster Bank (the "Bank"), a wholly-owned subsidiary of the Company, had
additional borrowing capacity of approximately $49.4 million from the FHLB at
March 31, 2002 and $112.8 million at December 31, 2001. Advances are secured by
a blanket security agreement. This agreement requires the Bank to maintain as
collateral certain qualifying assets, principally mortgage loans and securities.
At March 31, 2002 and December 31, 2001, investment securities were not utilized
as qualifying collateral causing reduced additional borrowing capacity. Had
securities been used for collateral, additional borrowing capacity would be
approximately $1.8 billion at March 31, 2002 and $2.4 billion at December 31,
2001. At March 31, 2002, the Bank was in compliance with the FHLB collateral
requirements.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
- ----------------------------------------------------------------------------
Repurchase agreements are primarily collateralized by U.S. Government Agency
mortgage-backed securities. The quarter average balance for borrowings under
short-term repurchase agreements exceeded 30% of total shareholders' equity at
March 31, 2002.
The following table summarizes balances for securities sold under agreement to
repurchase and other borrowings:
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Securities sold under agreements to repurchase $1,271,484 571,675
Federal funds purchased 80,000 180,000
Senior notes 126,000 126,000
Treasury tax and loan 26,163 124,510
- --------------------------------------------------------------------------------
Total $1,503,647 1,002,185
================================================================================
Information concerning short-term borrowings for securities sold under
agreements to repurchase is summarized below:
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Balance at quarter end $1,271,484 571,675
Quarter average balance 836,889 532,147
Highest balance during quarter 1,271,484 631,947
Weighted-average maturity date 2.8 months 2.7 months
Weighted-average interest rate 1.79% 1.96
Amortized cost of collateral $1,290,118 551,521
Fair value of collateral 1,312,839 564,092
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8: DEPOSITS
- ----------------
The following table sets forth the deposit accounts of the Bank showing balances
in dollars and as percentages of total deposits at the dates indicated.
- ------------------------------------------------------------------------------------------
MARCH 31, 2002 DECEMBER 31, 2001
% of % of
total total
(Dollars in thousands) Amount deposits Amount deposits
- ------------------------------------------------------------------------------------------
BALANCE BY ACCOUNT TYPE:
Demand deposits $ 850,623 11.9% $ 905,206 12.8%
NOW accounts 810,718 11.3 803,416 11.4
Regular savings and MMDAs 2,592,132 36.1 2,430,691 34.4
Certificates of deposit ("CDs") 2,794,048 39.0 2,831,345 40.0
- ------------------------------------------------------------------------------------------
Total retail deposits 7,047,521 98.3 6,970,658 98.6
Treasury CDs 121,825 1.7 95,813 1.4
- ------------------------------------------------------------------------------------------
Total deposits $7,169,346 100.0% $7,066,471 100.0%
==========================================================================================
Interest expense on deposits is summarized as follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
NOW accounts $ 1,075 1,278
Regular savings and MMDAs 10,441 12,221
Retail CDs 27,493 43,347
Treasury CDs 604 2,590
- --------------------------------------------------------------------------------
Total $39,613 59,436
================================================================================
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - BUSINESS SEGMENTS
- --------------------------
Webster has three segments for purposes of business segment reporting. These
segments include 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
condensed statements of income and total assets for Webster's reportable
segments.
Operating income and total assets by business segment are as follows:
THREE MONTHS ENDED MARCH 31, 2002
- -----------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 55,991 16,073 24,419 -- 96,483
Provision for loan losses 2,152 1,848 -- -- 4,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision 53,839 14,225 24,419 -- 92,483
Noninterest income 26,451 8,245 7,506 -- 42,202
Noninterest expense 52,675 14,323 6,876 3,319 77,193
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 27,615 8,147 25,049 (3,319) 57,492
Income taxes 8,718 2,572 7,908 (1,142) 18,056
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 18,897 5,575 17,141 (2,177) 39,436
=======================================================================================================================
Total assets at period end $5,823,692 2,000,963 4,517,445 -- 12,342,100
THREE MONTHS ENDED MARCH 31, 2001
- -----------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 63,821 17,015 6,875 -- 87,711
Provision for loan losses 572 2,628 -- -- 3,200
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision 63,249 14,387 6,875 -- 84,511
Noninterest income 23,253 7,064 9,169 -- 39,486
Noninterest expense 55,147 13,134 6,347 3,592 78,220
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item and cumulative effect of
change in method of accounting 31,355 8,317 9,697 (3,592) 45,777
Income taxes 10,394 2,757 3,216 (1,200) 15,167
- -----------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item and
cumulative effect of change in method
of accounting 20,961 5,560 6,481 (2,392) 30,610
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 $ 20,961 5,560 2,854 (2,392) 26,983
=======================================================================================================================
Total assets at period end $5,562,743 1,710,591 4,430,221 -- 11,703,555
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Retail Banking
- --------------
The Retail Banking segment includes investment and insurance services, consumer
lending and the Bank's deposit generation and direct banking activities, which
include the operation of automated teller machines and telebanking customer
support, sales and small business banking. The Retail Banking segment also
includes the Bank's residential real estate loan origination, servicing and
secondary marketing activities.
Business Banking
- ----------------
The Business Banking segment includes the Bank's commercial and industrial,
lease financing and commercial real estate lending activities. This segment also
includes business deposits, cash management activities for business banking,
government finance and all trust activities including Webster Financial
Advisors.
Treasury
- --------
The Treasury segment includes short-term investments, investment securities,
Federal Home Loan Bank advances, repurchase agreements and other borrowings.
Adjustments
- -----------
Management allocates indirect expenses to its segments. These expenses include
administration, finance, operations and other support functions. Adjustments for
expenses not allocated to any segment in 2002 and 2001 were capital securities
expense of $3.6 million for each period and minority interest of $297,000 and
$24,000, respectively.
Allocations to segments 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 may be
periodically revised.
NOTE 10 - 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.
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING
- -------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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, was effective for all fiscal quarters
of fiscal years beginning after June 15, 2001. In June 2001, 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 did not qualify for hedge accounting under SFAS No. 133. Webster also
reclassified all held to maturity securities to available for sale as permitted
under SFAS No. 133, as amended.
NOTE 12 - NET INCOME PER COMMON SHARE
- -------------------------------------
The following tables reconcile the components of basic and diluted earnings per
share ("EPS").
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands, except per share data) 2002 2001
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $39,436 26,983
- --------------------------------------------------------------------------------
Weighted-average common shares outstanding 48,803 48,938
- --------------------------------------------------------------------------------
Basic earnings per share $ .81 .55
================================================================================
DILUTED EARNINGS PER SHARE:
Net income $39,436 26,983
- --------------------------------------------------------------------------------
Weighted-average common shares outstanding 48,803 48,938
Potential common stock:
Options 780 628
- --------------------------------------------------------------------------------
Total weighted-average diluted shares 49,583 49,566
- --------------------------------------------------------------------------------
Diluted earnings per share $ .80 .54
================================================================================
At March 31, 2002 and 2001, options to purchase 65,840 and 683,107 shares of
common stock at exercise prices between $34.75 and $37.43 and $29.00 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
the 2002 and 2001 first quarter periods were $34.17 and $28.62, respectively.
See Note 13 of Notes to Consolidated Financial Statements for information on the
effect of SFAS No. 142 on EPS.
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - GOODWILL AND OTHER INTANGIBLE ASSETS
- ----------------------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and
adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141
requires that upon adoption of SFAS No. 142, the Company evaluate its existing
intangible assets and goodwill that were acquired in a prior purchase business
combination, and to make any necessary reclassifications in order to conform
with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon
adoption of SFAS No. 142, the Company is required to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
is required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any impairment loss
is to be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period. Also,
SFAS No. 142 requires impairment testing of goodwill within the first six months
of adoption. Goodwill impairment testing is a two step process. The first step
involves comparing the fair value of a reporting unit to its carrying value. If
the carrying value of the reporting unit exceeds its fair value, step two is
required. The second step involves the allocation of the reporting unit's fair
value to all its assets and liabilities as if the reporting unit had been
acquired as of the date of measurement. The implied fair value of goodwill is
then determined and compared to its carrying value. Any impairment loss
resulting from completion of the transitional impairment test of goodwill will
be recognized as a cumulative effect of accounting change and will be recognized
in the first interim accounting period.
During the first quarter of 2002, upon the implementation of SFAS No. 142,
Webster performed a reevaluation of the remaining useful lives of all previously
recognized other intangible assets with finite useful lives and found no
adjustment necessary to the amortization periods used. Webster also found that
no reclassifications of intangible assets were required. In addition, Webster
began its evaluation of the carrying value of goodwill for impairment. While its
review is not yet completed, management does not expect any material impairment.
Webster's review will be completed during the second quarter of 2002, as
required by SFAS No. 142, and any impairment, if necessary, will be recognized
as of January 1, 2002.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following adjusts reported net income and earnings per share to consistently
reflect the provisions of SFAS No. 142 in both periods.
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
(In thousands, except for earnings per share amounts) 2002 2001
- --------------------------------------------------------------------------------
NET INCOME:
As reported $ 39,436 26,983
Add back: Goodwill amortization (not tax deductible) -- 3,252
- --------------------------------------------------------------------------------
Adjusted net income $ 39,436 30,235
================================================================================
BASIC EARNINGS PER SHARE:
As reported $ 0.81 0.55
Add back: Goodwill amortization -- 0.07
- --------------------------------------------------------------------------------
Adjusted basic EPS $ 0.81 0.62
================================================================================
DILUTED EARNINGS PER SHARE:
As reported $ 0.80 0.54
Add back: Goodwill amortization -- 0.07
- --------------------------------------------------------------------------------
Adjusted diluted EPS $ 0.80 0.61
================================================================================
The following table sets forth the carrying values of goodwill and other
intangible assets, net of accumulated amortization.
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Balances subject to amortization:
Core deposit intangibles $ 72,126 76,163
Unidentified intangibles from branch acquistions 20,034 20,309
- --------------------------------------------------------------------------------
92,160 96,472
- --------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill 223,562 222,699
Pension asset 880 880
- --------------------------------------------------------------------------------
224,442 223,579
- --------------------------------------------------------------------------------
Total goodwill and other intangible assets $316,602 320,051
================================================================================
Amortization expense of intangible assets for the three months ended March 31,
2002 totaled $4.3 million. Estimated annual amortization expense of current
intangible assets with finite useful lives, absent any intangible impairment or
change in estimated useful lives, is summarized below for each of the next five
years.
(In thousands)
- --------------------------------------------------------------------------------
FOR YEARS ENDING DECEMBER 31,
2002 (full year) $ 17,100
2003 16,383
2004 16,364
2005 16,364
2006 12,191
- --------------------------------------------------------------------------------
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS
- ------------------------------------------
At March 31, 2002, Webster had outstanding interest rate swaps with a notional
amount of $500 million. These swaps are to hedge FHLB advances and qualify for
hedge accounting under SFAS No. 133. The swaps are used to transform FHLB
advances from floating rate to fixed rate debt. The interest rate swaps mature
in 2004 ($300 million) and 2007 ($200 million) and the hedged advances mature at
the same dates. At December 31, 2001, the Bank had no derivatives that qualified
for hedge accounting under SFAS No. 133.
The Bank transacts certain derivative products with its customer base. These
customer derivatives are offset with matching derivatives with other
counterparties in order to minimize the Bank's risk. The Bank's exposure with
respect to these derivatives is limited to nonperformance by either of the
parties in the transaction - the Bank's customer or the other counterparty.
The Bank also has rate lock commitments extended to borrowers that relate to the
origination of readily marketable mortgage loans held for sale ("rate locks")
that are considered to be derivatives, and do not qualify for hedge accounting,
under SFAS No. 133. To mitigate the interest rate risk inherent in rate locks,
as well as closed mortgage loans held for sale ("loans held for sale"), Webster
Bank enters into mandatory forward commitments to sell mortgage-backed
securities and best efforts forward commitments to sell individual mortgage
loans ("forward commitments"). Rate locks and forward commitments are considered
to be derivatives under SFAS No. 133. The Company records the estimated fair
value of the rate locks and forward commitments on its balance sheet in either
other assets or other liabilities, with the offset to net gain on sales of
mortgage loans.
The fair value of a rate lock is estimated based on the expected profit or loss
to be realized on the underlying loan, including the estimated value of the
servicing rights associated with the loan, as well as the probability that the
rate lock will be exercised by the borrower ("fallout factor"). For rate locks
associated with optional ("best efforts") forward commitments, fair value is
estimated based on the pricing specified in the related forward commitment. The
fair value of mandatory forward commitments is based on current pricing obtained
from independent third parties.
At March 31, 2002, the Company had rate locks of approximately $121.9 million,
mandatory forward commitments of approximately $187.0 million, and best efforts
forward commitments of approximately $5.4 million. The impact of the estimated
fair value of the rate locks and forward commitments, offset by the lower of
cost or market adjustment on the residential mortgage loans held for sale
portfolio, was not significant to the consolidated financial statements. At
December 31, 2001, the Company had rate locks of approximately $79.7 million,
mandatory forward commitments of approximately $194.0 million, and best efforts
forward commitments of approximately $1.4 million.
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
GENERAL
- -------
Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank (the "Bank"), Webster Insurance, Inc. ("Webster
Insurance"), and Webster D&P Holdings, Inc. ("Duff & Phelps"), delivers
financial services to individuals, families and businesses primarily in
Connecticut and equipment financing 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 106 banking and other offices, over 210 ATM's and its
Internet website (www.websterbank.com). Webster Bank was founded in 1935 and
converted from a federal mutual to a federal stock institution in 1986.
Webster's financial reports can be accessed through its website and are
generally posted within 24 hours of filing with the SEC.
LENDING ACTIVITIES
- ------------------
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total gross loans were $7.2 billion
and $7.0 billion at March 31, 2002 and December 31, 2001, respectively. 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 March 31, 2002 and December 31, 2001, residential
loans represented 51% of Webster's loan portfolio and commercial loans
represented 33% and 34%, respectively. The remaining portion of the loan
portfolios consisted of consumer loans. See Webster's 2001 Annual Report on Form
10-K for a complete description of the Company's lending activities.
Residential Mortgage Loans and Mortgage Banking Activity
- --------------------------------------------------------
Webster is dedicated to providing a full array of residential mortgage loan
products that meet the financial needs of its customers. During the first
quarter of 2002, Webster originated $449 million of total residential mortgages.
In 2001, Webster originated $1.3 billion in residential mortgages for the year
and $167 million during its first quarter. Webster had residential mortgage
loans of $3.7 billion and $3.5 billion at March 31, 2002 and December 31, 2001,
respectively. The Bank originates both fixed rate and adjustable rate
residential mortgage loans. At March 31, 2002, approximately $1.3 billion, or
36%, of Webster's total residential mortgage loans were adjustable rate loans.
Webster offers adjustable rate mortgage loans at initial interest rates
discounted from the fully-indexed rate. Adjustable rate loans originated during
2002 and 2001, when fully-indexed, will be 2.75% above the constant maturity
one-year U.S. Treasury yield index. At March 31, 2002, approximately $2.4
billion, or 64%, of Webster's total residential mortgage loans had a fixed rate.
Webster sells residential mortgage loans in the secondary market in a manner
consistent with its asset/liability management objectives. At March 31, 2002 and
December 31, 2001, Webster had $102 million and $144 million, respectively, of
residential mortgage loans held for sale.
Commercial Lending
- ------------------
The Bank's middle market lending unit has lending relationships with companies
located primarily in Connecticut with annual revenues ranging from $10 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.
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
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Board of Governors of the Federal Reserve System, the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation.
At March 31, 2002 and December 31, 2001, the specialized lending unit
administered $430.9 million and $410.3 million, respectively, of funded loans
against commitments of $666.8 million and $620.1 million, respectively. The
funded loans represented approximately 5.6% and 5.8% of the total loan portfolio
at March 31, 2002 and December 31, 2001, respectively. Originations totaled $52
million during the first quarter of 2002, as compared to $10 million during the
same period in 2001. A summary of loans administered by the specialized lending
unit by type of industry follows:
- --------------------------------------------------------------------------------
Principal Balances Outstanding at
(In thousands) MARCH 31, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------
INDUSTRY:
Manufacturing $113,303 105,171
Cable 58,775 58,364
Wireless and wire-line communications 51,832 58,246
Advertising/Publishing 41,190 46,171
Other telecom (a) 31,383 35,858
Radio/TV broadcasting 20,192 21,161
Competitive local exchange carrier 16,275 16,275
All other 38,697 22,669
- --------------------------------------------------------------------------------
Direct loans 371,647 363,915
Collateral debt obligations 59,300 46,380
- --------------------------------------------------------------------------------
Total $430,947 410,295
================================================================================
(a) Includes towers and integrated communication providers.
In addition to the loans administered by the specialized lending unit, Webster
had $154.0 million of loans that are also monitored by the SNCP against
commitments of $212.4 million at March 31, 2002. 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. These 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.
The Bank's Small Business Banking unit ("SBB") provides a full complement 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. SBB 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 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 SBB administered a portfolio of approximately $333
million at December 31, 2001, which decreased 4% to $321 million at March 31,
2002. Originations totaled $27 million during the first quarter of 2002, as
compared to $33 million during the same period in 2001.
Center Capital, a lease financing subsidiary of the Bank that was acquired in
March 2001, transacts business with end-users of equipment, either by soliciting
this business on a direct basis or through referrals from various equipment
manufacturers, dealers and distributors with whom they have relationships.
Center Capital has grown its portfolio since its acquisition from $244 million
to $321 million at December 31, 2001, an increase of 32%. During the first three
months of 2002, this growth continued as the leasing portfolio grew to $339
million at quarter end, an increase of 5.7% from the prior year end. Center
Capital originated $45 million in leases during the first quarter of 2002,
compared to
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
$11 million during the same period a year ago. However, the Center Capital
acquisition was not completed until March 2001, deflating the year ago
originations total. Total 2001 lease originations amounted to $156 million.
Commercial Real Estate
- ----------------------
Webster Bank originates construction, construction-to-permanent, and permanent
commercial real estate loans primarily throughout the New England region. At
March 31, 2002, outstanding commercial real estate loans totaled $953 million,
compared to $975 million as of December 31, 2001. 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. Webster originated $58 million of commercial real estate loans
during the first quarter of 2002, compared to $25 million during the same period
a year earlier.
Consumer
- --------
Consumer loan volume increased significantly in 2001 and, at December 31, loans
totaled $1.1 billion and represented 15.9 % of the loan portfolio. This growth
did not abate during the first quarter of 2002, as consumer loans grew to $1.2
billion, or 17.4%, of the loan portfolio at March 31, 2002. The growth is
attributable to the popularity of the Bank's home equity programs and the
expansion of lending into contiguous states through a network of brokers.
Originations during the first three months of 2002 totaled $259 million, an
increase of $162 million or 167% from the same period a year ago. Consumer loan
originations during 2001 totaled $868 million.
The Bank's consumer loan products consist of:
o Home Equity Lines of Credit
o Home Equity Loans
o Second Mortgage Loans
o Installment Loans
o Automobiles Loans
o Loans Secured by Deposit Accounts
FINANCIAL CONDITION
- -------------------
Webster, on a consolidated basis at March 31, 2002 and December 31, 2001, had
total assets of $12.3 billion and $11.9 billion, including total securities of
$4.2 billion and $4.0 billion, respectively, and net loans of $7.1 billion and
$6.9 billion, respectively. At March 31, 2002 and December 31, 2001, total
deposits were $7.2 billion and $7.1 billion, borrowings were $3.9 billion and
$3.5 billion, respectively, and shareholders' equity totaled $1.0 billion at
each date.
Total assets increased $484.7 million or 4.1% at March 31, 2002 from December
31, 2001. The overall increase is primarily due to increases in securities of
$223.2 million, residential loans of $134.1 million, home equity loans of $148.2
million and prepaid expense and other assets of $32.9 million. The net increase
in other assets is primarily due to an increase in unsettled investment
portfolio sale trades of $31.0 million at the end of the current period. These
increases were partially offset by decreases in commercial real estate loans of
$22.4 million and cash of $51.8 million.
Total liabilities rose $479.7 million primarily due to increases in borrowings
of $369.9 million and deposits of $102.9 million. The net increase in total
equity of $5.0 million is primarily due to net income of $39.4 million and $1.8
million in stock option proceeds, which were directly offset by $16.7 million in
unrealized losses on the available for sale securities, $12.5 million in
repurchases of Webster common stock and $8.3 million in common stock dividend
payments.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table provides information for Webster Bank's capital ratios as of
March 31, 2002 and December 31, 2001. At March 31, 2002, the Bank was in full
compliance with all applicable regulatory capital requirements.
- ---------------------------------------------------------------------------------------------------------------------
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002
Bank's equity (to total assets) $1,092,847 8.96%
Non-includable subsidiaries (2,156)
Goodwill and other intangibles (262,340)
Disallowed excess servicing (322)
- ---------------------------------------------------------------------------------------------------------------------
Unrealized gain on certain AFS securities 82
TANGIBLE CAPITAL (TO ADJUSTED TOTAL ASSETS) 828,111 6.95 $238,308 2.00% No Requirement
Qualifying intangibles 509
- ---------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL (TO ADJUSTED TOTAL ASSETS) 828,620 6.95 476,637 4.00 $595,796 5.00%
TIER 1 RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) 828,620 11.33 292,639 4.00 438,959 6.00
Allowable general allowance for loan losses 91,485
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 920,105 12.58% $585,278 8.00% $731,598 10.00%
DECEMBER 31, 2001
Tangible capital (to adjusted total assets) $ 827,874 7.28% $227,563 2.00% No Requirement
Tier 1 capital (to adjusted total assets) 829,890 7.29 455,206 4.00 $569,007 5.00%
Tier 1 capital (to risk-weighted assets) 829,890 11.83 280,542 4.00 420,813 6.00
Total capital (to risk-weighted assets) 917,619 13.08 561,084 8.00 701,355 10.00
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. 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, within limits set by the Board of Directors.
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.
Interest-rate risk simulation analyses cannot precisely measure the impact that
higher or lower rate environments will have on net interest income or market
value. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes, changes in cash flow patterns
and market conditions, as well as changes in management's strategies. Management
believes that Webster's interest-rate risk position at March 31, 2002,
represents a reasonable level of risk.
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table summarizes the estimated change in the economic value of
Webster's assets, liabilities and off-balance sheet contracts, its equity at
risk, at March 31, 2002 and December 31, 2001, if interest rates instantaneously
increase or decrease by 100 basis points.
Estimated Market Value Change
Book Market ----------------------------
(Dollars in thousands) Value Value -100 BP +100 BP
- -----------------------------------------------------------------------------------------------------------------------
MARCH 31, 2002
Assets $ 12,342,100 12,077,745 247,070 (300,721)
Liabilities, capital securities
and preferred stock 11,330,608 11,145,554 239,698 (179,202)
Off balance sheet items -- (5,296) 14,303 (13,802)
Net dollar impact 21,675 (135,321)
Net change as percent of Tier I Capital 2.6% (16.3)
DECEMBER 31, 2001
Assets $ 11,857,382 11,614,903 233,981 (286,658)
Liabilities, capital securities
and preferred stock 10,850,915 10,786,867 241,037 (184,241)
Net dollar impact (7,056) (102,417)
Net change as percent of Tier I Capital (.09)% (12.3)
The book value of assets exceeded the market value at March 31, 2002 and
December 31, 2001 because the equity at risk model assigns no value to goodwill
and other intangible assets, which totaled $316.6 million and $320.1 million,
respectively.
The following table summarizes the estimated impact on Webster's net income as
of March 31, 2002 and December 31, 2001 for the subsequent twelve month period,
if interest rates instantaneously increase or decrease by 100 basis points.
Estimated Net Income Impact
- --------------------------------------------------------------------------------
(Dollars in thousands) -100 BP +100 BP
- --------------------------------------------------------------------------------
MARCH 31, 2002
Net dollar change $ (2,900) (1,400)
Net change as percent of base (1.7)% (0.9)
DECEMBER 31, 2001
Net dollar change $ (2,300) 600
Net change as percent of base 1.5% (0.4)
These estimates assume that management does not take any action to mitigate any
negative effects from changing interest rates. The economic values and net
income estimates are subject to factors that could cause actual results to
differ. Management believes that Webster's interest-rate risk position at March
31, 2002 represents a reasonable level of risk.
26
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 amended by recent legislation, the OTS deleted its
requirement that federal savings associations maintain a certain minimum level
of liquid assets. Instead, adequate liquidity is based upon safety and soundness
considerations and 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 its cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable cost effective funding to support the balance sheet.
Liquidity comes from a variety of sources such as the cash flow from operating
activities including principal and interest payments on loans and investments
and 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 $49.4 million at March 31, 2002. In addition,
Webster had approximately $2.2 billion of unencumbered securities at March 31,
2002 that, if necessary, could have been used to increase borrowing capacity at
the FHLB or to collateralize other borrowings such as repurchase agreements. At
March 31, 2002, Webster had FHLB advances outstanding of $2.4 billion compared
to $2.5 billion at December 31, 2001.
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 March 31, 2002, the Bank has $100.9 million of retained earnings
available for dividend to Webster. Webster also maintains $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
49.4 million shares of outstanding common stock, as of September 1, 2001.
Webster plans to purchase these shares in the open market and via unsolicited
negotiated transactions, including block purchases, over the next year. During
the first quarter of 2002, Webster repurchased a total of 376,400 shares of its
common stock. The total cost of the repurchased shares was $12.5 million with an
average per share cost of approximately $33.15.
Applicable OTS regulations require the Bank, as a federal savings bank, 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 March 31,
2002, 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 included elsewhere within this Report.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ASSET QUALITY
- -------------
LOAN PORTFOLIO REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY
Webster devotes significant attention to maintaining asset quality through
conservative underwriting standards, active servicing of loans and 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 and classified 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.
NONPERFORMING ASSETS
The aggregate amount of nonperforming assets decreased to $54.3 million at March
31, 2002 from $62.5 million at December 31, 2001 and decreased as a percentage
of total assets to .44% at March 31, 2002 from .53% at December 31, 2001.
Nonaccrual loans decreased $10.3 million and foreclosed properties decreased
$1.0 million during the current year first quarter period, while loans past due
90 days and accruing increased $3.2 million. The decrease in nonaccrual loans
from December 31, 2001 to March 31, 2002 is principally due to the combination
of a $7.5 million decrease in nonaccrual commercial and industrial loans. The
remaining $2.8 million decrease is due to residential and commercial real estate
nonaccrual loans decreasing. The allowance for loan losses at March 31, 2002 was
$98.9 million and represented 210% of nonaccrual loans and 1.37% of total gross
loans.
The following table details nonperforming assets.
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis:
Residential $ 6,262 7,677
Commercial 29,335 36,854
Commercial real estate 9,925 11,062
Consumer 1,545 1,823
- --------------------------------------------------------------------------------
Total nonaccrual loans 47,067 57,416
- --------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial 2,035 --
Commercial real estate 1,197 --
- --------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing 3,232 --
- --------------------------------------------------------------------------------
Foreclosed and repossessed properties:
Residential and consumer 1,336 2,504
Commercial 2,690 2,534
- --------------------------------------------------------------------------------
Total foreclosed property 4,026 5,038
- --------------------------------------------------------------------------------
Total nonperforming assets $54,325 62,454
================================================================================
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Net charge-offs for the current year's first quarter totaled $2.4 million,
increasing $1.5 million as compared to the same period a year ago. The increase
in net charge-offs is primarily due to commercial loan net charge-offs that
increased $1.5 million. This increase primarily involved loans within the
specialized lending and lease finance portfolios.
PAST DUE LOANS
The following table sets forth information as to the Bank's loans past due 30-89
days.
MARCH 31, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------
Principal Percent of loans Principal Percent of loans
(Dollars in thousands) Balances outstanding Balances outstanding
- ------------------------------------------------------------------------------------------------------
PAST DUE 30-89 DAYS:
Residential $14,792 0.20% $18,359 0.26%
Commercial real estate 10,689 0.15 22,973 0.33
Commercial and industrial 10,431 0.14 16,286 0.23
Consumer 3,529 0.05 5,260 0.08
- ------------------------------------------------------------------------------------------------------
Total $39,441 0.54% $62,878 0.90%
======================================================================================================
TROUBLED DEBT RESTRUCTURINGS
At March 31, 2002 and December 31, 2001, the Bank had total accruing troubled
debt restructurings of approximately $4.8 million and $5.2 million,
respectively. Interest income for the three month period ended March 31, 2002
under the restructured terms totaled $96,000 as compared to $174,000 that would
have been booked under their original terms. Interest income for the three
months ended December 31, 2001 totaled $112,000 as compared to $184,000 that
would have been booked had the loans been under their original terms.
POTENTIAL PROBLEM LOANS
The following table summarizes Webster's classified loans (substandard, doubtful
and loss), including nonperforming loans at March 31, 2002 and December 31,
2001.
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2002 2001
- --------------------------------------------------------------------------------
Substandard:
Accruing $ 94,864 88,397
Nonaccruing 43,146 47,846
- --------------------------------------------------------------------------------
Total substandard 138,010 136,243
- --------------------------------------------------------------------------------
Doubtful:
Accruing 11 66
Nonaccruing 3,756 4,464
- --------------------------------------------------------------------------------
Total doubtful 3,767 4,530
- --------------------------------------------------------------------------------
Loss -- --
- --------------------------------------------------------------------------------
Total $141,777 140,773
================================================================================
- --------------------------------------------------------------------------------
Classified as a percent of loans 2.0% 2.0
================================================================================
At March 31, 2002 and December 31, 2001, $46.9 million and $52.3 million,
respectively, of nonperforming loans (excluding accruing troubled debt
restructurings) were included in the classified loan total. The remaining
classified loans of $94.9 million and $88.5 million continued to perform in
accordance with their contractual terms and accrue interest. Due to their
classification as substandard or doubtful, these loans are considered by
management to be potential problem loans.
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001.
GENERAL
Net income for the three months ended March 31, 2002, was $39.4 million or $.80
per diluted share compared to $27.0 million or $.54 per diluted share for the
same period ended March 31, 2001. The growth in net income was driven by
increases in net interest income and growth in revenues from fee-based services.
Declines in noninterest expense also contributed to the net income increase. The
decreased noninterest expense can be partially attributed to the adoption of
SFAS No. 142, which ceased the amortization of goodwill. Included in the net
income for the three months ending March 31, 2001 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 months ended March 31, 2002, amounted to $96.5
million compared to $87.7 million for the same period in 2001. The increase in
net interest income of $8.8 million in the current three month period is due
primarily to decreased interest expense of $34.3 million offsetting a decrease
in interest income of $25.5 million. This decline resulted from the lower
interest rate environment in the current year, partially offset by an increase
in volume of interest-earning assets and interest-bearing liabilities. See the
rate/volume table elsewhere within this section for additional information.
Net interest margin for the three months ended March 31, 2002 was 3.51% as
compared to 3.37% for the same period in the previous year. The margin increased
as the cost of our borrowed funds position declined faster than the yield on
earning assets.
INTEREST INCOME
Total interest income for the three months ended March 31, 2002 was $171.1
million compared to $196.6 million in the same period a year ago, a decline of
$25.5 million, or 13.0%. The yield on interest-earning assets dropped by 131
basis points for the current year primarily due to a lower yield on loans, which
decreased 160 basis points. The yield on loans declined as a result of the low
interest rate environment during 2001 and 2002, which caused an accelerated
level of prepayments and a reinvestment into assets with a lower yield. The
impact of the lower yield on earning assets was partially offset by a higher
volume of average earnings assets, which increased by $607.6 million. The yields
on interest-earning assets for the three months ended March 31, 2002 and 2001
were 6.24% and 7.55%, respectively.
INTEREST EXPENSE
Total interest expense for the three months ended March 31, 2002 of $74.6
million compared to $108.9 million for the same period one year earlier. The
decrease in interest expense for the current year three month period was
primarily due to the lower interest rate environment, which caused a 150 basis
point decrease in the overall cost of interest-bearing liabilities. The cost of
deposit and borrowing liabilities decreased 123 and 213 basis points,
respectively, when compared to the same period in the previous year. Lower costs
on borrowings and deposits were partially offset by the impact of a higher
volume of interest-bearing funds for the period. The costs of interest-bearing
liabilities for the three months ended March 31, 2002 and 2001 were 2.82% and
4.32%, respectively. Again, the low interest rate environment resulted in new
volumes being added at a much lower rate than those maturing for both time
deposits and borrowed funds.
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001
Fully Tax- Fully Tax-
Average Equivalent Average Equivalent
(Dollars in thousands) Balance Interest (b) Yield Balance Interest (b) Yield
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Loans $ 6,996,981 111,495 6.39% $ 6,943,051 138,631 7.99%
Securities 4,044,428 59,902 5.98(a) 3,500,761 58,216 6.67(a)
------------ ------- ------------ ---------
Total interest-earning assets 11,041,409 171,397 6.24 10,443,812 196,847 7.55
Noninterest-earning assets 881,237 869,976
------------ ------------
TOTAL ASSETS $ 11,922,646 $ 11,313,788
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,023,570 39,613 2.29% $ 6,853,563 59,436 3.52%
Borrowings 3,633,984 34,997 3.85 3,308,348 49,465 5.98
------------ ------- ------------ ---------
Total interest-bearing liabilities 10,657,554 74,610 2.82 10,161,911 108,901 4.32
Noninterest-bearing liabilities 86,796 81,485
------------ ------------
TOTAL LIABILITIES 10,744,350 10,243,396
Capital securities and preferred stock of
subsidiary corporation 159,577 166,244
SHAREHOLDERS' EQUITY 1,018,719 904,148
------------ ------------
Total liabilities and shareholders' equity $ 11,922,646 $ 11,313,788
============ ============
Less: Fully-taxable equivalent adjustments (304) (235)
------- ---------
Net interest income 96,483 87,711
======= =========
Interest-rate spread 3.42% 3.23%
==== ====
Net yield on average interest-earning assets 3.51% 3.37%
==== ====
(a) For purposes of this computation, unrealized gains of $39.0 million and
$10.7 million for March 2002 and 2001, respectively are excluded from the
average balance for rate calculations.
(b) On a fully tax-equivalent basis.
31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Net interest income also can be understood in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have impacted interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rates
(changes in rates multiplied by prior volume) and (iii) the net change. The
change attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
THREE MONTHS ENDED MARCH 31,
2002 V. 2001
- --------------------------------------------------------------------------------
Increase (decrease) due to
(In thousands) Rate Volume Total
- --------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans, net $(28,197) 1,061 (27,136)
Securities and short-term investments (6,574) 8,260 1,686
- --------------------------------------------------------------------------------
Total (34,771) 9,321 (25,450)
- --------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (21,303) 1,480 (19,823)
FHLB advances and other
borrowings (18,964) 4,496 (14,468)
- --------------------------------------------------------------------------------
Total (40,267) 5,976 (34,291)
- --------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income 5,496 3,345 8,841
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.0 million, for the three month period ended
March 31, 2002 compared to $3.2 million for the respective period in 2001.
Management performs a quarterly review of the loan portfolio and based on this
review determines the level of provision necessary to maintain the allowance for
loan losses at an adequate level. Based upon management's quarterly review, the
provision for the first quarter of 2002 was increased to $4.0 million from $3.2
million a year ago. Several factors influenced the increase, including the
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 March 31, 2002, the allowance for loan losses
totaled $98.9 million and represented 210% of nonaccrual loans as compared to
$97.3 million and 169% respectively, at December 31, 2001. At March 31, 2002 and
December 31, 2001, the allowance for loan losses represented 1.37% and 1.40% of
total outstanding loans, respectively. At March 31, 2001, the allowance for loan
losses totaled $95.0 million and represented 202% of nonaccrual loans, and 1.33%
of total outstanding loans.
NONINTEREST INCOME
Total noninterest income for the three months ended March 31, 2002 totaled $42.2
million, compared to $39.5 million for the same period in 2001. When the three
month periods are compared, noninterest income increased for the current period
by $2.7 million primarily due to higher income from insurance revenues of $2.4
million, fees and service charges of $2.6 million and $573,000 of deposit
service fee income. The increase in insurance revenues was partly due to the
acquisitions of Wolf Zackin and Benefit Plans Design insurance agencies in April
2001. The acquisition of Center Capital in March 2001, contributed to the higher
level of loan fee income for the current period. These increases in noninterest
income were partially offset by decreases of $1.1 million in other income,
financial advisory revenue of $546,000 and $844,000 of lower realized net gains
from the sale of securities.
32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Total noninterest expense for the three months ended March 31, 2002 totaled
$77.2 million compared to $78.2 million for the same period in 2001. The 2001
period included $3.7 million of branch reconfiguration expenses. On an adjusted
basis, excluding the branch reconfiguration expense, noninterest expense
increased $2.7 million in the current year period. This increase for the current
year was primarily due to increases of $4.5 million for compensation and
benefits expense and $1.0 million of other expense that were partially offset by
a decrease in intangible asset amortization expense of $3.3 million. The
increase in compensation and other expense for the current year is partly due to
the acquisitions of Wolf Zackin and Benefit Plans Design insurance agencies in
April 2001 and Center Capital in March 2001. The balance of the increase is
attributable to merit increases and increased costs related to the medical and
pension plans. The adoption of SFAS No. 142 in January 2002 eliminated the
requirement to amortize goodwill but requires periodic review of goodwill for
impairment. The implementation of SFAS No. 142 in the current period, resulted
in goodwill amortization expense decreasing by $3.3 million when compared to the
same expense one year earlier. See Note 13 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further information
concerning SFAS No. 142.
INCOME TAXES
Total income tax expense for the three months ended March 31, 2002 was $18.1
million compared to $13.4 million for the same period in 2001. The effective tax
rates for the three month periods ended March 31, 2002 and 2001 were
approximately 31.4% and 33.1%, respectively. Tax expense for the current year
period is higher than the corresponding prior year period primarily due to a
higher level of income before taxes, while the effective tax rate decline is
due, primarily, to the Company's January 1, 2002 adoption of the provisions of
SFAS No. 142, regarding goodwill and other intangible asset amortization, as
more fully discussed in Note 13 of Notes to Consolidated Financial Statements.
Goodwill amortization expense, which ceased with the adoption of SFAS No. 142,
was nondeductible for income tax purposes.
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 25 and 26 under the caption
"Asset/Liability Management and Market Risk".
33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
(a) Not Applicable
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
Item 3. Defaults upon Senior Securities
-------------------------------
(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
Webster filed the following Current Report on Form 8-K with
the Securities and Exchange Commission during the quarter
ended March 31, 2002:
Current Report on Form 8-K, filed on February 11, 2002
(announcing the date of Webster's Annual Meeting of
Shareholders).
34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- --------------------------------------------------------------------------------
Exhibits:
Not applicable.
35
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: May 14, 2002 By: /s/ William J. Healy
- ------------------ ----------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
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