UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended JUNE 30, 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)
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(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) 47,957,207
- ------------------------------ -------------------------------
Class Outstanding at July 31, 2002
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Statements of Condition at June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income for the three and six months ended June 30, 2002
and 2001 (unaudited) 4
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2002
and 2001 (unaudited) 5
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2002
and 2001 (unaudited) 6
Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001 (unaudited) 7
Notes to Consolidated Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Changes in Securities and Use of Proceeds 42
Item 3. Defaults upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42
SIGNATURE 43
2
ITEM 1. INTERIM FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
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(unaudited)
JUNE 30, DECEMBER 31,
(In thousands, except share and per share data) 2002 2001
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ASSETS:
Cash and due from depository institutions $ 244,257 218,908
Short-term investments 55,539 35,937
Securities: (Note 2)
Trading, at fair value 163 --
Available for sale, at fair value 4,155,071 3,999,133
Loans receivable, net (Notes 3 and 4) 7,333,045 6,869,911
Goodwill (Note 13) 212,601 222,699
Intangible assets (Note 13) 88,760 97,352
Cash surrender value of life insurance 167,492 163,023
Premises and equipment, net 81,802 82,808
Accrued interest receivable 56,543 54,288
Deferred tax asset, net (Note 5) 16,277 33,158
Prepaid expenses and other assets 78,829 80,165
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Total assets $ 12,490,379 11,857,382
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 8) $ 7,337,589 7,066,471
Federal Home Loan Bank advances (Note 6) 2,196,984 2,531,179
Securities sold under agreements to repurchase and other borrowings (Note 7) 1,660,665 1,002,185
Accrued expenses and other liabilities 83,376 91,503
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Total liabilities 11,278,614 10,691,338
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Corporation-obligated mandatorily redeemable capital securities of
subsidiary trusts (Note 16) 135,000 150,000
Preferred stock of subsidiary corporation 9,577 9,577
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
Authorized - 200,000,000 shares
Issued - 49,507,192 shares at June 30, 2002 and
49,502,742 at December 31, 2001 495 495
Paid-in capital 414,956 415,194
Retained earnings 645,491 590,254
Treasury stock at cost, 1,080,041 shares at June 30, 2002
and 353,325 shares at December 31, 2001 (37,169) (10,141)
Unearned compensation (3,864) (3,998)
Employee Stock Ownership Plan shares purchased with debt -- (286)
Accumulated other comprehensive income 47,279 14,949
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Total shareholders' equity 1,067,188 1,006,467
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Total liabilities and shareholders' equity $ 12,490,379 11,857,382
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See accompanying notes to consolidated interim financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2002 2001 2002 2001
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INTEREST INCOME:
Loans $ 114,027 134,702 225,522 273,330
Securities and short-term investments 59,340 59,755 118,938 117,739
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Total interest income 173,367 194,457 344,460 391,069
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INTEREST EXPENSE:
Deposits (Note 8) 37,005 57,702 76,618 117,138
Borrowings 33,797 46,311 68,794 95,776
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Total interest expense 70,802 104,013 145,412 212,914
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Net interest income 102,565 90,444 199,048 178,155
Provision for loan losses (Note 4) 4,000 3,200 8,000 6,400
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Net interest income after provision for loan losses 98,565 87,244 191,048 171,755
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NONINTEREST INCOME:
Deposit service charges 14,924 14,325 28,730 27,557
Loan and loan servicing fees 6,255 5,670 11,478 8,567
Insurance revenue 6,376 5,573 13,812 10,587
Trust and investment services 4,068 4,591 8,455 8,985
Financial advisory services 4,357 3,792 8,316 8,297
Increase in cash surrender value of life insurance 2,267 2,391 4,469 4,715
Gain on sale of securities, net 1,126 1,794 4,531 6,043
Other 945 3,967 2,729 6,838
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Total noninterest income 40,318 42,103 82,520 81,589
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NONINTEREST EXPENSE:
Compensation and benefits 40,742 36,062 80,890 71,679
Occupancy 6,212 6,526 12,497 13,406
Furniture and equipment 6,812 7,160 13,380 13,871
Intangible asset amortization (Note 13) 4,280 7,886 8,593 15,450
Marketing 2,438 2,293 4,862 4,383
Professional services 2,820 2,542 5,147 4,112
Capital securities 3,537 3,615 7,153 7,231
Branch reconfiguration -- -- -- 3,703
Acquisition expenses 616 -- 616 --
Other 11,859 10,220 23,371 20,689
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Total noninterest expense 79,316 76,304 156,509 154,524
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Income before income taxes, extraordinary item and
cumulative effect of change in method of accounting 59,567 53,043 117,059 98,820
Income taxes 18,846 18,539 36,902 33,706
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Income before extraordinary item and cumulative effect
of change in method of accounting 40,721 34,504 80,157 65,114
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) -- -- (7,280) (2,418)
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NET INCOME $ 40,721 34,504 72,877 61,487
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Net Income per common share: (Notes 12 and 13)
Basic $ 0.84 0.70 1.50 1.25
Diluted 0.82 0.69 1.47 1.24
Dividends paid per common share 0.19 0.17 0.36 0.33
See accompanying notes to consolidated interim financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
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Employee Accumulated
Stock Other
Ownership Compre-
Unearned Plan Shares hensive
Common Paid-in Retained Treasury Compen- Purchased Income
(In thousands,) Stock Capital Earnings Stock sation With Debt (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642) (890) 890,374
- -----------------------------------------------------------------------------------------------------------------------------
Net income for the six months
ended June 30, 2001 -- -- 61,487 -- -- -- -- 61,487
Dividends paid -- -- (16,232) -- -- -- -- (16,232)
Allocation of ESOP shares -- 440 -- -- -- 356 -- 796
Exercise of stock options -- (1,997) -- 8,584 -- -- -- 6,587
Common stock repurchased -- -- -- (1,191) -- -- -- (1,191)
Consideration granted for
purchase acquisitions -- 221 -- 1,181 -- -- -- 1,402
Restricted stock grants, net
of amortization -- 1,059 -- 1,480 (1,936) -- -- 603
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 3,084 3,084
Other, net -- -- (8) -- -- -- -- (8)
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BALANCE, JUNE 30, 2001 $ 495 416,057 535,325 (3,307) (3,576) (286) 2,194 946,902
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SIX MONTHS ENDED JUNE 30, 2002
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BALANCE, DECEMBER 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
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Net income for the six months
ended June 30, 2002 -- -- 72,877 -- -- -- 72,877
Dividends paid -- -- (17,623) -- -- -- -- (17,623)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (948) -- 5,252 -- -- -- 4,304
Common stock repurchased -- -- -- (33,011) -- -- -- (33,011)
Restricted stock grants, net
of amortization -- 192 (17) 731 134 -- -- 1,040
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 32,330 32,330
Employee Stock Purchase Plan -- (144) -- -- -- -- -- (144)
Other, net -- 91 -- -- -- -- -- 91
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BALANCE, JUNE 30, 2002 $ 495 414,956 645,491 (37,169) (3,864) -- 47,279 1,067,188
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See accompanying notes to consolidated interim financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
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THREE MONTHS ENDED JUNE 30,
(In thousands) 2002 2001
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Net income $ 40,721 34,504
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities available for
sale arising during the period (net of income tax effect of $32,890
and ($3,901) for 2002 and 2001, respectively) 49,692 (7,979)
Reclassification adjustment for net gains included in
net income (net of income tax effect of $439
and $641 for 2002 and 2001, respectively) (663) (966)
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Other comprehensive income (loss) 49,029 (8,945)
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Comprehensive income $ 89,750 25,559
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SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001
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Net income $ 72,877 61,487
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale
arising during the period (net of income tax effect of $23,555
and $4,247 for 2002 and 2001, respectively) 35,046 6,569
Reclassification adjustment for net gains included in
net income (net of income tax effect of $1,833
and $2,312 for 2002 and 2001, respectively) (2,716) (3,485)
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Other comprehensive income 32,330 3,084
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Comprehensive income $ 105,207 64,571
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See accompanying notes to consolidated interim financial statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001
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OPERATING ACTIVITIES:
Net income $ 72,877 61,487
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 8,000 6,400
Depreciation and amortization 10,606 10,750
Amortization (accretion) of securities premiums/discounts, net 465 (540)
Amortization (accretion) of loan premiums/discounts, net 4,835 (1,484)
Amortization of intangible assets 8,593 15,450
Cumulative effect of change in accounting method (Note 11) 11,200 3,614
Gains on sale of foreclosed properties, net (237) (906)
Gains on sale of securities, net (4,549) (5,797)
Gains on the sale of loans, net (1,632) (1,385)
Losses (gains) on trading securities, net 18 (246)
(Increase) decrease in trading securities (181) 252
Loans originated for sale (501,223) (278,136)
Proceeds from sale of loans originated for sale 535,346 211,291
(Increase) decrease in interest receivable (2,255) 5,643
Increase in prepaid expenses and other assets, net (6,375) (29,136)
Increase (decrease) in interest payable 6,330 (20,705)
Decrease in accrued expenses and other liabilities, net (13,664) (30,845)
Increase in cash surrender value of life insurance (4,469) (4,715)
Proceeds from life insurance contract surrender -- 19,531
Other, net (396) --
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Net cash provided (used) by operating activities 123,289 (39,477)
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INVESTING ACTIVITIES:
Purchases of securities, available for sale (939,629) (1,077,401)
Principal collected on securities 633,628 233,830
Maturities of securities 3,550 47,543
Proceeds from sale of securities, available for sale 204,649 387,737
Increase in short-term investments, net (19,602) (9,489)
(Increase) decrease in loans, net (510,132) 231,100
Proceeds from sale of foreclosed properties 3,850 4,354
Purchase of premises and equipment, net (7,667) (287)
Net cash paid for purchase acquisitions -- (17,263)
Other, net (660) --
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Net cash used by investing activities (632,013) (199,876)
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FINANCING ACTIVITIES:
Increase in deposits, net 271,118 68,394
Decrease in FHLB advances, net (334,195) (523,107)
Increase in securities sold under agreement to repurchase and
other borrowings, net 658,480 805,755
Cash dividends paid to common shareholders (17,623) (16,232)
Redemption of Series A preferred stock of subsidiary corporation -- (40,000)
Redemption of capital securities (15,000) --
Exercise of stock options 4,304 7,431
Common stock repurchased (33,011) (1,191)
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Net cash provided by financing activities 534,073 301,050
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Increase in cash and cash equivalents 25,349 61,697
Cash and cash equivalents at beginning of period 218,908 265,035
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Cash and cash equivalents at end of period $ 244,257 326,732
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7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001
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SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 36,530 30,059
Interest paid 139,083 233,619
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties $ 1,672 2,986
Reclassification of held to maturity securities to available for sale (fair
value of $248,215 at January 1, 2001) -- 261,747
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Assets acquired and liabilities assumed in purchase business combinations
were as follows:
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SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001
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Fair value of noncash assets acquired in purchase acquisitions $ -- 247,040
Fair value of liabilities assumed in purchase acquisitions -- 251,842
Common stock issued in purchase business combinations -- 1,402
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See accompanying notes to consolidated interim financial statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
- -------------------------------------------------------------
The Consolidated Interim Financial Statements include the accounts of Webster
Financial Corporation ("Webster" or the "Company") and its subsidiaries. The
Consolidated Interim Financial Statements and Notes thereto have been prepared
in conformity with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany transactions have been eliminated in consolidation.
Amounts in prior period financial statements are reclassified whenever necessary
to conform to current period presentations. The results of operations for the
three and six month periods ended June 30, 2002 are not necessarily indicative
of the results which may be expected for the year as a whole.
The preparation of the Consolidated Interim Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the Consolidated Interim Financial Statements and
the reported amounts of revenues and expenses for the periods presented. The
actual results of Webster could differ from those estimates. Material estimates
that are susceptible to near-term changes include the determination of the
allowance for loan losses and the valuation allowance for the deferred tax
asset. These Consolidated Interim Financial Statements should be read in
conjunction with the audited Consolidated Interim Financial Statements and Notes
thereto included in Webster's 2001 Annual Report on Form 10-K for the year ended
December 31, 2001.
NOTE 2: SECURITIES
- ------------------
A summary of securities follows:
JUNE 30, 2002 DECEMBER 31, 2001
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Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
TRADING SECURITIES:
Municipal securities (a) $ 163 -- -- 163 -- -- -- --
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AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes -- -- -- -- 2,014 -- -- 2,014
Municipal bonds and notes 92,153 2,525 (38) 94,640 78,349 1,266 (536) 79,079
Corporate bonds and notes 185,361 351 (11,268) 174,444 207,024 786 (18,428) 189,382
Equity securities (b) 157,032 7,748 (720) 164,060 166,351 7,649 (4,114) 169,886
Mortgage-backed securities (c) 3,640,145 81,937 (155) 3,721,927 3,519,067 50,008 (10,303) 3,558,772
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Total 4,074,691 92,561 (12,181) 4,155,071 3,972,805 59,709 (33,381) 3,999,133
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(a) For trading securities, amortized cost equals market value and includes
recognized gains and losses.
(b) As of June 30, 2002, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $127.8 million, preferred stock of
$5.4 million and common stock of $30.9 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, comprised of Fannie Mae, Freddie Mac,
Government National Mortgage Association and non-agency issued
mortgage-backed securities
As part of its ongoing review of its investment portfolio, management evaluates
unrealized losses on securities for declines in value that are other than
temporary in nature. During the six months ended June 30, 2002, Webster recorded
a writedown of $1.8 million, included in gain on sale of securities, for two
equity holdings whose value decline was deemed to be other than temporary in
nature.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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NOTE 3: LOANS RECEIVABLE, NET
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A summary of loans, net follows:
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(Dollars in thousands) JUNE 30, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------------------
Amount % Amount %
------ ---- ------ ---
Residential mortgage loans:
1-4 family units $ 3,255,299 44.4% $ 3,058,662 44.5%
Multi-family units 108,196 1.5 104,038 1.5
Construction 180,452 2.5 223,583 3.3
Loans held for sale 109,795 1.5 143,918 2.1
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Total residential mortgage loans 3,653,742 49.9 3,530,201 51.4
- --------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,022,800 14.0 1,046,874 15.2
Lease financing 369,544 5.0 320,704 4.7
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Total commercial loans 1,392,344 19.0 1,367,578 19.9
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Commercial real estate:
Commercial mortgage 872,160 11.9 892,145 13.0
Commercial construction 120,000 1.6 82,831 1.2
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Total commercial real estate 992,160 13.5 974,976 14.2
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Consumer loans:
Home equity credit loans and lines 1,349,283 18.4 1,038,350 15.1
Other consumer 45,214 0.6 56,113 0.8
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Total consumer loans 1,394,497 19.0 1,094,463 15.9
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Total loans 7,432,743 101.4 6,967,218 101.4
Less: allowance for loan losses (99,698) (1.4) (97,307) (1.4)
- --------------------------------------------------------------------------------------------------------------
Loans receivable, net $ 7,333,045 100.0% $ 6,869,911 100.0%
- --------------------------------------------------------------------------------------------------------------
At June 30, 2002, net loans included $12.6 million of net discounts and $25.1
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 $67.4 million and $78.2 million at June 30, 2002 and
December 31, 2001, respectively.
As of June 30, 2002 and December 31, 2001, residential mortgage origination
commitments totaled $216.2 million and $158.2 million, respectively. Residential
commitments outstanding at June 30, 2002 consisted of adjustable rate and fixed
rate mortgages of $29.8 million and $186.4 million, respectively, at rates
ranging from 5.2% to 7.3%. 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 $195.7 million and $195.4
million at June 30, 2002 and December 31, 2001, respectively. At June 30, 2002
and December 31, 2001, unused portions of home equity credit lines extended were
$948.8 million and $754.7 million, respectively. Unused commercial lines of
credit, letters of credit, standby letters of credit, lease financing
commitments and outstanding commercial loan commitments totaled $913.7 million
and $800.3 million at June 30, 2002 and December 31, 2001, respectively.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 2002 and December 31, 2001, Webster serviced, for the benefit of
others, mortgage loans aggregating approximately $1.2 billion.
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:
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 98,930 94,970 97,307 90,809
Provisions charged to operations 4,000 3,200 8,000 6,400
Allowance acquired through purchase transaction -- -- -- 1,852
- ---------------------------------------------------------------------------------------------------------------
102,930 98,170 105,307 99,061
CHARGE-OFFS:
Residential 187 134 549 522
Commercial (a) 3,352 1,911 5,254 2,492
Commercial real estate -- -- -- --
Consumer 250 371 627 825
- ---------------------------------------------------------------------------------------------------------------
Total charge-offs 3,789 2,416 6,430 3,839
RECOVERIES:
Residential 89 66 136 181
Commercial (a) 428 250 606 592
Commercial real estate -- -- -- --
Consumer 40 65 79 140
- ---------------------------------------------------------------------------------------------------------------
Total recoveries 557 381 821 913
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs 3,232 2,035 5,609 2,926
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $ 99,698 96,135 99,698 96,135
- ---------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans outstanding
during the period (annualized) 0.18% 0.12 0.16 .08
- ---------------------------------------------------------------------------------------------------------------
(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 INTERIM 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 June 30, 2002 and
December 31, 2001 are summarized below. Temporary differences arise for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A 100% valuation allowance has been applied to the State
of Connecticut income tax assets since Webster expects to have minimal
Connecticut income tax liability for the foreseeable future.
- --------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Loan loss and other allowances, net $ 39,985 39,839
Intangibles 12,161 8,023
Loan discounts 9,078 10,214
Net operating loss carryforwards 8,683 9,767
Accrued compensation and benefits 8,327 6,163
Other accrued expenses 1,924 3,073
Lease financing costs 1,122 1,709
Other 1,287 916
- --------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 82,567 79,704
Less: state tax valuation allowance, net of federal benefit (11,063) (10,959)
- --------------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 71,504 68,745
- --------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale 31,960 10,498
Intangibles 14,408 15,744
Loan premiums 2,931 3,915
Compensation and benefits 2,026 2,026
Mortgage servicing rights 2,305 1,815
Accrued dividends 508 570
Depreciation and amortization 358 402
Other 731 617
- --------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 55,227 35,587
- --------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 16,277 33,158
- --------------------------------------------------------------------------------------------------------------------
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
- ---------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
- -------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
Total Total
(Dollars in thousands) Outstanding Callable Outstanding Callable
- -------------------------------------------------------------------------------------------------------------------
FIXED RATE:
1.25% to 6.87% due in 2002 $ 150,000 -- 883,000 --
4.24% to 6.67% due in 2003 312,962 -- 313,440 --
1.99% to 6.78% due in 2004 750,258 -- 550,320 100,000
5.91% to 6.25% due in 2005 102,398 100,000 102,802 100,000
4.68% to 6.31% due in 2006 52,297 -- 52,558 --
4.88% to 6.98% due in 2007 702,318 500,000 502,362 500,000
4.49% to 5.93% due in 2008 29,588 27,000 29,773 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 499 -- 521 --
6.60% due in 2011 2,113 -- 2,200 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- -------------------------------------------------------------------------------------------------------------------
2,117,433 642,000 2,451,976 742,000
VARIABLE RATE:
5.76% and 5.76% due in 2004 80,000 -- 80,000 --
- -------------------------------------------------------------------------------------------------------------------
2,197,433 642,000 2,531,976 742,000
Unamortized discount on FHLB advances (449) -- (797) --
- -------------------------------------------------------------------------------------------------------------------
Total advances, net $ 2,196,984 642,000 2,531,179 742,000
- -------------------------------------------------------------------------------------------------------------------
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 June 30, 2002, Webster had $328.9 million of
additional borrowing capacity at the FHLB. Investment securities were not
utilized as qualifying collateral. Had securities been used for collateral,
additional borrowing capacity would be approximately $2.2 billion at June 30,
2002. At June 30, 2002, the Bank was in compliance with the FHLB collateral
requirements.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM 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
June 30, 2002.
The following table summarizes balances for securities sold under agreement to
repurchase and other borrowings:
- -----------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 1,268,413 571,675
Federal funds purchased 159,000 180,000
Senior notes 126,000 126,000
Treasury tax and loan 107,252 124,510
- -----------------------------------------------------------------------------------------------------------------
Total $ 1,660,665 1,002,185
- -----------------------------------------------------------------------------------------------------------------
Information concerning short-term borrowings for securities sold under
agreements to repurchase is summarized below:
- -----------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Quarter end balance $ 1,268,413 571,675
Quarter average balance 1,161,405 532,147
Highest month end balance during quarter 1,268,413 631,947
Weighted-average maturity date Less than 1 month 2.7 months
Weighted-average interest rate 1.73% 1.96
Amortized cost of collateral $ 1,275,920 571,241
Fair value of collateral 1,306,829 584,340
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8: DEPOSITS
- ----------------
The following table sets forth deposit accounts showing balances by account type
in dollars and as percentages of total deposits at the dates indicated.
- -----------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
% of % of
total total
(Dollars in thousands) Amount deposits Amount deposits
- -----------------------------------------------------------------------------------------------------------------------------
Demand deposits $ 922,463 12.6% $ 905,206 12.8%
NOW accounts 871,018 11.9 803,416 11.4
Regular savings, escrow and MMDAs 2,743,219 37.4 2,430,691 34.4
Certificates of deposit 2,696,163 36.7 2,831,345 40.0
- -----------------------------------------------------------------------------------------------------------------------------
Total retail deposits 7,232,863 98.6 6,970,658 98.6
Treasury certificates of deposit 104,726 1.4 95,813 1.4
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 7,337,589 100.0% $ 7,066,471 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
NOW accounts $ 1,110 1,332 2,185 2,609
Regular savings and MMDAs 10,907 13,288 21,347 25,510
Retail certificates of deposit 24,357 41,176 51,850 84,536
- -----------------------------------------------------------------------------------------------------------------------------
Total retail deposits 36,374 55,796 75,382 112,655
Treasury certificates of deposit 631 1,906 1,236 4,483
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits $ 37,005 57,702 76,618 117,138
- -----------------------------------------------------------------------------------------------------------------------------
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9: BUSINESS SEGMENTS
- -------------------------
Webster has three business segments. These segments are Retail Banking, Business
Banking and Treasury. The organizational hierarchies that define the business
segments are periodically reviewed and revised. Results may be restated, when
necessary, to reflect changes in the organizational structure. The following
table presents the condensed statements of income and total assets for Webster's
reportable segments.
Operating income and total assets by business segment for the quarter and year
to date are as follows:
THREE MONTHS ENDED JUNE 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 61,668 15,944 24,953 -- 102,565
Provision for loan losses 414 3,586 -- -- 4,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 61,254 12,358 24,953 -- 98,565
Noninterest income 26,990 8,790 4,538 -- 40,318
Noninterest expense 55,242 14,233 6,473 3,368 79,316
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,002 6,915 23,018 (3,368) 59,567
Income taxes 10,441 2,241 7,283 (1,119) 18,846
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 22,561 4,674 15,735 (2,249) 40,721
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,930,491 2,053,565 4,506,323 -- 12,490,379
THREE MONTHS ENDED JUNE 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 59,612 16,895 13,937 -- 90,444
Provision for loan losses 129 3,071 -- -- 3,200
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 59,483 13,824 13,937 -- 87,244
Noninterest income 26,601 7,943 7,559 -- 42,103
Noninterest expense 53,035 13,269 6,637 3,363 76,304
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,049 8,498 14,859 (3,363) 53,043
Income taxes 11,550 3,059 5,193 (1,263) 18,539
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 21,499 5,439 9,666 (2,100) 34,504
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,638,333 1,966,555 4,213,674 -- 11,818,562
SIX MONTHS ENDED JUNE 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 115,279 29,975 53,794 -- 199,048
Provision for loan losses 2,566 5,434 -- -- 8,000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 112,713 24,541 53,794 -- 191,048
Noninterest income 53,867 17,034 11,619 -- 82,520
Noninterest expense 107,621 28,853 13,348 6,687 156,509
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 58,959 12,722 52,065 (6,687) 117,059
Income taxes 18,586 4,158 16,413 (2,255) 36,902
- ---------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in method of accounting 40,373 8,564 35,652 (4,432) 80,157
Cumulative effect of change in method
of accounting (net of taxes) (Note 11) -- (7,280) -- -- (7,280)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 40,373 1,284 35,652 (4,432) 72,877
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,930,491 2,053,565 4,506,323 -- 12,490,379
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL BUSINESS CONSOLIDATED
(In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $ 119,591 30,556 28,008 -- 178,155
Provision for loan losses 3,089 3,311 -- -- 6,400
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 116,502 27,245 28,008 -- 171,755
Noninterest income 49,854 14,919 16,816 -- 81,589
Noninterest expense 104,755 26,427 16,387 6,955 154,524
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary
item and cumulative effect of
change in method of accounting 61,601 15,737 28,437 (6,955) 98,820
Income taxes 21,043 5,471 9,662 (2,470) 33,706
- ---------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item and
cumulative effect of change in method
of accounting 40,558 10,266 18,775 (4,485) 65,114
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 $ 40,558 10,266 15,148 (4,485) 61,487
- ---------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,638,333 1,966,555 4,213,674 -- 11,818,562
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,
financial advisory services, 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 fully allocates indirect expenses to its segments. These expenses
include administration, finance, operations and other support functions.
Adjustments for expenses not allocated to any segment for the three and six
month periods ending June 30, 2002 and 2001 were capital securities expense of
$3.5 million, $7.2 million, $3.6 million and $7.2 million, respectively, and
minority interest credits of $169,000, $466,000, and $252,000, $276,000,
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.
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10: EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT
- ----------------------------------------------------------
In January 2001, a $1.8 million charge to earnings, or $1.2 million, net of
taxes, was recorded for the early extinquishment of debt. A prepayment penalty
was incurred on seven Federal Home Loan Bank advances totaling $155.3 million
with rates between 6.30% and 8.20% and remaining maturity dates ranging from 1
month to 20 months.
NOTE 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 charge to earnings, or $2.4 million net of taxes, 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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible 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.
During the second quarter of 2002, Webster completed its review of the carrying
value of its goodwill and other intangible assets in compliance with the
requirements of SFAS No. 142. As a result of this review, Webster determined
that a portion of the goodwill related to its investment in Webster D&P
Holdings, Inc. ("Duff & Phelps") was impaired, and recorded a one-time
transitional charge of $11.2 million, or $7.3 million after taxes. The charge
was recorded effective January 1, 2002 and is included in the Consolidated
Statements of Income for the six months ended June 30, 2002 in accordance with
the transitional rules under SFAS 142. This review revealed no impairment in any
other portion of goodwill. See Note 13 of Notes to Consolidated Interim
Financial Statements for further information concerning SFAS No. 141 and 142.
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: NET INCOME PER COMMON SHARE
- ------------------------------------
The following tables reconcile the components of basic and diluted earnings per
share.
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $ 40,721 34,504 72,877 61,487
- ------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 48,631 49,119 48,717 49,029
- ------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .84 .70 1.50 1.25
- ------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income $ 40,721 34,504 72,877 61,487
- ------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 48,631 49,119 48,717 49,029
Potential common stock: options 954 665 867 646
- ------------------------------------------------------------------------------------------------------------------
Total weighted-average diluted shares 49,585 49,784 49,584 49,675
- ------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .82 .69 1.47 1.24
- ------------------------------------------------------------------------------------------------------------------
For the three months ended June 30, 2002 and 2001, options to purchase 15,825
and 653,977 shares of common stock at exercise prices between $38.84 and $39.45
and $31.45 and $35.38, respectively, were not considered in the computation of
potential common stock 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 second quarters were $38.59 and $31.27, respectively. See Note 13
of Notes to Consolidated Interim Financial Statements for information on the
effect of SFAS No. 142 on earnings per share.
For the six months ended June 30, 2002 and 2001, options to purchase 72,050 and
787,799 shares of common stock at exercise prices between $36.69 and $39.45 and
$30.19 and $35.38, respectively, were also not considered in the computation of
potential common stock since the option's exercise prices were greater than the
average market price of Webster common stock. The average market prices for 2002
and 2001 year-to-date periods were $36.39 and $29.95, respectively. See Note 13
of Notes to Consolidated Interim Financial Statements for information on the
effect of SFAS No. 142 on earnings per share.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13: GOODWILL AND 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. SFAS No.
142 also 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. The review of the
carrying value of goodwill was completed during the second quarter of 2002. As a
result, it was determined that a portion of the goodwill related to the
acquisition of Duff & Phelps, LLC was impaired. Accordingly, a one-time
transitional charge of $7.3 million, after taxes, was recognized retroactive to
January 1, 2002, in accordance with the provisions of SFAS No. 142. The
valuation analysis utilized a discounted cash flow analysis that valued a stream
of free cash flows, including a terminal value, to estimate an imputed value for
Duff & Phelps. No other portion of goodwill or other intangible assets was
determined to be impaired. The imputed value of Duff & Phelps has been impacted
by the extremely challenging business environment and especially by the slowdown
in mergers and acquisitions activity, which comprised a significant portion of
Duff & Phelps revenues at the date of Webster's purchase.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Balances subject to amortization:
Core deposit intangibles $ 68,122 76,163
Unidentified intangibles from branch acquisitions 19,758 20,309
- ---------------------------------------------------------------------------------------------------------------
87,880 96,472
Balances not subject to amortization:
Pension asset 880 880
- ---------------------------------------------------------------------------------------------------------------
Total intangible assets $ 88,760 97,352
- ---------------------------------------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill $ 212,601 222,699
- ---------------------------------------------------------------------------------------------------------------
Changes in the carrying amount of goodwill for the six months ended June 30,
2002 are as follows:
Retail Business
Banking Banking Total
- ---------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 185,685 37,014 222,699
Impairment loss -- (11,200) (11,200)
Purchase price adjustments 45 369 414
Minority interest purchases -- 688 688
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 185,730 26,871 212,601
- ---------------------------------------------------------------------------------------------------------------
Amortization of intangible assets for the three and six months ended June 30,
2002 totaled $4.3 million and $8.6 million, respectively. Estimated annual
amortization expense of current intangible assets with finite useful lives,
absent any impairment or change in estimated useful lives, is summarized below
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
- ---------------------------------------------------------------------------------------------------------------
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except for earnings per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME:
As reported $ 40,721 34,504 72,877 61,487
Add back: Goodwill amortization (not tax deductible) -- 3,574 -- 6,826
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 40,721 38,078 72,877 68,313
- ---------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
As reported $ 0.84 0.70 1.50 1.25
Add back: Goodwill amortization -- 0.08 -- 0.14
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted basic EPS $ 0.84 0.78 1.50 1.39
- ---------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
As reported $ 0.82 0.69 1.47 1.24
Add back: Goodwill amortization -- 0.07 -- 0.14
- ---------------------------------------------------------------------------------------------------------------------------
Adjusted diluted EPS $ 0.82 0.76 1.47 1.38
- ---------------------------------------------------------------------------------------------------------------------------
NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS
- -----------------------------------------
At June 30, 2002, Webster had outstanding interest rate swaps with a notional
amount of $500 million. These swaps are to hedge FHLB advances and qualify for
fair value hedge accounting under SFAS No. 133. The swaps are used to transform
FHLB advances from fixed rate to floating rate 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 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"), the Bank enters into
mandatory forward commitments to sell mortgage-backed securities and best
efforts forward commitments to sell individual mortgage loans ("forward
commitments"). Rate locks and forward commitments are considered to be
derivatives under SFAS No. 133. The estimated fair value of the rate locks and
forward commitments are recorded on the balance sheet in either other assets or
other liabilities, with the offset to net gain on sales of loans, included in
loan and loan servicing fees.
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.
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 2002, the Company had rate locks of approximately $158.3 million,
mandatory forward commitments of approximately $187.1 million, and best efforts
forward commitments of approximately $8.6 million. The recording of the
estimated fair value of the rate locks and forward commitments, offset by the
lower of cost or market adjustment on the residential mortgage loans held for
sale portfolio, did not significantly impact the Consolidated Interim 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.
NOTE 15: RECENT ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
On July 30, 2002, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they occur
rather than at the date of commitment to an exit or disposal plan. SFAS No. 146
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. Management does not expect any material impact on its
financial statements when the statement is adopted.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections". This statement amends
SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for fiscal years beginning after May 15, 2002, with early
application encouraged. Management does not expect any material impact on its
financial statements when this statement is adopted.
On October 3, 2001, FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This Statement also
supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The provisions of this Statement are to be
applied prospectively. The Company adopted SFAS No. 144 effective January 1,
2002, without material impact on its financial statements.
On August 16, 2001, FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to all entities. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. Under this
Statement, the liability is discounted and the accretion expense is recognized
using the credit-adjusted risk-free interest rate in effect when the liability
was initially recognized. FASB issued this Statement to provide consistency for
the accounting and reporting of liabilities associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Earlier application is permitted. The Company
does not expect any material impact on its financial statements when this
Statement is adopted.
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". Statement 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. Statement 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 Statement No. 142. Statement 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. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company
adopted the provisions of Statement No. 141 effective July 1, 2001 and the
provisions of Statement No. 142 effective January 1, 2002. Refer to Note 13 of
Notes to Consolidated Interim Financial Statements for information concerning
the impact of SFAS Nos. 141 and 142 on Webster.
On July 24, 2002 Webster announced, effective July 1, 2002, it will begin using
SFAS No. 123 "Accounting for Stock- Based Compensation", as the method of
accounting for employee stock-based compensation. Under the provisions of SFAS
No. 123, Webster had previously elected to use APB No. 25 to account for
employee stock-based compensation. By electing to use the provisions of SFAS No.
123, compensation expense will be recorded for employee stock option grants
using the fair value method and amortized over the vesting period. Under current
guidance, the impact of using SFAS No. 123 to account for employee stock-based
compensation will be to reduce diluted earnings per share by $0.01 in 2002.
Refer to Note 15 of the Notes to Consolidated Financial Statements included in
Webster's 2001 Annual Report on Form 10-K for more information on the effects of
electing to use SFAS No. 123 to account for employee stock based compensation.
NOTE 16: CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
- ---------------------------------------------------------------------------
SUBSIDIARY TRUSTS
- -----------------
In 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Company. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I was $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997.
On April 1, 1997, Eagle Financial Capital Trust I, subsequently renamed Webster
Capital Trust II ("Trust II"), completed a $50 million private placement of
10.00% capital securities. Proceeds from the issue were invested by Trust II in
junior subordinated deferrable debentures issued by Eagle due in 2027. These
debentures represent the sole assets of Trust II.
The subordinated debt securities are unsecured obligations of Webster and are
subordinate and junior in right of payment to all present and future senior
indebtedness of Webster. Webster has entered into guarantees, which together
with Webster's obligations under the subordinated debt securities and the
declarations of trust governing Trust I and Trust II, including its obligations
to pay costs, expenses, debts and liabilities (other than trust securities),
provides a full and unconditional guarantee of amounts on the capital
securities.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During the second quarter 2002, Webster purchased $15.0 million of its capital
securities that were issued by Webster Capital Trust I and II. $5.0 million of
the purchased securities had been issued by Webster Capital Trust I and, as of
June 30, 2002, had remaining capital securities outstanding of $95.0 million.
$10.0 million of the reacquired securities had been issued by Webster Capital
Trust II and, as of June 30, 2002, had remaining capital securities outstanding
of $40.0 million. Refer to Webster's 2001 Annual Report filed on Form 10-K for
further information concerning Webster's Capital Trust I and II.
Expense of the securities, including amortization of issuance costs, for the
three months ended June 30, 2002 and 2001, were $3.5 million and $3.6 million,
respectively, and for the six months ended June 30, 2002 and 2001, was $7.2
million for each period.
25
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 Bank provides
business and consumer banking, mortgage lending, trust and investment services
and insurance services through 108 banking offices, 214 ATM's and its Internet
website (www.websteronline.com). The Bank was founded in 1935 and converted from
a federal mutual to a federal stock institution in 1986. Webster's financial
reports can be accessed through its website and are generally posted within 24
hours of filing with the SEC.
FINANCIAL CONDITION
- -------------------
Webster, on a consolidated basis at June 30, 2002 and December 31, 2001, had
total assets of $12.5 billion and $11.9 billion, respectively, including total
securities of $4.2 billion and $4.0 billion, respectively, and net loans of $7.3
billion and $6.9 billion, respectively. At June 30, 2002 and December 31, 2001,
total deposits were $7.3 billion and $7.1 billion, respectively, borrowings were
$3.9 billion and $3.5 billion, respectively, and shareholders' equity totaled
$1.1 billion and $1.0 billion, respectively.
Total assets increased $633.0 million, or 5.3%, at June 30, 2002 from December
31, 2001. The overall increase is primarily due to increases in securities of
$156.1 million, residential loans of $123.5 million, home equity loans of $310.9
million, lease financing of $48.8 million and cash and due from banks of $25.3
million. These increases were partially offset by decreases in commercial loans
of $24.1 million, intangible assets of $18.7 million and net deferred tax asset
of $16.9 million. The change in the deferred tax asset is primarily due to a
favorable change in net unrealized gains on available for sale securities, which
increased by $54.1 million for the current six month period. See Note 5 of Notes
to Consolidated Interim Financial Statements contained elsewhere in this report
for further information on the deferred tax asset.
Total liabilities rose $587.3 million at June 30, 2002 from December 31, 2001
primarily due to increases in borrowings of $324.3 million and deposits of
$271.1 million. The change in total borrowings was primarily due to borrowings
under repurchase agreements increasing $696.7 million, partially offset by FHLB
advances declining by $334.2 million. Refer to Notes 6 and 7 of Notes to
Consolidated Interim Financial Statements contained elsewhere in this report for
further information on Webster's borrowings. The net increase in total equity of
$60.7 million is primarily due to net income of $72.9 million, $4.3 million in
stock option exercise proceeds and $32.3 million in unrealized gains on the
available for sale securities, which were partially offset by $33.0 million in
repurchases of Webster common stock and $17.6 million in common stock dividend
payments.
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
LENDING ACTIVITIES
- ------------------
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total loans were $7.4 billion and
$7.0 billion at June 30, 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 small
business loans. At June 30, 2002 and December 31, 2001, residential loans
represented 50% and 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. Refer to 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 three and
six months ending June 30, 2002, Webster originated $480.4 million and $929
million, respectively, of total residential mortgages. In 2001, Webster
originated residential mortgage loans of $322.9 million during its second
quarter and $1.3 billion for the year. Substantially all this originated loan
volume is sold in the secondary market. The residential mortgage loan portfolio
totaled $3.7 billion and $3.5 billion at June 30, 2002 and December 31, 2001,
respectively. The Bank originates both fixed rate and adjustable rate
residential mortgage loans. At June 30, 2002, approximately $1.3 billion, or
35%, of its total residential mortgage loan portfolio was adjustable rate
loans. Adjustable rate mortgage loans are offered 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 June 30, 2002, approximately $2.4
billion, or 65%, of 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 June 30, 2002 and December
31, 2001, Webster had $109.8 million and $143.9 million, respectively, of
residential mortgage loans held for sale.
Commercial Lending
- ------------------
The middle market lending unit has lending relationships with companies located
primarily in Connecticut with annual revenues ranging from $10 to $250 million.
Middle market loans totaled $451 million and $492 million at June 30, 2002 and
December 31, 2001, respectively. The decline in loans is attributable to the
slowdown in economic growth and the resulting impact this had on business in the
State. The Bank provides these middle market customers 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 cash management services,
including automated investments, lock box and account reconciliation services.
As part of its strategy to expand its commercial loan portfolio, the Bank 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 broader national and syndicated lending
markets. A portion of the loans administered by the Specialized Lending unit is
monitored by the Shared National Credit Program ("SNCP"). The SNCP is designed
to provide consistent review and classification by bank regulatory agencies of
any loan or loan commitment that totals $20 million or more and is shared by
three or more supervised institutions. These bank regulatory agencies include
the Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
At June 30, 2002 and December 31, 2001, Specialized Lending administered $420.3
million and $410.3 million, respectively, of funded loans against commitments of
$662.7 million and $620.1 million, respectively. The funded loans represented
approximately 5.7% and 5.8% of the total loan portfolio at June 30, 2002 and
December 31, 2001, respectively. Originations totaled $48.9 million during the
second quarter of 2002, as compared to $5.0 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) JUNE 30, 2002 DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------
INDUSTRY:
Manufacturing $ 87,420 99,584
Wireless and wire-line communications 51,019 58,246
Cable 48,843 58,364
Advertising/Publishing 48,356 46,171
Towers and integrated communication providers 31,424 35,858
Competitive local exchange carrier 15,770 16,275
Radio/TV broadcasting 13,167 21,161
Pharmaceuticals 9,308 --
Energy 6,786 --
All other 45,251 28,256
- ------------------------------------------------------------------------------------------------------------
Total direct loans 357,344 363,915
Collateralized debt obligations 62,980 46,380
- ------------------------------------------------------------------------------------------------------------
Total loans $ 420,324 410,295
- ------------------------------------------------------------------------------------------------------------
In addition to the loans administered by the Specialized Lending unit, Webster
had $159.5 million of loans that are also monitored by the SNCP against
commitments of $239.7 million at June 30, 2002. This compares with $148.2
million of loans and $214.0 million of commitments at December 31, 2001. These
loans are located primarily in the Northeast region and are commercial loans and
real estate loans. The loans are managed by the Bank's commercial division,
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 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 $10 million. This
market represents a significant percentage of commercial businesses located in
Connecticut. SBB uses the Bank's branch network as well as dedicated business
development officers to fully service its existing customer base and call on
potential new customers. 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 of the Bank's commercial loan products
including lines of credit, letters of credit, term loans and mortgages on
owner-occupied real estate. The Bank is also a Small Business Administration
("SBA") preferred lender authorized to offer all SBA loan guaranty products and
is also active in several loan programs provided through the Connecticut
Development Authority. The SBB administered a portfolio of approximately $333.0
million at December 31, 2001, which decreased 4.8% to $317.0 million at June 30,
2002 reflecting the reduced level of business activity as a result of the
economic environment. Originations totaled $31.4 million and $58.4 million for
the second quarter and first six month of 2002, respectively, as compared to
$35.3 million and $68.0 million during the same respective periods in 2001.
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Center Capital Corporation ("Center Capital"), a lease financing subsidiary of
the Bank 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
business relationships. Center Capital has grown its portfolio since its
acquisition from $243.7 million to $320.7 million at December 31, 2001, an
increase of 31.6%. During the first six months of 2002, this growth continued as
the leasing portfolio grew to $369.5 million at period end, an increase of 15.3%
from the prior year end. Center Capital originated $64.0 million in leases
during the second quarter of 2002, compared to $47.7 million during the same
period a year ago. Total originations for the six month periods of 2002 and 2001
were $109.2 and $58.7 million, respectively. The Center Capital acquisition was
not completed until March 2001, which impacted the 2001 originations total.
On May 20, 2002, Webster announced it had reached a definitive agreement to
acquire the asset-based lending division of IBJ Whitehall Business Credit
Corporation, a subsidiary of the Industrial Bank of Japan Trust Company. The
asset based lending operations will operate as Whitehall Business Credit
Corporation, a subsidiary of Webster Bank. In the transaction, which closed
August 2, 2002, Webster acquired approximately $500 million of outstanding loans
and letters of credit, most of which are customers in the Northeast. Webster
will employ the current staff of approximately 55 people and will maintain
offices in New York City, NY, Braintree, MA and Atlanta, GA. Webster also
expects to obtain approximately $21 million of deposits and cash management
accounts related to the purchased loans.
Commercial Real Estate
- ----------------------
Webster Bank originates construction, construction-to-permanent, and permanent
commercial real estate ("CRE") loans primarily throughout the New England
region. At June 30, 2002, outstanding commercial real estate loans totaled
$992.2 million compared to $975.0 million as of December 31, 2001. Included in
these loans are owner-occupied CRE loans of $468.6 million and $489.4 million at
June 30, 2002 and December 31, 2001, respectively. 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 $188.4 million of commercial real estate
loans during the first six months of 2002 compared to $96.9 million during the
same period a year earlier.
Consumer
- --------
Consumer loan volume increased significantly in 2001 and, at December 31,
consumer loans totaled $1.1 billion and represented 15.9% of the loan portfolio.
This growth continued during the first six months of 2002, as consumer loans
grew to $1.4 billion, or 19.0%, of the loan portfolio at June 30, 2002. The
growth is attributable to the lower interest rate environment and the popularity
of the Bank's home equity programs and the expansion of lending into states
contiguous to Connecticut and other targeted states through a network of
brokers. Originations during the first six months of 2002 totaled $518.5
million, an increase of $238.4 million or 85.1% from the same period a year
earlier. Consumer loan originations during the year 2001 totaled $868.3 million.
INVESTMENT ACTIVITIES
- ---------------------
Webster, directly or through the Bank, maintains an investment portfolio that is
primarily structured to provide a source of liquidity for operating needs,
generate interest income and to provide a means to balance interest rate
sensitivity. At June 30, 2002, investment portfolio totaled $4.2 billion, with
$4.1 billion and $65.5 million held by the Bank and Parent Company,
respectively. At December 31, 2001, the investment portfolio totaled $4.0
billion, with $3.9 billion and $83.2 million held by the Bank and Parent
Company, respectively. At both June 30, 2002 and December 31, 2001, the Bank's
investment portfolio consisted primarily of mortgage-backed securities, while
the Parent Company's portfolio consisted primarily of equities, mutual funds and
corporate securities.
The portfolios are managed by the Bank's Treasury Group in accordance with
regulatory guidelines and established corporate investment policies. These
guidelines and policies include limitations on aspects such as investment
grade/ratings, concentrations and investment type to help manage risk associated
with investing in securities.
29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
DEPOSIT ACTIVITIES
- ------------------
Total deposits increased $271.1 million, or 3.8%, at June 30, 2002 from December
31, 2001. The increase occurred entirely in the lower cost, non-maturity
deposits, as demand deposits, NOW accounts, regular savings and money market
deposits increased $397.4 million, or 9.6%, while certificates of deposits
decreased $126.3 million, or 4.3%. These changes reflect the success of
Webster's strategic plan, which called for increasing lower cost, non-maturity
deposits as a percentage of total deposits. This percentage increased to 61.9%
at June 30, 2002 from 58.6% at December 31, 2001, and 51.6% at December 31,
2000.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- ------------------------------------------
Interest-rate risk is the sensitivity of the market value of interest-sensitive
assets and liabilities and the sensitivity of earnings to changes in interest
rates over short-term and long-term time horizons. Webster's Asset/Liability
Management Committee manages interest-rate risk to maximize net income and net
market value over time in changing interest-rate environments, within limits set
by the Board of Directors. Management measures interest-rate risk using
simulation analyses to measure earnings and equity at risk. Earnings at risk is
defined as the change in earnings from a base scenario due to changes in
interest rates. Equity at risk is defined as the change in the net market value
of assets and liabilities due to changes in interest rates. Market value is
measured as the net present value of future cash flows. Simulation analysis
incorporates assumptions about balance sheet changes such as asset and liability
growth, loan and deposit pricing and changes to the mix of assets and
liabilities. Key assumptions relate to the behavior of interest rates and
spreads, prepayment speeds and the run-off of deposits. From such simulations,
interest-rate risk is quantified and appropriate strategies are formulated and
implemented.
Interest-rate risk simulation analyses cannot precisely measure the impact that
higher or lower rate environments will have on net interest income or market
value. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes, changes in cash flow patterns
and market conditions, as well as changes in management's strategies. These
estimates assume that management does not take any action to mitigate any
negative effects from changing interest rates. Management believes that
Webster's interest-rate risk position at June 30, 2002 represents a reasonable
level of risk.
The following table summarizes the estimated change in the market value of
Webster's assets, liabilities and off-balance sheet contracts and the change in
its equity at risk at June 30, 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
- ---------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002
Assets $ 12,490,379 12,307,291 197,862 (280,368)
Liabilities, capital securities
and preferred stock 11,423,191 11,416,802 270,658 (217,003)
Off balance sheet items -- 7,442 13,328 (12,820)
Net dollar impact (59,468) (76,185)
Net change as percent of Tier I Capital (6.8)% (8.7)
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 (0.9)% (12.3)
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The book value of assets exceeded the market value at June 30, 2002 and December
31, 2001 because the equity at risk model assigns no value to goodwill and other
intangible assets, which totaled $301.4 million and $320.1 million,
respectively.
The following table summarizes the estimated impact on Webster's net income as
of June 30, 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
- --------------------------------------------------------------------------------
JUNE 30, 2002
Net dollar change $ (9,700) 2,300
Net change as percent of base (6.3)% 1.5
DECEMBER 31, 2001
Net dollar change $ (2,300) 600
Net change as percent of base (1.5)% 0.4
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
Webster is required to maintain sufficient liquidity to ensure its safe and
sound operation. Liquidity management allows it to meet its cash needs at a
reasonable cost under various operating environments. Liquidity is actively
managed and reviewed in order to maintain stable, cost-effective funding to
support the balance sheet. Liquidity comes from a variety of sources such as the
cash flow from operating activities including principal and interest payments on
loans and investments, unpledged securities, which can be sold or utilized as
collateral to secure funding, and by maintaining the ability to attract new
deposits. Webster's goal is to develop 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 $328.9 million at June 30, 2002. In addition,
Webster had approximately $2.1 billion of unpledged securities at June 30, 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 June
30, 2002, Webster had FHLB advances outstanding of $2.2 billion compared to $2.5
billion at December 31, 2001.
The main sources of liquidity at the holding company level are dividends from
the Bank, investment income and net proceeds from capital offerings and
borrowings. The main uses of liquidity are 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 June 30, 2002, the Bank had $144.7 million of retained earnings
available for dividend to the holding company. Webster also maintains $100.0
million in available revolving lines of credit with correspondent banks.
On September 14, 2001, Webster announced a stock buyback program of up to 2.5
million shares, or approximately 5 percent of its 49.4 million shares of
outstanding common stock, as of September 1, 2001. Webster planned to purchase
these shares in the open market and via unsolicited negotiated transactions,
including block purchases, over the one year period ending September 14, 2002.
Through August 9, 2002, Webster has repurchased approximately 2.2 million shares
of its common stock under this buyback program, including 917,400 shares
31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
repurchased during the first six months of 2002. The total cost of the shares
repurchased during the first six months of 2002 was $33.0 million with an
average per share cost of approximately $35.98.
On July 23, 2002, Webster announced an additional stock buyback program of 2.4
million shares, or approximately 5 percent of then outstanding shares. This
announcement, combined with the 268,000 shares remaining from the September 2001
buyback program, results in current repurchase authorization of approximately
2.7 million shares.
Applicable Office of Thrift Supervision ("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 June 30, 2002, the Bank was in full compliance with all
applicable capital requirements and exceeded the capital requirements for a
"well capitalized" institution. The following table provides information on
Webster Bank's capital ratios as of June 30, 2002 and December 31, 2001.
- ----------------------------------------------------------------------------------------------------------------------------
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2002
Bank's equity (to total assets) $ 1,184,120 9.58%
Non-includable subsidiaries (2,156)
Goodwill and other intangibles (258,687)
Unrealized gain on certain AFS securities (47,401)
- ----------------------------------------------------------------------------------------------------------------------------
TANGIBLE CAPITAL (TO ADJUSTED TOTAL ASSETS) 875,876 7.29 $ 240,226 2.00% No Requirement
Qualifying intangibles 345
- ----------------------------------------------------------------------------------------------------------------------------
TIER 1 CAPITAL (TO ADJUSTED TOTAL ASSETS) 876,221 7.29 480,465 4.00 $ 600,581 5.00%
TIER 1 RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) 876,221 11.71 299,296 4.00 448,944 6.00
Allowable allowance for loan losses 93,537
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 969,758 12.96% $ 598,592 8.00% $ 748,240 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 QUALITY
- -------------
LOAN PORTFOLIO REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY
Webster devotes significant attention to maintaining asset quality through
prudent 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 potential losses
inherent in the current loan portfolio. Potential 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 these loans.
32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management considers the adequacy of the allowance for loan losses a critical
accounting policy. As such, the adequacy of the allowance is subject to
judgement in its determination. Actual loan losses could differ materially from
management's estimate if actual loss factors and conditions differ significantly
from the assumptions utilized. These factors and conditions include the general
economic conditions within Connecticut and nationally, trends with industries
where the loan portfolio is concentrated, real estate values, interest rates and
the financial condition of individual borrowers. While management believes the
allowance for loan losses is adequate at June 30, 2002, actual results in future
periods may prove different and these differences could be significant.
Refer to the Allowance for Loan Losses Methodology section within Management's
Discussion and Analysis of the Webster's 2001 Annual Report on Form 10-K for
additional information on the allowance for loan losses methodology.
NONPERFORMING ASSETS
The amount of nonperforming assets decreased to $51.6 million at June 30, 2002
from $62.5 million at December 31, 2001 and decreased as a percentage of total
assets to 0.41% at June 30, 2002 from 0.53% at December 31, 2001. Nonaccrual
loans decreased $10.0 million and foreclosed properties decreased $1.9 million
since the prior year end, while loans past due 90 days and accruing increased
$1.0 million. The decrease in nonaccrual loans from December 31, 2001 to June
30, 2002 is principally due to a $6.2 million decrease in nonaccrual commercial
loans. This decrease was primarily due to two commercial loan relationships with
balances of $5.3 million that were paid off in the first quarter of 2002. The
remaining $3.8 million decrease is due to residential, commercial real estate
and consumer nonaccrual loans decreasing. The allowance for loan losses at June
30, 2002 was $99.7 million and represented 206% of nonaccrual loans and 1.34% of
total loans.
The following table details nonperforming assets.
- -------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis:
Residential $ 5,991 7,677
Commercial 40,042 47,916
Consumer 1,409 1,823
- -------------------------------------------------------------------------------------------------------
Total nonaccrual loans 47,442 57,416
- -------------------------------------------------------------------------------------------------------
Loans past due 90 days or more and accruing:
Commercial 899 --
Commercial real estate 121 --
- -------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing 1,020 --
- -------------------------------------------------------------------------------------------------------
Foreclosed and repossessed properties:
Residential and consumer 805 2,504
Commercial 2,294 2,534
- -------------------------------------------------------------------------------------------------------
Total foreclosed property 3,099 5,038
- -------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 51,561 62,454
- -------------------------------------------------------------------------------------------------------
33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PAST DUE LOANS
The following table sets forth information as to the Bank's loans past due 30-89
days.
JUNE 30, 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 $ 14,233 0.19% $ 18,359 0.26%
Commercial 15,776 0.21 39,259 0.56
Consumer 3,617 0.05 5,260 0.08
- -------------------------------------------------------------------------------------------------------------
Total $ 33,626 0.45% $ 62,878 0.90%
- -------------------------------------------------------------------------------------------------------------
The overall decrease in loans past due 30-89 days of $29.3 million at June 30,
2002 from December 31, 2001 is primarily due to a reduction of $19.5 million in
commercial real estate loans. Three commercial real estate loan relationships
that totaled $17.2 million were current at June 30, 2002, but past due at
December 31, 2001.
TROUBLED DEBT RESTRUCTURINGS
At June 30, 2002 and December 31, 2001, the Bank had total accruing troubled
debt restructurings of approximately $3.1 million and $5.1 million,
respectively. A troubled debt restructuring occurs when the Bank for economic or
legal reasons related to debtor's financial difficulties grants a concession to
the debtor that it would not otherwise consider. Interest income recognized for
the three and six months ended June 30, 2002 under the restructured terms
totaled $57,000 and $153,000 respectively, as compared to $100,000 and $274,000
that would have been booked under their original terms. Interest income
recognized for the three and six months ended June 30, 2001 totaled $76,000 and
$179,000 respectively, as compared to $125,000 and $312,000 that would have been
booked had the loans been under their original terms. At June 30, 2002, the $3.1
million of debt restructurings were performing in accordance with their
restructured terms and are not included in nonaccruing loans.
POTENTIAL PROBLEM LOANS
The following table summarizes Webster's classified loans (substandard, doubtful
and loss), including nonperforming loans at June 30, 2002 and December 31, 2001.
- -----------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
- -----------------------------------------------------------------------------
Substandard:
Accruing $ 106,281 88,397
Nonaccruing 43,634 47,846
- -----------------------------------------------------------------------------
Total substandard 149,915 136,243
- -----------------------------------------------------------------------------
Doubtful:
Accruing 6 66
Nonaccruing 3,808 4,464
- -----------------------------------------------------------------------------
Total doubtful 3,814 4,530
- -----------------------------------------------------------------------------
Loss -- --
- -----------------------------------------------------------------------------
Total $ 153,729 140,773
- -----------------------------------------------------------------------------
Classified as a percent of loans 2.2% 2.0
- -----------------------------------------------------------------------------
34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The prolonged weakness in the business sector of the economy has continued to
impact the level of classified loans. These loans increased $13.0 million since
December 31, 2001. This increase was primarily in Business Banking, which
includes Middle Market, Small Business and Lease Financing, which increased
$10.1 million from December 31, 2001 and its classified loans totaled $85.5
million at June 30, 2002. The Specialized Lending portfolio where classified
loans at the end of the second quarter were $59.2 million, increased $5.7
million from year end. Additionally, decreases of $2.8 million occurred in the
residential and consumer portfolios. Webster believes that early identification
and management of problem loans serves to minimize future losses, therefore it
employs a rigorous portfolio review and management process, which identifies
deteriorating credit risk and proactively manages problem loans.
The total of nonperforming loans included in classified loans at June 30, 2002
was $47.4 million down $4.9 million from year end. The remaining classified
loans of $106.3 million continued to perform in accordance with their
contractual terms and accrue interest. Due to their classification as
substandard or doubtful, these currently performing loans are considered by
management to be potential problem loans, and may in the future become
nonperforming loans.
RESULTS OF OPERATIONS
- ---------------------
A COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001.
GENERAL
Net income for the three months ended June 30, 2002, was $40.7 million or $.82
per diluted share compared to $34.5 million or $.69 per diluted share for the
same period ended a year earlier. Net income for the six months ended June 30,
2002 was $72.9 million or $1.47 per diluted share compared to $61.5 million or
$1.24 per diluted share for the same period in the previous year.
The increase in net income for the current quarter and six months was driven by
growth in revenues, which rose approximately 10%. Most of the revenue increase
came as a result of growth in net interest income due to the benefits of a
favorable interest rate environment, significant increase in low-cost core
deposits and loan growth.
During the second quarter, the Company completed a review of the carrying value
of all its goodwill and other intangible assets in compliance with the
requirements of SFAS No. 142 and determined that a portion of goodwill related
to the acquisition of Duff & Phelps LLC was impaired. Accordingly, a one-time
transitional charge of $7.3 million, net of taxes, or $0.15 per diluted share,
was recorded retroactive to January 1, 2002.
Included in the net income for the six months ending June 30, 2001 are a $2.4
million expense, net of taxes, for the cumulative effect of a change in the
method of accounting relating to the implementation of SFAS No. 133 and an
extraordinary expense of $1.2 million, net of taxes, which represents costs
incurred for the early extinguishment of FHLB debt. Combined these two items
have the effect of reducing diluted per share earnings $0.07.
NET INTEREST INCOME
Net interest income for the quarter increased $12.1 million, or 13.4%, over the
prior year and for the six month period was up $20.9 million, or 11.7%, compared
to the same period a year earlier. This improvement can be attributed to
benefits of a lower interest rate environment and the favorable effect it had on
the net interest margin. The growth in earning assets together with a
significant increase in low-cost core deposits also contributed to the growth in
net interest income. The net interest margin for the quarter was 3.61% compared
to 3.39% a year ago and for the six month period was 3.56% up from 3.37% for the
same period last year.
35
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The decline in interest income and interest expense is attributable to a lower
interest rate environment in 2002 as compared to the prior year. Throughout
2001, the Board of Governors of the Federal Reserve Bank reduced interest rates
in order to stimulate economic growth. For the first six months of 2002, the
prime interest rate averaged 4.75% compared to 7.98% during the corresponding
period a year ago. This had significant impact on the yields on earning assets
and the cost of interest-bearing liabilities.
INTEREST INCOME
Total interest income for the second quarter of 2002 decreased $21.1 million, or
10.8%, from the second quarter of the prior year. The decline is primarily due
to a drop in the yield realized on interest-earning assets, which decreased by
119 basis points, primarily from a 138 basis point decline on the yield in the
loan portfolio. 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 on
interest income of a lower realized yield on interest-earning assets was
partially offset by volume increase in average earnings assets of $748.5
million.
Total interest income for the first six months of 2002 decreased $46.6 million,
or 11.9%, from the same period a year ago. The yield on interest-earning assets
decreased by 125 basis points, resulting in a lower level of interest income.
Again, the yield on loans was the primary factor declining 138 basis points from
the same period a year earlier. Partially offsetting the effect of lower rates
was the volume increase in average interest-earning assets of $673.5 million.
INTEREST EXPENSE
Total interest expense for the second quarter of 2002 declined $33.2 million, or
31.9%, from the second quarter of 2001. The decrease was primarily due to a 139
basis point decrease in the overall cost of interest-bearing liabilities. The
cost of deposits and borrowings decreased 128 and 162 basis points,
respectively. The low interest rate environment was the prime factor in the
decline in interest expense, resulting as existing balances are repriced at
lower rates and new volumes were added at a much lower rate than maturing
deposits and borrowings. Average interest-bearing liabilities rose $502.9
million during this quarter, partially offsetting the benefit of lower rates.
Total interest expense for the first six months of 2002 decreased $67.5 million,
or 31.7%, from the same period a year earlier. The decline was primarily due to
a decrease in the overall cost of interest-bearing liabilities of 145 basis
points to 2.69%. Average interest-bearing liabilities for the period increased
$499.3 million. The short duration of the time deposits and borrowed funds
allowed Webster to lower its funding cost in a low interest rate environment.
36
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 JUNE 30,
- --------------------------------------------------------------------------------------------------------------------------------
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 $ 7,300,691 114,027 6.23% $ 7,059,838 134,705 7.61%
Securities and short-term investments 4,135,496 59,637 5.84(a) 3,627,868 60,015 6.63(a)
----------- --------- ----------- ---------
Total interest-earning assets 11,436,187 173,664 6.09 10,687,706 194,720 7.28
--------- ---------
Noninterest-earning assets 822,701 968,906
----------- -----------
TOTAL ASSETS $ 12,258,888 $ 11,656,612
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,219,978 37,005 2.06% $ 6,938,596 57,702 3.34%
Borrowings 3,759,431 33,797 3.56 3,537,931 46,311 5.18
----------- --------- ----------- ---------
Total interest-bearing liabilities 10,979,409 70,802 2.57 10,476,527 104,013 3.96
Noninterest-bearing liabilities 72,703 89,471
----------- -----------
TOTAL LIABILITIES 11,052,112 10,565,998
Capital securities and preferred stock of
subsidiary corporation 155,950 159,577
Shareholders' equity 1,050,826 931,037
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,258,888 $ 11,656,612
========== ===========
Less: Fully-taxable equivalent adjustments (297) (263)
--------- ---------
Net interest income 102,565 90,444
========= =========
Interest-rate spread 3.52% 3.32%
==== ====
Net interest margin 3.61% 3.39%
==== ====
(a) For purposes of this computation, unrealized gains of $54.0 million and
$8.4 million for 2002 and 2001, respectively, are excluded from the average
balance for rate calculations.
(b) On a fully tax-equivalent basis.
37
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------------------------------
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 $ 7,149,701 225,522 6.31% $ 7,001,769 273,336 7.80%
Securities and short-term investments 4,090,213 119,539 5.91(a) 3,564,665 118,231 6.65(a)
----------- -------- ----------- ---------
Total interest-earning assets 11,239,914 345,061 6.16 10,566,434 391,567 7.41
Noninterest-earning assets 851,773 -------- 919,713 ---------
----------- -----------
TOTAL ASSETS $ 12,091,687 $ 11,486,147
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $ 7,122,317 76,618 2.17% $ 6,896,314 117,138 3.43%
Borrowings 3,697,055 68,794 3.70 3,423,774 95,776 5.57
----------- -------- ----------- ---------
Total interest-bearing liabilities 10,819,372 145,412 2.69 10,320,088 212,914 4.14
Noninterest-bearing liabilities 79,735 85,500
----------- -----------
TOTAL LIABILITIES 10,899,107 10,405,588
Capital securities and preferred stock of
subsidiary corporation 157,754 162,892
Shareholders' equity 1,034,826 917,667
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,091,687 $ 11,486,147
=========== ===========
Less: Fully-taxable equivalent adjustments (601) (498)
-------- ---------
Net interest income 199,048 178,155
======== =========
Interest-rate spread 3.47% 3.27%
==== ====
Net interest margin 3.56% 3.37%
==== ====
(a) For purposes of this computation, unrealized gains of $46.5 million and
$9.6 million for 2002 and 2001, respectively, are excluded from the average
balance for rate calculations.
(b) On a fully tax-equivalent basis.
38
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 V. 2001 2002 V. 2001
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) due to Increase (decrease) due to
(In thousands) Rate Volume Total Rate Volume Total
- ------------------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans $ (25,117) 4,439 (20,678) (53,442) 5,628 (47,814)
Securities and short-term investments (7,913) 7,535 (378) (14,470) 15,778 1,308
- ------------------------------------------------------------------------------------------------------------------------------
Total (33,030) 11,974 (21,056) (67,912) 21,406 (46,506)
- ------------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (22,966) 2,269 (20,697) (44,318) 3,798 (40,520)
Borrowings (15,207) 2,693 (12,514) (34,097) 7,115 (26,982)
- ------------------------------------------------------------------------------------------------------------------------------
Total (38,173) 4,962 (33,211) (78,415) 10,913 (67,502)
- ------------------------------------------------------------------------------------------------------------------------------
Net change in fully taxable-equivalent
net interest income $ 5,143 7,012 12,155 10,503 10,493 20,996
- ------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.0 million and $8.0 million, respectively,
for the three and six months ended June 30, 2002 compared to $3.2 million and
$6.4 million for the same periods in 2001. Management performs a quarterly
review of the loan portfolio and based on this review determines the level of
provision necessary to maintain an adequate loan loss allowance. Several factors
influenced the increase in the provision, including the rise in net charge-offs,
the level of nonaccrual loans, growth in the loan portfolio and the reduced
level of economic activity. For further information see the "Loan Portfolio
Review and Allowance for Loan Loss Methodology" included in the "Financial
Condition - Asset Quality" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations within this report. At June 30,
2002, the allowance for loan losses totaled $99.7 million, or 1.34% of total
loans, and represented 206% of nonaccrual loans as compared to $97.3 million, or
1.40% of total loans, and 169% of nonaccrual loans, at December 31, 2001.
NONINTEREST INCOME
Total noninterest income for second quarter of 2002 decreased $1.8 million, or
4.2%, from the same quarter a year ago. The decline was due to the decrease in
securities gains of $668,000 and other income of $3.0 million primarily due to
life insurance proceeds of $1.9 million received in the second quarter of 2001.
These were partially offset by an increase in loan fees and service charges of
$1.2 million and an increase in insurance revenues of $803,000.
Total noninterest income for the first six months of 2002 increased $931,000, or
1.1%, from the same period a year earlier. The increase is primarily due to
increases in loan fees and service charges of $4.1 million, and insurance
revenue of $3.2 million. These were offset by declines in net gains from the
sale of securities of $1.5 million, and other income of $4.1 million. The full
period impact of the acquisition of Center Capital in March 2001 contributed to
the higher level of loan fee income for the current period. The increase in
insurance revenue was partly due to the acquisitions of Wolf Zackin and Benefits
Plans Design insurance agencies in April 2001.
39
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The lack of meaningful revenue growth in trust and investment services and
financial advisory services is primarily due to the decline in stock market
values and retail investor purchase activity and the lack of activity in the
merger and acquisition market. The trend in revenues from these areas will
continue until improvement occurs in the level of economic activity.
NONINTEREST EXPENSE
Total noninterest expense for the second quarter of 2002 increased $3.0 million,
or 3.9%, over the same quarter a year ago. Adjusted for the impact of SFAS No.
142 in 2002, which no longer requires the amortization of goodwill as an
expense, the growth in noninterest expense was $6.6 million. Most of this
increase occurred in compensation and benefits and other expense. Compensation
and benefits rose $4.7 million, or 13.0%, due to merit increases, higher staff
levels in growth businesses together with increased cost of medical and pension
plans. The increase in other expense is primarily due to higher costs related to
check processing and statement rendering. Also contributing to the increase was
$616,000 of expenses during the quarter related to the acquisition of IBJ
Whitehall Business Credit Corporation, which closed on August 2, 2002.
Total noninterest expense for the first six months of 2002 increased $2.0
million, or 1.3%, compared to the same period a year ago. Adjusted for the
goodwill amortization, noninterest expense growth was $8.8 million. The majority
of the increase occurred as a result of increases in compensation and benefits
of $9.2 million and other operating expenses of $2.7 million. The rise in
compensation and benefits can be attributed to merit increases, increase in
staff and full impact of acquisitions of Center Capital in March 2001 and two
insurance agencies in April 2001. The growth in other expense resulted from
increased check processing and statement rendering costs. These increases were
partially offset by branch reconfiguration expenses of $3.7 million recognized
in the first quarter of 2001.
On July 24, 2002, Webster announced effective July 1, 2002, it will begin to
expense the cost of employee stock option using SFAS No. 123 "Accounting for
Stock-Based Compensation". Under the provisions of SFAS No. 123, Webster had
previously elected to use APB No. 25 to account for employee stock-based
compensation. By electing to use the provisions of SFAS No. 123, compensation
expense will be recorded for employee stock option grants using the fair value
method and amortized over the vesting period commencing with grants made during
2002. Under current guidance, the impact of using SFAS No. 123 will be to reduce
diluted earnings per share by $0.01 in 2002. Refer to Note 15 of Notes to
Consolidated Financial Statements included in Webster's 2001 Annual Report on
Form 10-K for more information on the effect of electing to use SFAS No. 123 to
account for employee stock-based compensation.
INCOME TAXES
Tax expense for the second quarter and six months ended June 30, 2002 are higher
than the prior year periods primarily due to a higher level of income before
taxes. The effective tax rates for the three months ended June 30, 2002 and 2001
were approximately 31.6% and 35.0%, and for the six months were 31.5% and 34.1%,
respectively. State income tax continues to be minimized due to the operation of
a Passive Investment Company in compliance with Connecticut Statute.
40
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products, services and prices. Some of these and other factors are discussed in
Webster's annual and quarterly reports previously filed with the Securities and
Exchange Commission. Such developments could have an adverse impact on Webster's
financial position and results of operations
SARBANES-OXLEY ACT OF 2002
- --------------------------
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
landmark legislation on accounting reform and corporate governance. Although
much of the Act is still being assessed, we do not anticipate any significant
changes in the operations of, and reporting by, the Company as a result of the
Act. In accordance with the requirements of the Sarbanes-Oxley Act, written
certifications for this quarterly report on Form 10-Q by the chief executive
officer and chief financial officer accompany this report as filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information regarding quantitative and qualitative disclosures about market risk
appears under Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", on pages 30 through 31 under the caption
"Asset/Liability Management and Market Risk".
41
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Part II - Other Information
Item 1. Legal Proceedings - Not applicable.
-----------------
Item 2 Changes in Securities and Use of Proceeds - Not applicable
-----------------------------------------
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3 Defaults upon Senior Securities - Not applicable
-------------------------------
Item 4 Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on April 25, 2002.
(b) The following individuals were elected as directors at the annual
meeting: directors George T. Carpenter, John J. Crawford, and C.
Michael Jacobi were re-elected for three year terms. The other
continuing directors are: Joel S. Becker, William T. Bromage,
Robert A. Finkenzeller, John F. McCarthy, Michael G. Morris, and
James C. Smith.
(c) The following matters were voted upon and approved by the
Company's shareholders at the 2002 Annual Meeting of
Shareholderson April 25, 2002: (i) the election of three directors
to serve for three-year terms (Proposal 1) and (ii) the
ratification of the appointment of KPMG LLP as independent
auditors of the Company for the fiscal year ending December 31,
2002 (Proposal 2).
As to Proposal 1, George T. Carpenter received 41,699,273 votes
for election and 585,457 votes were withheld; John J. Crawford
received 41,910,741 votes for election and 373,988 votes were
withheld; C. Michael Jacobi received 41,972,810 votes for election
and 311,919 votes were withheld. There were no abstentions or
broker non-votes for any of the nominees. As to Proposal 2,
shareholders cast 40,162,680 votes for, 2,019,313 votes against
and 102,732 abstentions.
Item 5 Other Information - Not applicable
-----------------
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
Not Applicable
42
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: August 13, 2002 By: /s/ William J. Healy
- ---------------------------------------- ---------------------------------
William J. Healy
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
43