10-Q 1 form10q.txt FORM 10-Q 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) --------------------------------------------------------------------------------------------------------------- (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 -------------------------------------------------------------------------------------------------------------------------------- PAGE NO. -------- 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
------------------------------------------------------------------------------------------------------------------------- (unaudited) JUNE 30, DECEMBER 31, (In thousands, except share and per share data) 2002 2001 ------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------- Total assets $ 12,490,379 11,857,382 ------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------- Total liabilities 11,278,614 10,691,338 ------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 1,067,188 1,006,467 ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 12,490,379 11,857,382 ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements. 3 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)
-------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, (In thousands, except per share data) 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 114,027 134,702 225,522 273,330 Securities and short-term investments 59,340 59,755 118,938 117,739 -------------------------------------------------------------------------------------------------------------- Total interest income 173,367 194,457 344,460 391,069 -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits (Note 8) 37,005 57,702 76,618 117,138 Borrowings 33,797 46,311 68,794 95,776 -------------------------------------------------------------------------------------------------------------- Total interest expense 70,802 104,013 145,412 212,914 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 98,565 87,244 191,048 171,755 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- Total noninterest income 40,318 42,103 82,520 81,589 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- Total noninterest expense 79,316 76,304 156,509 154,524 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------------------------------------- NET INCOME $ 40,721 34,504 72,877 61,487 -------------------------------------------------------------------------------------------------------------- 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)
----------------------------------------------------------------------------------------------------------------------------- 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) ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2001 $ 495 416,057 535,325 (3,307) (3,576) (286) 2,194 946,902 ----------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 2002 ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467 ----------------------------------------------------------------------------------------------------------------------------- Net income for the six months ended June 30, 2002 -- -- 72,877 -- -- -- 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 ----------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 2002 $ 495 414,956 645,491 (37,169) (3,864) -- 47,279 1,067,188 -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements. 5 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, (In thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 49,029 (8,945) ---------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 89,750 25,559 ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, (In thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------------------------------- Other comprehensive income 32,330 3,084 ---------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 105,207 64,571 ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements. 6 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
---------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, (In thousands) 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- 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) -- ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 123,289 (39,477) ---------------------------------------------------------------------------------------------------------------------------- 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) -- ---------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (632,013) (199,876) ---------------------------------------------------------------------------------------------------------------------------- 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) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 534,073 301,050 ---------------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 25,349 61,697 Cash and cash equivalents at beginning of period 218,908 265,035 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 244,257 326,732 ----------------------------------------------------------------------------------------------------------------------------
7 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
---------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, (In thousands) 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------------------
Assets acquired and liabilities assumed in purchase business combinations were as follows:
---------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, (In thousands) 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated interim financial statements. 8 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION ------------------------------------------------------------- The Consolidated Interim Financial Statements include the accounts of Webster Financial Corporation ("Webster" or the "Company") and its subsidiaries. The Consolidated Interim Financial Statements and Notes thereto have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three and six 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 ------------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Fair Amortized Unrealized Fair (In thousands) Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------- TRADING SECURITIES: Municipal securities (a) $ 163 -- -- 163 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------------------------------------------------------- Total 4,074,691 92,561 (12,181) 4,155,071 3,972,805 59,709 (33,381) 3,999,133 -------------------------------------------------------------------------------------------------------------------------------
(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 -------------------------------------------------------------------------------- NOTE 3: LOANS RECEIVABLE, NET ----------------------------- A summary of loans, net follows:
-------------------------------------------------------------------------------------------------------------- (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 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- Total commercial loans 1,392,344 19.0 1,367,578 19.9 -------------------------------------------------------------------------------------------------------------- Commercial real estate: Commercial mortgage 872,160 11.9 892,145 13.0 Commercial construction 120,000 1.6 82,831 1.2 -------------------------------------------------------------------------------------------------------------- Total commercial real estate 992,160 13.5 974,976 14.2 -------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------- Total consumer loans 1,394,497 19.0 1,094,463 15.9 -------------------------------------------------------------------------------------------------------------- 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:
--------------------------------------------------------------------------------------------------------------- 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