UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 2002. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________to_______________. Commission File Number: 0-15213. WEBSTER FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 06-1187536 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) </TABLE> WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702 (Address of principal executive offices) (Zip Code) (203) 753-2921 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practicable date. Common Stock (par value $ .01) 48,893,132 - ------------------------------ ----------------------------- Class Outstanding at April 30, 2002
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES INDEX - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PAGE NO. -------- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Interim Financial Statements Consolidated Statements of Condition at March 31, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Income for the three months ended March 31, 2002 and 2001 (unaudited) 4 Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2002 and 2001 (unaudited) 5 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2002 and 2001 (unaudited) 6 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (unaudited) 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk 33 PART II - OTHER INFORMATION Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 34 Item 3. Defaults upon Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 34 EXHIBIT INDEX AND DESCRIPTION 35 SIGNATURE 36 </TABLE> 2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL INFORMATION - ----------------------------- CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- (unaudited) MARCH 31, DECEMBER 31, (In thousands, except share and per share data) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS: Cash and due from depository institutions $ 167,160 218,908 Short-term investments 33,472 35,937 Securities: (Note 2) Trading, at fair value 527 -- Available for sale, at fair value 4,221,800 3,999,133 Loans receivable, net (Notes 3 and 4) 7,140,331 6,869,911 Goodwill (Note 13) 223,562 222,699 Other intangible assets (Note 13) 93,040 97,352 Cash surrender value of life insurance 165,225 163,023 Premises and equipment, net 82,209 82,808 Accrued interest receivable 58,928 54,288 Deferred tax asset, net (Note 5) 42,812 33,158 Prepaid expenses and other assets 113,034 80,165 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 12,342,100 11,857,382 =================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits (Note 8) $ 7,169,346 7,066,471 Federal Home Loan Bank advances (Note 6) 2,399,579 2,531,179 Securities sold under agreements to repurchase and other borrowings (Note 7) 1,503,647 1,002,185 Accrued expenses and other liabilities 98,459 91,503 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 11,171,031 10,691,338 - ------------------------------------------------------------------------------------------------------------------- Corporation-obligated mandatorily redeemable capital securities of subsidiary trusts 150,000 150,000 Preferred stock of subsidiary corporation 9,577 9,577 SHAREHOLDERS' EQUITY: Common stock, $.01 par value: Authorized - 200,000,000 shares Issued - 49,502,742 shares at March 31, 2002 and at December 31, 2001 495 495 Paid-in capital 414,906 415,194 Retained earnings 621,336 590,254 Less: Treasury stock at cost, 623,387 shares at March 31, 2002 and 353,325 shares at December 31, 2001 (19,404) (10,141) Unearned compensation (4,090) (3,998) Less: Employee Stock Ownership Plan shares purchased with debt -- (286) Accumulated other comprehensive (loss) income (1,751) 14,949 - ------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,011,492 1,006,467 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 12,342,100 11,857,382 =================================================================================================================== </TABLE> See accompanying notes to consolidated interim financial statements. 3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands, except per share data) 2002 2001 - --------------------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME: Loans $111,495 138,628 Securities and short-term investments (Note 2) 59,598 57,984 - --------------------------------------------------------------------------------------------------- Total interest income 171,093 196,612 - --------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits (Note 8) 39,613 59,436 Borrowings 34,997 49,465 - --------------------------------------------------------------------------------------------------- Total interest expense 74,610 108,901 - --------------------------------------------------------------------------------------------------- Net interest income 96,483 87,711 Provision for loan losses (Note 4) 4,000 3,200 - --------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 92,483 84,511 - --------------------------------------------------------------------------------------------------- NONINTEREST INCOME: Fees and service charges 18,636 16,035 Insurance revenue 7,436 5,014 Trust and investment services 4,387 4,394 Financial advisory services 3,959 4,505 Increase in cash surrender value of life insurance 2,202 2,324 Gain on sale of securities, net 3,405 4,249 Gain on sale of loans, net 393 94 Other 1,784 2,871 - --------------------------------------------------------------------------------------------------- Total noninterest income 42,202 39,486 - --------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE: Compensation and benefits 40,148 35,617 Occupancy 6,285 6,880 Furniture and equipment 6,568 6,711 Intangible asset amortization (Note 13) 4,313 7,564 Marketing 2,424 2,090 Professional services 2,327 1,570 Capital securities 3,616 3,616 Branch reconfiguration -- 3,703 Other 11,512 10,469 - --------------------------------------------------------------------------------------------------- Total noninterest expense 77,193 78,220 - --------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary item and Cumulative effect of change in method of accounting 57,492 45,777 Income taxes 18,056 15,167 - --------------------------------------------------------------------------------------------------- Income before extraordinary item and cumulative effect of change in method of accounting 39,436 30,610 Extraordinary item - early extinguishment of debt (net of taxes) (Note 10) -- (1,209) cumulative effect of change in method of accounting (net of taxes) (Note 11) -- (2,418) - --------------------------------------------------------------------------------------------------- NET INCOME $ 39,436 26,983 =================================================================================================== Net Income Per Common Share: (Notes 12 and 13) Basic $ 0.81 0.55 Diluted 0.80 0.54 Dividends paid per common share 0.17 0.16 </TABLE> See accompanying notes to consolidated interim financial statements 4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------------- Employee Accumulated Stock Other Ownership Compre- Unearned Plan Shares hensive Common Paid-in Retained Treasury Compen- Purchased Income (In thousands, except per share data) Stock Capital Earnings Stock sation With Debt (Loss) Total - --------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2001 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000 $ 495 416,334 490,078 (13,361) (1,640) (642) (890) 890,374 - --------------------------------------------------------------------------------------------------------------------------------- Net income for the three months ended March 31, 2001 -- -- 26,983 -- -- -- -- 26,983 Dividends paid -- -- (7,852) -- -- -- -- (7,852) Allocation of ESOP shares -- 440 -- -- -- 356 -- 796 Exercise of stock options -- (767) -- 3,601 -- -- -- 2,834 Common stock repurchased -- -- -- (1,191) -- -- -- (1,191) Consideration granted for purchase acquisitions -- 137 -- 680 -- -- -- 817 Restricted stock grants, net of amortization -- -- -- -- 129 -- -- 129 Net unrealized gain on securities available for sale, net of taxes -- -- -- -- -- -- 12,029 12,029 Other, net -- -- (8) -- -- -- -- (8) - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2001 $ 495 416,144 509,201 (10,271) (1,511) (286) 11,139 924,911 ================================================================================================================================= <CAPTION> THREE MONTHS ENDED MARCH 31, 2002 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467 - --------------------------------------------------------------------------------------------------------------------------------- Net income for the three months ended March 31, 2002 -- -- 39,436 -- -- -- -- 39,436 Dividends paid -- -- (8,337) -- -- -- -- (8,337) Allocation of ESOP shares -- 571 -- -- -- 286 -- 857 Exercise of stock options -- (694) -- 2,496 -- -- -- 1,802 Common stock repurchased -- -- -- (12,477) -- -- -- (12,477) Restricted stock grants, net of amortization -- -- (17) 718 (92) -- -- 609 Net unrealized loss on securities available for sale, net of taxes -- -- -- -- -- -- (16,700) (16,700) Other, net -- (165) -- -- -- -- -- (165) - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2002 $ 495 414,906 621,336 (19,404) (4,090) -- (1,751) 1,011,492 ================================================================================================================================= </TABLE> See accompanying notes to consolidated interim financial statements. 5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net income $ 39,436 26,983 Other comprehensive (loss) income, net of tax: Unrealized net holding (loss) gain on securities available for sale arising during the period (net of income tax effect of ($9,764) and $7,944 for 2002 and 2001, respectively) (14,428) 14,753 Reclassification adjustment for net gains included in net income (net of income tax effect of $1,224 and $1,466 for 2002 and 2001, respectively) (2,272) (2,724) - ------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income (16,700) 12,029 - ------------------------------------------------------------------------------------------------------------- Comprehensive income $ 22,736 39,012 ============================================================================================================= </TABLE> See accompanying notes to consolidated interim financial statements. 6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 39,436 26,983 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,000 3,200 Depreciation and amortization 5,287 5,118 Amortization (accretion) of securities premiums/discounts, net 18 (159) Amortization (accretion) of loan premiums/discounts, net 2,708 (929) Amortization of intangible assets 4,313 7,564 Cumulative effect of change in accounting method (Note 11) -- 3,614 Gains on sale of foreclosed properties, net (141) (262) Gains on sale of securities, net (3,496) (4,190) Gains on the sale of loans, net (393) (94) Losses (gains) on trading securities, net 91 (59) (Increase) decrease in trading securities (618) 35 Loans originated for sale (208,597) (76,370) Proceeds from sale of loans, originated for sale 250,167 57,267 (Increase) decrease in interest receivable (4,640) 835 (Increase) decrease in prepaid expenses and other assets, net (33,149) 4,904 Increase (decrease) in interest payable 9,231 (19,186) (Decrease) increase in accrued expenses and other liabilities, net (2,074) 123,326 Increase in cash surrender value of life insurance (2,202) (2,324) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 59,941 129,273 - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchases of securities, available for sale (766,842) (736,592) Principal collected on securities 387,000 74,977 Maturities of securities 2,570 84,919 Proceeds from sale of securities, available for sale 130,655 310,698 Decrease in short-term investments, net 2,465 1,441 (Increase) decrease in loans, net (319,283) 55,370 Proceeds from sale of foreclosed properties 2,131 1,504 Net cash from (purchase) sale of premises and equipment (3,682) 1,958 Net cash paid for purchase acquisitions -- (10,066) Other, net (428) -- - --------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (565,414) (215,791) - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Increase (decrease) in deposits, net 102,875 (27,064) Net decrease of FHLB advances (131,600) (590,881) Net increase in securities sold under agreement to repurchase and other borrowings 501,462 722,778 Cash dividends paid to common shareholders (8,337) (7,852) Redemption of Series A preferred stock of subsidiary corporation -- (40,000) Exercise of stock options 1,802 2,834 Common stock repurchased (12,477) (1,191) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 453,725 58,624 - --------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (51,748) (27,894) Cash and cash equivalents at beginning of period 218,908 265,035 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 167,160 237,141 ===================================================================================================================== </TABLE> 7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> SUPPLEMENTAL DISCLOSURES: Income taxes paid $ 2,236 19 Interest paid 65,379 128,087 SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES: Transfer of loans to foreclosed properties $ 977 1,233 Reclassification of held to maturity securities to available for sale (fair value of $248,215 at January 1, 2001) -- 261,747 - ------------------------------------------------------------------------------------------------------------- </TABLE> Assets acquired and liabilities assumed in purchase business combinations were as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Fair value of noncash assets acquired in purchase acquisitions $ -- 244,405 Fair value of liabilities assumed in purchase acquisitions -- 249,152 Common stock issued in purchase business combinations -- 817 - ------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated interim financial statements. 8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - -------------------------------------------------------------- The Consolidated Financial Statements include the accounts of Webster Financial Corporation ("Webster" or the "Company") and its subsidiaries. The Consolidated Financial Statements and Notes thereto have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three month period ended March 31, 2002 are not necessarily indicative of the results which may be expected for the year as a whole. The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the periods presented. The actual results of Webster could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for loan losses and the valuation allowance for the deferred tax asset. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2001. NOTE 2 - SECURITIES - ------------------- A summary of securities follows: <TABLE> <CAPTION> MARCH 31, 2002 DECEMBER 31, 2001 - --------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Fair Amortized Unrealized Fair (In thousands) Cost (a) Gains Losses Value Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> TRADING SECURITIES: Municipal securities $ 527 -- -- 527 -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE PORTFOLIO: U.S. Treasury Notes -- -- -- -- 2,014 -- -- 2,014 Municipal bonds and notes 82,039 1,216 (586) 82,669 78,349 1,266 (536) 79,079 Corporate bonds and notes 196,637 228 (17,276) 179,589 207,024 786 (18,428) 189,382 Equity securities (b) 159,814 9,811 (2,622) 167,003 166,351 7,649 (4,114) 169,886 Mortgage-backed securities (c) 3,784,410 33,331 (25,202) 3,792,539 3,519,067 50,008 (10,303) 3,558,772 - --------------------------------------------------------------------------------------------------------------------------- $ 4,222,900 44,586 (45,686) 4,221,800 3,972,805 59,709 (33,381) 3,999,133 - --------------------------------------------------------------------------------------------------------------------------- Total $ 4,223,427 44,586 (45,686) 4,222,327 3,972,805 59,709 (33,381) 3,999,133 =========================================================================================================================== </TABLE> (a) For trading securities, this value represents book value, which includes recognized gains and losses. (b) As of March 31, 2002, the fair value of equity securities consisted of Federal Home Loan Bank ("FHLB") stock of $127.5 million, preferred stock of $5.4 million and common stock of $34.1 million. The fair value of equity securities at December 31, 2001 consisted of FHLB stock of $126.6 million, preferred stock of $5.4 million and common stock of $37.9 million. (c) Includes mortgage-backed securities, which are guaranteed by Fannie Mae, Freddie Mac and Government National Mortgage Association and represent participating interests in direct pass-through pools of mortgage loans originated and serviced by the issuers of the securities. 9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3: LOANS RECEIVABLE, NET - ----------------------------- A summary of loans, net follows: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (Dollars in thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------- Amount % Amount % ------ --- ------ --- <S> <C> <C> <C> <C> Residential mortgage loans: 1-4 family units $ 3,265,105 45.8% $ 3,058,662 44.5% Multi-family units 102,418 1.4 104,038 1.5 Construction 194,463 2.7 223,583 3.3 Loans held for sale 102,348 1.4 143,918 2.1 - ---------------------------------------------------------------------------------------------------- Total residential mortgage loans 3,664,334 51.3 3,530,201 51.4 - ---------------------------------------------------------------------------------------------------- Commercial loans: Commercial non-mortgage 1,046,296 14.7 1,046,874 15.2 Lease financing 338,980 4.7 320,704 4.7 - ---------------------------------------------------------------------------------------------------- Total commercial loans 1,385,276 19.4 1,367,578 19.9 - ---------------------------------------------------------------------------------------------------- Commercial real estate: Commercial mortgage 865,198 12.1 892,145 13.0 Commercial construction 87,355 1.2 82,831 1.2 - ---------------------------------------------------------------------------------------------------- Total commercial real estate 952,553 13.3 974,976 14.2 - ---------------------------------------------------------------------------------------------------- Consumer loans: Home equity credit lines 1,186,523 16.7 1,038,350 15.1 Other consumer 50,575 0.7 56,113 0.8 - ---------------------------------------------------------------------------------------------------- Total consumer loans 1,237,098 17.4 1,094,463 15.9 - ---------------------------------------------------------------------------------------------------- Gross loans 7,239,261 101.4 6,967,218 101.4 Less: allowance for loan losses (98,930) (1.4) (97,307) (1.4) - ---------------------------------------------------------------------------------------------------- Loans receivable, net $ 7,140,331 100.0% $ 6,869,911 100.0% ==================================================================================================== </TABLE> At March 31, 2002, net loans included $14.1 million of net discounts and $19.7 million of net deferred costs. At December 31, 2001, net loans included $17.2 of net discounts and $19.0 million of net deferred costs. The unadvanced portions of closed loans totaled $67.2 million and $78.2 million at March 31, 2002 and December 31, 2001, respectively. As of March 31, 2002 and December 31, 2001, residential mortgage origination commitments totaled $215.0 million and $158.2 million, respectively. Residential commitments outstanding at March 31, 2002 consisted of adjustable rate and fixed rate mortgages of $62.8 million and $152.2 million, respectively, at rates ranging from 5.0% to 7.8%. Residential commitments outstanding at December 31, 2001 consisted of adjustable rate and fixed rate mortgages of $46.5 million and $111.7 million, respectively, at rates ranging from 5.4% to 7.5%. Commitments to originate loans generally expire within 60 days. Webster also had outstanding commitments to sell residential mortgage loans of $192.4 million and $195.4 million at March 31, 2002 and December 31, 2001, respectively. At March 31, 2002 and December 31, 2001, unused portions of home equity credit lines extended were $851.8 million and $754.7 million, respectively. Unused commercial lines of credit, letters of credit, standby letters of credit, lease financing commitments and outstanding new commercial loan commitments totaled $839.5 million and $800.3 million at March 31, 2002 and December 31, 2001, respectively. At March 31, 2002 and December 31, 2001, Webster serviced, for the benefit of others, mortgage loans aggregating approximately $1.1 billion and $1.2 billion, respectively. 10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4: ALLOWANCE FOR LOAN LOSSES - --------------------------------- The allowance for loan losses is maintained at a level to absorb probable losses inherent in the loan portfolio. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and reduced by charge-offs on loans. The following table provides a summary of the activity in the allowance for loan losses for the indicated periods: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - ------------------------------------------------------------------------------------- <S> <C> <C> Balance at beginning of period $ 97,307 90,809 Provisions charged to operations 4,000 3,200 Allowance acquired through purchase transaction -- 1,852 - ------------------------------------------------------------------------------------- 101,307 95,861 CHARGE-OFFS: Residential 362 388 Commercial (a) 1,902 581 Commercial real estate -- -- Consumer 377 454 - ------------------------------------------------------------------------------------- Total charge-offs 2,641 1,423 RECOVERIES: Residential 48 115 Commercial (a) 178 342 Commercial real estate -- -- Consumer 38 75 - ------------------------------------------------------------------------------------- Net charge-offs 2,377 891 - ------------------------------------------------------------------------------------- Balance at end of period $ 98,930 94,970 ===================================================================================== Ratio of net charge-offs to average loans outstanding during the period (annualized) .14% .05 ===================================================================================== </TABLE> (a) All small business loans, both commercial and commercial real estate, are considered commercial for purposes of charge-offs and recoveries. 11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5: DEFERRED TAX ASSET, NET - ------------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2002 and December 31, 2001 are summarized below. A 100% valuation allowance has been applied to the gross State of Connecticut income tax assets since Webster does not expect to have any Connecticut income tax liability for the foreseeable future. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (In thousands) 2002 2001 - --------------------------------------------------------------------------------------------- <S> <C> <C> DEFERRED TAX ASSETS: Loan loss and other allowances, net $ 39,253 39,839 Loan discounts 9,646 10,214 Net operating loss carryforwards 9,372 9,767 Accrued compensation and benefits 8,525 6,163 Intangibles 7,965 8,023 Other accrued expenses 2,052 3,073 Lease financing costs 1,122 1,709 Net unrealized loss on securities 491 -- Other 820 916 - --------------------------------------------------------------------------------------------- Total gross deferred tax assets 79,246 79,704 Less: state tax valuation allowance, net of federal benefit (10,924) (10,959) - --------------------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 68,322 68,745 - --------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Intangibles 15,349 15,744 Loan premiums 3,378 3,915 Compensation and benefits 2,026 2,026 Mortgage servicing rights 1,879 1,815 Accrued dividends 501 570 Depreciation and amortization 334 402 Net unrealized gain on securities -- 10,498 Other 2,043 617 - --------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 25,510 35,587 - --------------------------------------------------------------------------------------------- Net deferred tax asset $ 42,812 33,158 ============================================================================================= </TABLE> 12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6: FEDERAL HOME LOAN BANK ADVANCES - --------------------------------------- Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as follows: <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------- MARCH 31, 2002 DECEMBER 31, 2001 Total Total (Dollars in thousands) Outstanding Callable Outstanding Callable - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> FIXED RATE: 1.25% to 6.87% due in 2002 $ 252,000 -- 883,000 -- 4.24% to 6.67% due in 2003 313,200 -- 313,440 -- 1.99% to 6.78% due in 2004 850,290 100,000 550,320 100,000 5.91% to 6.25% due in 2005 102,600 100,000 102,802 100,000 4.68% to 6.31% due in 2006 52,427 -- 52,558 -- 4.88% to 6.98% due in 2007 702,339 500,000 502,362 500,000 4.49% to 5.93% due in 2008 29,680 27,000 29,773 27,000 5.50% due in 2009 5,000 5,000 5,000 5,000 8.44% due in 2010 510 -- 521 -- 6.60% due in 2011 2,156 -- 2,200 -- 5.49% due in 2013 10,000 10,000 10,000 10,000 - --------------------------------------------------------------------------------------------------------------- 2,320,202 742,000 2,451,976 742,000 VARIABLE RATE: 5.76% and 6.81% due in 2004 80,000 -- 80,000 -- - --------------------------------------------------------------------------------------------------------------- 2,400,202 742,000 2,531,976 742,000 Unamortized discount on FHLB advances (623) -- (797) -- - --------------------------------------------------------------------------------------------------------------- Total advances, net $ 2,399,579 742,000 2,531,179 742,000 =============================================================================================================== </TABLE> Webster Bank (the "Bank"), a wholly-owned subsidiary of the Company, had additional borrowing capacity of approximately $49.4 million from the FHLB at March 31, 2002 and $112.8 million at December 31, 2001. Advances are secured by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets, principally mortgage loans and securities. At March 31, 2002 and December 31, 2001, investment securities were not utilized as qualifying collateral causing reduced additional borrowing capacity. Had securities been used for collateral, additional borrowing capacity would be approximately $1.8 billion at March 31, 2002 and $2.4 billion at December 31, 2001. At March 31, 2002, the Bank was in compliance with the FHLB collateral requirements. 13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS - ---------------------------------------------------------------------------- Repurchase agreements are primarily collateralized by U.S. Government Agency mortgage-backed securities. The quarter average balance for borrowings under short-term repurchase agreements exceeded 30% of total shareholders' equity at March 31, 2002. The following table summarizes balances for securities sold under agreement to repurchase and other borrowings: - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase $1,271,484 571,675 Federal funds purchased 80,000 180,000 Senior notes 126,000 126,000 Treasury tax and loan 26,163 124,510 - -------------------------------------------------------------------------------- Total $1,503,647 1,002,185 ================================================================================ Information concerning short-term borrowings for securities sold under agreements to repurchase is summarized below: - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (Dollars in thousands) 2002 2001 - -------------------------------------------------------------------------------- Balance at quarter end $1,271,484 571,675 Quarter average balance 836,889 532,147 Highest balance during quarter 1,271,484 631,947 Weighted-average maturity date 2.8 months 2.7 months Weighted-average interest rate 1.79% 1.96 Amortized cost of collateral $1,290,118 551,521 Fair value of collateral 1,312,839 564,092 14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8: DEPOSITS - ---------------- The following table sets forth the deposit accounts of the Bank showing balances in dollars and as percentages of total deposits at the dates indicated. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 % of % of total total (Dollars in thousands) Amount deposits Amount deposits - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> BALANCE BY ACCOUNT TYPE: Demand deposits $ 850,623 11.9% $ 905,206 12.8% NOW accounts 810,718 11.3 803,416 11.4 Regular savings and MMDAs 2,592,132 36.1 2,430,691 34.4 Certificates of deposit ("CDs") 2,794,048 39.0 2,831,345 40.0 - ------------------------------------------------------------------------------------------ Total retail deposits 7,047,521 98.3 6,970,658 98.6 Treasury CDs 121,825 1.7 95,813 1.4 - ------------------------------------------------------------------------------------------ Total deposits $7,169,346 100.0% $7,066,471 100.0% ========================================================================================== </TABLE> Interest expense on deposits is summarized as follows: - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- NOW accounts $ 1,075 1,278 Regular savings and MMDAs 10,441 12,221 Retail CDs 27,493 43,347 Treasury CDs 604 2,590 - -------------------------------------------------------------------------------- Total $39,613 59,436 ================================================================================ 15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9 - BUSINESS SEGMENTS - -------------------------- Webster has three segments for purposes of business segment reporting. These segments include Retail Banking, Business Banking and Treasury. The organizational hierarchies that define the business segments are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in the organizational structure. The following table presents the condensed statements of income and total assets for Webster's reportable segments. Operating income and total assets by business segment are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2002 - ----------------------------------------------------------------------------------------------------------------------- RETAIL BUSINESS CONSOLIDATED (In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net interest income $ 55,991 16,073 24,419 -- 96,483 Provision for loan losses 2,152 1,848 -- -- 4,000 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision 53,839 14,225 24,419 -- 92,483 Noninterest income 26,451 8,245 7,506 -- 42,202 Noninterest expense 52,675 14,323 6,876 3,319 77,193 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 27,615 8,147 25,049 (3,319) 57,492 Income taxes 8,718 2,572 7,908 (1,142) 18,056 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 18,897 5,575 17,141 (2,177) 39,436 ======================================================================================================================= Total assets at period end $5,823,692 2,000,963 4,517,445 -- 12,342,100 <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 - ----------------------------------------------------------------------------------------------------------------------- RETAIL BUSINESS CONSOLIDATED (In thousands) BANKING BANKING TREASURY ADJUSTMENTS TOTAL - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net interest income $ 63,821 17,015 6,875 -- 87,711 Provision for loan losses 572 2,628 -- -- 3,200 - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision 63,249 14,387 6,875 -- 84,511 Noninterest income 23,253 7,064 9,169 -- 39,486 Noninterest expense 55,147 13,134 6,347 3,592 78,220 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary item and cumulative effect of change in method of accounting 31,355 8,317 9,697 (3,592) 45,777 Income taxes 10,394 2,757 3,216 (1,200) 15,167 - ----------------------------------------------------------------------------------------------------------------------- Net income before extraordinary item and cumulative effect of change in method of accounting 20,961 5,560 6,481 (2,392) 30,610 Extraordinary item-early extinguishment of debt (net of taxes) -- -- (1,209) -- (1,209) Cumulative effect of change in method of accounting (net of taxes) -- -- (2,418) -- (2,418) - ----------------------------------------------------------------------------------------------------------------------- Net income $ 20,961 5,560 2,854 (2,392) 26,983 ======================================================================================================================= Total assets at period end $5,562,743 1,710,591 4,430,221 -- 11,703,555 </TABLE> 16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Retail Banking - -------------- The Retail Banking segment includes investment and insurance services, consumer lending and the Bank's deposit generation and direct banking activities, which include the operation of automated teller machines and telebanking customer support, sales and small business banking. The Retail Banking segment also includes the Bank's residential real estate loan origination, servicing and secondary marketing activities. Business Banking - ---------------- The Business Banking segment includes the Bank's commercial and industrial, lease financing and commercial real estate lending activities. This segment also includes business deposits, cash management activities for business banking, government finance and all trust activities including Webster Financial Advisors. Treasury - -------- The Treasury segment includes short-term investments, investment securities, Federal Home Loan Bank advances, repurchase agreements and other borrowings. Adjustments - ----------- Management allocates indirect expenses to its segments. These expenses include administration, finance, operations and other support functions. Adjustments for expenses not allocated to any segment in 2002 and 2001 were capital securities expense of $3.6 million for each period and minority interest of $297,000 and $24,000, respectively. Allocations to segments are subject to periodic adjustment as the internal management accounting system is revised and business or product lines within the segments change. Also, because the development and application of these methodologies is a dynamic process, the financial results presented may be periodically revised. NOTE 10 - EXTRAORDINARY ITEM - EARLY EXTINGUISHMENT OF DEBT - ----------------------------------------------------------- In January 2001, Webster recorded a $1.8 million charge ($1.2 million, net of taxes) to earnings for the early extinquishment of debt. The prepayment penalty was incurred on seven Federal Home Loan Bank advances totaling $155.3 million with rates between 6.30% and 8.20% and remaining maturity dates ranging from 1 month to 20 months. 17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 11 - CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING - ------------------------------------------------------------- In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS"), No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Under this Statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS No. 133, as amended by SFAS No. 137, was effective for all fiscal quarters of fiscal years beginning after June 15, 2001. In June 2001, the FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities, an amendment to SFAS No. 133." This Statement amended the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. Upon adoption, hedging relationships must be designated anew and documented pursuant to the provisions of this Statement. The Company implemented SFAS No. 133 as of January 1, 2001. The implementation of SFAS No. 133 resulted in a $3.6 million (net of tax, $2.4 million) charge to earnings for derivatives that did not qualify for hedge accounting under SFAS No. 133. Webster also reclassified all held to maturity securities to available for sale as permitted under SFAS No. 133, as amended. NOTE 12 - NET INCOME PER COMMON SHARE - ------------------------------------- The following tables reconcile the components of basic and diluted earnings per share ("EPS"). - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands, except per share data) 2002 2001 - -------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Net income $39,436 26,983 - -------------------------------------------------------------------------------- Weighted-average common shares outstanding 48,803 48,938 - -------------------------------------------------------------------------------- Basic earnings per share $ .81 .55 ================================================================================ DILUTED EARNINGS PER SHARE: Net income $39,436 26,983 - -------------------------------------------------------------------------------- Weighted-average common shares outstanding 48,803 48,938 Potential common stock: Options 780 628 - -------------------------------------------------------------------------------- Total weighted-average diluted shares 49,583 49,566 - -------------------------------------------------------------------------------- Diluted earnings per share $ .80 .54 ================================================================================ At March 31, 2002 and 2001, options to purchase 65,840 and 683,107 shares of common stock at exercise prices between $34.75 and $37.43 and $29.00 and $35.38, respectively, were not considered in the computation of potential common stock for the quarterly periods since the options' exercise prices were greater than the average market price of Webster common stock. The average market prices for the 2002 and 2001 first quarter periods were $34.17 and $28.62, respectively. See Note 13 of Notes to Consolidated Financial Statements for information on the effect of SFAS No. 142 on EPS. 18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13 - GOODWILL AND OTHER INTANGIBLE ASSETS - ---------------------------------------------- In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted the provisions of SFAS No. 141 effective July 1, 2001 and adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141 requires that upon adoption of SFAS No. 142, the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss is to be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. Also, SFAS No. 142 requires impairment testing of goodwill within the first six months of adoption. Goodwill impairment testing is a two step process. The first step involves comparing the fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, step two is required. The second step involves the allocation of the reporting unit's fair value to all its assets and liabilities as if the reporting unit had been acquired as of the date of measurement. The implied fair value of goodwill is then determined and compared to its carrying value. Any impairment loss resulting from completion of the transitional impairment test of goodwill will be recognized as a cumulative effect of accounting change and will be recognized in the first interim accounting period. During the first quarter of 2002, upon the implementation of SFAS No. 142, Webster performed a reevaluation of the remaining useful lives of all previously recognized other intangible assets with finite useful lives and found no adjustment necessary to the amortization periods used. Webster also found that no reclassifications of intangible assets were required. In addition, Webster began its evaluation of the carrying value of goodwill for impairment. While its review is not yet completed, management does not expect any material impairment. Webster's review will be completed during the second quarter of 2002, as required by SFAS No. 142, and any impairment, if necessary, will be recognized as of January 1, 2002. 19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following adjusts reported net income and earnings per share to consistently reflect the provisions of SFAS No. 142 in both periods. - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In thousands, except for earnings per share amounts) 2002 2001 - -------------------------------------------------------------------------------- NET INCOME: As reported $ 39,436 26,983 Add back: Goodwill amortization (not tax deductible) -- 3,252 - -------------------------------------------------------------------------------- Adjusted net income $ 39,436 30,235 ================================================================================ BASIC EARNINGS PER SHARE: As reported $ 0.81 0.55 Add back: Goodwill amortization -- 0.07 - -------------------------------------------------------------------------------- Adjusted basic EPS $ 0.81 0.62 ================================================================================ DILUTED EARNINGS PER SHARE: As reported $ 0.80 0.54 Add back: Goodwill amortization -- 0.07 - -------------------------------------------------------------------------------- Adjusted diluted EPS $ 0.80 0.61 ================================================================================ The following table sets forth the carrying values of goodwill and other intangible assets, net of accumulated amortization. - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- Balances subject to amortization: Core deposit intangibles $ 72,126 76,163 Unidentified intangibles from branch acquistions 20,034 20,309 - -------------------------------------------------------------------------------- 92,160 96,472 - -------------------------------------------------------------------------------- Balances not subject to amortization: Goodwill 223,562 222,699 Pension asset 880 880 - -------------------------------------------------------------------------------- 224,442 223,579 - -------------------------------------------------------------------------------- Total goodwill and other intangible assets $316,602 320,051 ================================================================================ Amortization expense of intangible assets for the three months ended March 31, 2002 totaled $4.3 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any intangible impairment or change in estimated useful lives, is summarized below for each of the next five years. (In thousands) - -------------------------------------------------------------------------------- FOR YEARS ENDING DECEMBER 31, 2002 (full year) $ 17,100 2003 16,383 2004 16,364 2005 16,364 2006 12,191 - -------------------------------------------------------------------------------- 20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS - ------------------------------------------ At March 31, 2002, Webster had outstanding interest rate swaps with a notional amount of $500 million. These swaps are to hedge FHLB advances and qualify for hedge accounting under SFAS No. 133. The swaps are used to transform FHLB advances from floating rate to fixed rate debt. The interest rate swaps mature in 2004 ($300 million) and 2007 ($200 million) and the hedged advances mature at the same dates. At December 31, 2001, the Bank had no derivatives that qualified for hedge accounting under SFAS No. 133. The Bank transacts certain derivative products with its customer base. These customer derivatives are offset with matching derivatives with other counterparties in order to minimize the Bank's risk. The Bank's exposure with respect to these derivatives is limited to nonperformance by either of the parties in the transaction - the Bank's customer or the other counterparty. The Bank also has rate lock commitments extended to borrowers that relate to the origination of readily marketable mortgage loans held for sale ("rate locks") that are considered to be derivatives, and do not qualify for hedge accounting, under SFAS No. 133. To mitigate the interest rate risk inherent in rate locks, as well as closed mortgage loans held for sale ("loans held for sale"), Webster Bank enters into mandatory forward commitments to sell mortgage-backed securities and best efforts forward commitments to sell individual mortgage loans ("forward commitments"). Rate locks and forward commitments are considered to be derivatives under SFAS No. 133. The Company records the estimated fair value of the rate locks and forward commitments on its balance sheet in either other assets or other liabilities, with the offset to net gain on sales of mortgage loans. The fair value of a rate lock is estimated based on the expected profit or loss to be realized on the underlying loan, including the estimated value of the servicing rights associated with the loan, as well as the probability that the rate lock will be exercised by the borrower ("fallout factor"). For rate locks associated with optional ("best efforts") forward commitments, fair value is estimated based on the pricing specified in the related forward commitment. The fair value of mandatory forward commitments is based on current pricing obtained from independent third parties. At March 31, 2002, the Company had rate locks of approximately $121.9 million, mandatory forward commitments of approximately $187.0 million, and best efforts forward commitments of approximately $5.4 million. The impact of the estimated fair value of the rate locks and forward commitments, offset by the lower of cost or market adjustment on the residential mortgage loans held for sale portfolio, was not significant to the consolidated financial statements. At December 31, 2001, the Company had rate locks of approximately $79.7 million, mandatory forward commitments of approximately $194.0 million, and best efforts forward commitments of approximately $1.4 million. 21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------------------- GENERAL - ------- Webster Financial Corporation ("Webster" or the "Company"), through its subsidiaries, Webster Bank (the "Bank"), Webster Insurance, Inc. ("Webster Insurance"), and Webster D&P Holdings, Inc. ("Duff & Phelps"), delivers financial services to individuals, families and businesses primarily in Connecticut and equipment financing and financial advisory services to public and private companies throughout the United States. Webster provides business and consumer banking, mortgage lending, trust and investment services and insurance services through 106 banking and other offices, over 210 ATM's and its Internet website (www.websterbank.com). Webster Bank was founded in 1935 and converted from a federal mutual to a federal stock institution in 1986. Webster's financial reports can be accessed through its website and are generally posted within 24 hours of filing with the SEC. LENDING ACTIVITIES - ------------------ Webster, through its consolidated Bank subsidiary, originates various types of residential, commercial and consumer loans. Total gross loans were $7.2 billion and $7.0 billion at March 31, 2002 and December 31, 2001, respectively. The Bank offers commercial and residential permanent and construction mortgage loans, commercial and industrial loans, lease financing and various types of consumer loans including home equity lines of credit, home equity loans and other types of small business loans. At March 31, 2002 and December 31, 2001, residential loans represented 51% of Webster's loan portfolio and commercial loans represented 33% and 34%, respectively. The remaining portion of the loan portfolios consisted of consumer loans. See Webster's 2001 Annual Report on Form 10-K for a complete description of the Company's lending activities. Residential Mortgage Loans and Mortgage Banking Activity - -------------------------------------------------------- Webster is dedicated to providing a full array of residential mortgage loan products that meet the financial needs of its customers. During the first quarter of 2002, Webster originated $449 million of total residential mortgages. In 2001, Webster originated $1.3 billion in residential mortgages for the year and $167 million during its first quarter. Webster had residential mortgage loans of $3.7 billion and $3.5 billion at March 31, 2002 and December 31, 2001, respectively. The Bank originates both fixed rate and adjustable rate residential mortgage loans. At March 31, 2002, approximately $1.3 billion, or 36%, of Webster's total residential mortgage loans were adjustable rate loans. Webster offers adjustable rate mortgage loans at initial interest rates discounted from the fully-indexed rate. Adjustable rate loans originated during 2002 and 2001, when fully-indexed, will be 2.75% above the constant maturity one-year U.S. Treasury yield index. At March 31, 2002, approximately $2.4 billion, or 64%, of Webster's total residential mortgage loans had a fixed rate. Webster sells residential mortgage loans in the secondary market in a manner consistent with its asset/liability management objectives. At March 31, 2002 and December 31, 2001, Webster had $102 million and $144 million, respectively, of residential mortgage loans held for sale. Commercial Lending - ------------------ The Bank's middle market lending unit has lending relationships with companies located primarily in Connecticut with annual revenues ranging from $10 to $250 million. The Bank provides these customers with a complete array of traditional commercial credit facilities such as lines of credit, term loans, owner-occupied commercial mortgages, asset based lending and interest-rate protection products. In addition, the Bank provides state of the art cash management services, including automated investments, lock box and account reconciliation services. The Bank, as part of its strategy to expand its commercial loan portfolio, has a specialized lending unit. The specialized lending unit's objective is to obtain geographic and industry diversification within the overall commercial loan portfolio by participating in the national syndicated lending market. The loans administered by the specialized lending unit are monitored by the Shared National Credit Program ("SNCP"). The SNCP is designed to provide consistent review and classification by bank regulatory agencies of any loan or loan commitment that totals $20 million or more and is shared by three or more supervised institutions. These bank regulatory agencies include the 22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. At March 31, 2002 and December 31, 2001, the specialized lending unit administered $430.9 million and $410.3 million, respectively, of funded loans against commitments of $666.8 million and $620.1 million, respectively. The funded loans represented approximately 5.6% and 5.8% of the total loan portfolio at March 31, 2002 and December 31, 2001, respectively. Originations totaled $52 million during the first quarter of 2002, as compared to $10 million during the same period in 2001. A summary of loans administered by the specialized lending unit by type of industry follows: - -------------------------------------------------------------------------------- Principal Balances Outstanding at (In thousands) MARCH 31, 2002 DECEMBER 31, 2001 - -------------------------------------------------------------------------------- INDUSTRY: Manufacturing $113,303 105,171 Cable 58,775 58,364 Wireless and wire-line communications 51,832 58,246 Advertising/Publishing 41,190 46,171 Other telecom (a) 31,383 35,858 Radio/TV broadcasting 20,192 21,161 Competitive local exchange carrier 16,275 16,275 All other 38,697 22,669 - -------------------------------------------------------------------------------- Direct loans 371,647 363,915 Collateral debt obligations 59,300 46,380 - -------------------------------------------------------------------------------- Total $430,947 410,295 ================================================================================ (a) Includes towers and integrated communication providers. In addition to the loans administered by the specialized lending unit, Webster had $154.0 million of loans that are also monitored by the SNCP against commitments of $212.4 million at March 31, 2002. These loans are located primarily in the Northeast region and are commercial and industrial loans and real estate loans. The loans are managed by the Bank's commercial divisions, whose focus is primarily middle market lending. These SNCP loans are distinguished from the specialized lending unit SNCP loans by being relatively smaller transactions where the Bank, in most cases, has a direct relationship with the borrower. The Bank's Small Business Banking unit ("SBB") provides a full complement of loan and deposit products to small businesses located throughout Connecticut. Webster's SBB target market is businesses with annual revenues of up to $5 million. This market represents a significant percentage of commercial businesses located in Connecticut. SBB uses the Bank's branch network as well as dedicated business development officers to fully service its existing customer base and call on potential new customers. SBB uses the Fair Isaac credit scoring model to assist in loan approvals of up to $250,000 and offers a $50,000 same day line of credit approval program. SBB provides all commercial loan products including lines of credit, letters of credit, term loans and mortgages on owner-occupied real estate. The Bank is also a Small Business Administration ("SBA") preferred lender authorized to offer all SBA loan guaranty products and is also active in several loan programs provided through the Connecticut Development Authority. The SBB administered a portfolio of approximately $333 million at December 31, 2001, which decreased 4% to $321 million at March 31, 2002. Originations totaled $27 million during the first quarter of 2002, as compared to $33 million during the same period in 2001. Center Capital, a lease financing subsidiary of the Bank that was acquired in March 2001, transacts business with end-users of equipment, either by soliciting this business on a direct basis or through referrals from various equipment manufacturers, dealers and distributors with whom they have relationships. Center Capital has grown its portfolio since its acquisition from $244 million to $321 million at December 31, 2001, an increase of 32%. During the first three months of 2002, this growth continued as the leasing portfolio grew to $339 million at quarter end, an increase of 5.7% from the prior year end. Center Capital originated $45 million in leases during the first quarter of 2002, compared to 23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- $11 million during the same period a year ago. However, the Center Capital acquisition was not completed until March 2001, deflating the year ago originations total. Total 2001 lease originations amounted to $156 million. Commercial Real Estate - ---------------------- Webster Bank originates construction, construction-to-permanent, and permanent commercial real estate loans primarily throughout the New England region. At March 31, 2002, outstanding commercial real estate loans totaled $953 million, compared to $975 million as of December 31, 2001. The Bank's strategy is to originate loans with income producing real estate as collateral. The Bank develops relationships with regional developers and participates in loans with selected banks. Webster originated $58 million of commercial real estate loans during the first quarter of 2002, compared to $25 million during the same period a year earlier. Consumer - -------- Consumer loan volume increased significantly in 2001 and, at December 31, loans totaled $1.1 billion and represented 15.9 % of the loan portfolio. This growth did not abate during the first quarter of 2002, as consumer loans grew to $1.2 billion, or 17.4%, of the loan portfolio at March 31, 2002. The growth is attributable to the popularity of the Bank's home equity programs and the expansion of lending into contiguous states through a network of brokers. Originations during the first three months of 2002 totaled $259 million, an increase of $162 million or 167% from the same period a year ago. Consumer loan originations during 2001 totaled $868 million. The Bank's consumer loan products consist of: o Home Equity Lines of Credit o Home Equity Loans o Second Mortgage Loans o Installment Loans o Automobiles Loans o Loans Secured by Deposit Accounts FINANCIAL CONDITION - ------------------- Webster, on a consolidated basis at March 31, 2002 and December 31, 2001, had total assets of $12.3 billion and $11.9 billion, including total securities of $4.2 billion and $4.0 billion, respectively, and net loans of $7.1 billion and $6.9 billion, respectively. At March 31, 2002 and December 31, 2001, total deposits were $7.2 billion and $7.1 billion, borrowings were $3.9 billion and $3.5 billion, respectively, and shareholders' equity totaled $1.0 billion at each date. Total assets increased $484.7 million or 4.1% at March 31, 2002 from December 31, 2001. The overall increase is primarily due to increases in securities of $223.2 million, residential loans of $134.1 million, home equity loans of $148.2 million and prepaid expense and other assets of $32.9 million. The net increase in other assets is primarily due to an increase in unsettled investment portfolio sale trades of $31.0 million at the end of the current period. These increases were partially offset by decreases in commercial real estate loans of $22.4 million and cash of $51.8 million. Total liabilities rose $479.7 million primarily due to increases in borrowings of $369.9 million and deposits of $102.9 million. The net increase in total equity of $5.0 million is primarily due to net income of $39.4 million and $1.8 million in stock option proceeds, which were directly offset by $16.7 million in unrealized losses on the available for sale securities, $12.5 million in repurchases of Webster common stock and $8.3 million in common stock dividend payments. 24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following table provides information for Webster Bank's capital ratios as of March 31, 2002 and December 31, 2001. At March 31, 2002, the Bank was in full compliance with all applicable regulatory capital requirements. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------- OTS Minimum FDIC Minimum Actual Capital Requirements Well Capitalized (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> MARCH 31, 2002 Bank's equity (to total assets) $1,092,847 8.96% Non-includable subsidiaries (2,156) Goodwill and other intangibles (262,340) Disallowed excess servicing (322) - --------------------------------------------------------------------------------------------------------------------- Unrealized gain on certain AFS securities 82 TANGIBLE CAPITAL (TO ADJUSTED TOTAL ASSETS) 828,111 6.95 $238,308 2.00% No Requirement Qualifying intangibles 509 - --------------------------------------------------------------------------------------------------------------------- TIER 1 CAPITAL (TO ADJUSTED TOTAL ASSETS) 828,620 6.95 476,637 4.00 $595,796 5.00% TIER 1 RISK-BASED CAPITAL (TO RISK-WEIGHTED ASSETS) 828,620 11.33 292,639 4.00 438,959 6.00 Allowable general allowance for loan losses 91,485 - --------------------------------------------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL (TO RISK-WEIGHTED ASSETS) $ 920,105 12.58% $585,278 8.00% $731,598 10.00% DECEMBER 31, 2001 Tangible capital (to adjusted total assets) $ 827,874 7.28% $227,563 2.00% No Requirement Tier 1 capital (to adjusted total assets) 829,890 7.29 455,206 4.00 $569,007 5.00% Tier 1 capital (to risk-weighted assets) 829,890 11.83 280,542 4.00 420,813 6.00 Total capital (to risk-weighted assets) 917,619 13.08 561,084 8.00 701,355 10.00 </TABLE> ASSET/LIABILITY MANAGEMENT AND MARKET RISK - ------------------------------------------ Interest-rate risk is the sensitivity of the market value of Webster's interest-sensitive assets and liabilities and the sensitivity of Webster's earnings to changes in interest rates over short-term and long-term time horizons. Webster's Asset & Liability Management Committee manages interest-rate risk to maximize net interest income and net market value over time in changing interest-rate environments, within limits set by the Board of Directors. Management measures interest-rate risk using simulation analyses with particular emphasis on measuring changes in net market value and net interest income in different rate environments. Market value is measured as the net present value of future cash flows. Simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest-rate risk is quantified and appropriate strategies are formulated and implemented. Interest-rate risk simulation analyses cannot precisely measure the impact that higher or lower rate environments will have on net interest income or market value. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in management's strategies. Management believes that Webster's interest-rate risk position at March 31, 2002, represents a reasonable level of risk. 25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following table summarizes the estimated change in the economic value of Webster's assets, liabilities and off-balance sheet contracts, its equity at risk, at March 31, 2002 and December 31, 2001, if interest rates instantaneously increase or decrease by 100 basis points. <TABLE> <CAPTION> Estimated Market Value Change Book Market ---------------------------- (Dollars in thousands) Value Value -100 BP +100 BP - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> MARCH 31, 2002 Assets $ 12,342,100 12,077,745 247,070 (300,721) Liabilities, capital securities and preferred stock 11,330,608 11,145,554 239,698 (179,202) Off balance sheet items -- (5,296) 14,303 (13,802) Net dollar impact 21,675 (135,321) Net change as percent of Tier I Capital 2.6% (16.3) DECEMBER 31, 2001 Assets $ 11,857,382 11,614,903 233,981 (286,658) Liabilities, capital securities and preferred stock 10,850,915 10,786,867 241,037 (184,241) Net dollar impact (7,056) (102,417) Net change as percent of Tier I Capital (.09)% (12.3) </TABLE> The book value of assets exceeded the market value at March 31, 2002 and December 31, 2001 because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $316.6 million and $320.1 million, respectively. The following table summarizes the estimated impact on Webster's net income as of March 31, 2002 and December 31, 2001 for the subsequent twelve month period, if interest rates instantaneously increase or decrease by 100 basis points. Estimated Net Income Impact - -------------------------------------------------------------------------------- (Dollars in thousands) -100 BP +100 BP - -------------------------------------------------------------------------------- MARCH 31, 2002 Net dollar change $ (2,900) (1,400) Net change as percent of base (1.7)% (0.9) DECEMBER 31, 2001 Net dollar change $ (2,300) 600 Net change as percent of base 1.5% (0.4) These estimates assume that management does not take any action to mitigate any negative effects from changing interest rates. The economic values and net income estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest-rate risk position at March 31, 2002 represents a reasonable level of risk. 26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Bank is required to maintain sufficient liquidity to ensure its safe and sound operation. As amended by recent legislation, the OTS deleted its requirement that federal savings associations maintain a certain minimum level of liquid assets. Instead, adequate liquidity is based upon safety and soundness considerations and is assessed by the OTS on a case-by-case basis by reviewing such factors as the institution's overall asset/liability structure, market conditions, competition and the nature of the institution's activities. The OTS considers both an institution's liquidity ratio as well as safety and soundness issues in assessing whether an institution has sufficient liquidity. Liquidity management allows Webster to meet its cash needs at a reasonable cost under various operating environments. Liquidity is actively managed and reviewed in order to maintain stable cost effective funding to support the balance sheet. Liquidity comes from a variety of sources such as the cash flow from operating activities including principal and interest payments on loans and investments and unpledged securities, which can be sold or utilized to secure funding, and by maintaining the ability to attract new deposits. Webster's goal is to maintain a strong base of core deposits to support its growing balance sheet. Management monitors current and projected cash needs and adjusts liquidity as necessary. Webster has a detailed liquidity contingency plan, which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity risks. Webster is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $49.4 million at March 31, 2002. In addition, Webster had approximately $2.2 billion of unencumbered securities at March 31, 2002 that, if necessary, could have been used to increase borrowing capacity at the FHLB or to collateralize other borrowings such as repurchase agreements. At March 31, 2002, Webster had FHLB advances outstanding of $2.4 billion compared to $2.5 billion at December 31, 2001. Webster's main sources of liquidity at the holding company level are dividends from the Bank, investment income and net proceeds from capital offerings and borrowings. The main uses of liquidity are purchases of investment securities, the payment of dividends to common stockholders, repurchases of Webster's common stock, and the payment of interest on borrowings and capital securities. There are certain regulatory restrictions on the payment of dividends by the Bank to Webster. At March 31, 2002, the Bank has $100.9 million of retained earnings available for dividend to Webster. Webster also maintains $100.0 million in available revolving lines of credit with correspondent banks. As announced on September 14, 2001, Webster has initiated a stock buyback program of up to 2.5 million shares, or approximately 5 percent of Webster's 49.4 million shares of outstanding common stock, as of September 1, 2001. Webster plans to purchase these shares in the open market and via unsolicited negotiated transactions, including block purchases, over the next year. During the first quarter of 2002, Webster repurchased a total of 376,400 shares of its common stock. The total cost of the repurchased shares was $12.5 million with an average per share cost of approximately $33.15. Applicable OTS regulations require the Bank, as a federal savings bank, satisfy certain minimum capital requirements, including a core capital requirement and risk-based capital requirements. As an OTS regulated savings institution, the Bank is also subject to a minimum tangible capital requirement. At March 31, 2002, the Bank was in full compliance with all applicable capital requirements and exceeded the capital requirements for a "well capitalized" institution as displayed in the table included in the "Financial Condition" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere within this Report. 27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- ASSET QUALITY - ------------- LOAN PORTFOLIO REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY Webster devotes significant attention to maintaining asset quality through conservative underwriting standards, active servicing of loans and aggressive management of nonperforming assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable losses inherent in the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors which, in management's judgment, deserve current recognition in estimating loan losses. In assessing the specific risks inherent in the portfolio, management takes into consideration the risk of loss on Webster's nonaccrual loans and classified loans, including an analysis of the collateral for the loans. Webster's methodology for assessing the appropriateness of the allowance consists of several key elements. The loan portfolio is segmented into pools of loans that are similar in type and risk characteristic. These homogeneous pools are tracked over time and historic delinquency, nonaccrual and loss information is collected and analyzed. In addition, problem loans are identified and analyzed individually on a periodic basis to detect specific probable losses. Webster collects industry delinquency, nonaccrual and loss data using the same portfolio segments for comparison purposes. NONPERFORMING ASSETS The aggregate amount of nonperforming assets decreased to $54.3 million at March 31, 2002 from $62.5 million at December 31, 2001 and decreased as a percentage of total assets to .44% at March 31, 2002 from .53% at December 31, 2001. Nonaccrual loans decreased $10.3 million and foreclosed properties decreased $1.0 million during the current year first quarter period, while loans past due 90 days and accruing increased $3.2 million. The decrease in nonaccrual loans from December 31, 2001 to March 31, 2002 is principally due to the combination of a $7.5 million decrease in nonaccrual commercial and industrial loans. The remaining $2.8 million decrease is due to residential and commercial real estate nonaccrual loans decreasing. The allowance for loan losses at March 31, 2002 was $98.9 million and represented 210% of nonaccrual loans and 1.37% of total gross loans. The following table details nonperforming assets. - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, (In thousands) 2002 2001 - -------------------------------------------------------------------------------- NONPERFORMING ASSETS: Loans accounted for on a nonaccrual basis: Residential $ 6,262 7,677 Commercial 29,335 36,854 Commercial real estate 9,925 11,062 Consumer 1,545 1,823 - -------------------------------------------------------------------------------- Total nonaccrual loans 47,067 57,416 - -------------------------------------------------------------------------------- Loans past due 90 days or more and accruing: Commercial 2,035 -- Commercial real estate 1,197 -- - -------------------------------------------------------------------------------- Total loans past due 90 days or more and accruing 3,232 -- - -------------------------------------------------------------------------------- Foreclosed and repossessed properties: Residential and consumer 1,336 2,504 Commercial 2,690 2,534 - -------------------------------------------------------------------------------- Total foreclosed property 4,026 5,038 - -------------------------------------------------------------------------------- Total nonperforming assets $54,325 62,454 ================================================================================ 28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Net charge-offs for the current year's first quarter totaled $2.4 million, increasing $1.5 million as compared to the same period a year ago. The increase in net charge-offs is primarily due to commercial loan net charge-offs that increased $1.5 million. This increase primarily involved loans within the specialized lending and lease finance portfolios. PAST DUE LOANS The following table sets forth information as to the Bank's loans past due 30-89 days. <TABLE> <CAPTION> MARCH 31, 2002 DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------ Principal Percent of loans Principal Percent of loans (Dollars in thousands) Balances outstanding Balances outstanding - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> PAST DUE 30-89 DAYS: Residential $14,792 0.20% $18,359 0.26% Commercial real estate 10,689 0.15 22,973 0.33 Commercial and industrial 10,431 0.14 16,286 0.23 Consumer 3,529 0.05 5,260 0.08 - ------------------------------------------------------------------------------------------------------ Total $39,441 0.54% $62,878 0.90% ====================================================================================================== </TABLE> TROUBLED DEBT RESTRUCTURINGS At March 31, 2002 and December 31, 2001, the Bank had total accruing troubled debt restructurings of approximately $4.8 million and $5.2 million, respectively. Interest income for the three month period ended March 31, 2002 under the restructured terms totaled $96,000 as compared to $174,000 that would have been booked under their original terms. Interest income for the three months ended December 31, 2001 totaled $112,000 as compared to $184,000 that would have been booked had the loans been under their original terms. POTENTIAL PROBLEM LOANS The following table summarizes Webster's classified loans (substandard, doubtful and loss), including nonperforming loans at March 31, 2002 and December 31, 2001. - -------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, 2002 2001 - -------------------------------------------------------------------------------- Substandard: Accruing $ 94,864 88,397 Nonaccruing 43,146 47,846 - -------------------------------------------------------------------------------- Total substandard 138,010 136,243 - -------------------------------------------------------------------------------- Doubtful: Accruing 11 66 Nonaccruing 3,756 4,464 - -------------------------------------------------------------------------------- Total doubtful 3,767 4,530 - -------------------------------------------------------------------------------- Loss -- -- - -------------------------------------------------------------------------------- Total $141,777 140,773 ================================================================================ - -------------------------------------------------------------------------------- Classified as a percent of loans 2.0% 2.0 ================================================================================ At March 31, 2002 and December 31, 2001, $46.9 million and $52.3 million, respectively, of nonperforming loans (excluding accruing troubled debt restructurings) were included in the classified loan total. The remaining classified loans of $94.9 million and $88.5 million continued to perform in accordance with their contractual terms and accrue interest. Due to their classification as substandard or doubtful, these loans are considered by management to be potential problem loans. 29
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001. GENERAL Net income for the three months ended March 31, 2002, was $39.4 million or $.80 per diluted share compared to $27.0 million or $.54 per diluted share for the same period ended March 31, 2001. The growth in net income was driven by increases in net interest income and growth in revenues from fee-based services. Declines in noninterest expense also contributed to the net income increase. The decreased noninterest expense can be partially attributed to the adoption of SFAS No. 142, which ceased the amortization of goodwill. Included in the net income for the three months ending March 31, 2001 are a $2.4 million (net of taxes) expense related to the cumulative effect of a change in the method of accounting (SFAS No. 133 implementation), and an extraordinary expense of $1.2 million which represents costs incurred for the early extinguishment of debt related to borrowings from the Federal Home Loan Bank. NET INTEREST INCOME Net interest income for the three months ended March 31, 2002, amounted to $96.5 million compared to $87.7 million for the same period in 2001. The increase in net interest income of $8.8 million in the current three month period is due primarily to decreased interest expense of $34.3 million offsetting a decrease in interest income of $25.5 million. This decline resulted from the lower interest rate environment in the current year, partially offset by an increase in volume of interest-earning assets and interest-bearing liabilities. See the rate/volume table elsewhere within this section for additional information. Net interest margin for the three months ended March 31, 2002 was 3.51% as compared to 3.37% for the same period in the previous year. The margin increased as the cost of our borrowed funds position declined faster than the yield on earning assets. INTEREST INCOME Total interest income for the three months ended March 31, 2002 was $171.1 million compared to $196.6 million in the same period a year ago, a decline of $25.5 million, or 13.0%. The yield on interest-earning assets dropped by 131 basis points for the current year primarily due to a lower yield on loans, which decreased 160 basis points. The yield on loans declined as a result of the low interest rate environment during 2001 and 2002, which caused an accelerated level of prepayments and a reinvestment into assets with a lower yield. The impact of the lower yield on earning assets was partially offset by a higher volume of average earnings assets, which increased by $607.6 million. The yields on interest-earning assets for the three months ended March 31, 2002 and 2001 were 6.24% and 7.55%, respectively. INTEREST EXPENSE Total interest expense for the three months ended March 31, 2002 of $74.6 million compared to $108.9 million for the same period one year earlier. The decrease in interest expense for the current year three month period was primarily due to the lower interest rate environment, which caused a 150 basis point decrease in the overall cost of interest-bearing liabilities. The cost of deposit and borrowing liabilities decreased 123 and 213 basis points, respectively, when compared to the same period in the previous year. Lower costs on borrowings and deposits were partially offset by the impact of a higher volume of interest-bearing funds for the period. The costs of interest-bearing liabilities for the three months ended March 31, 2002 and 2001 were 2.82% and 4.32%, respectively. Again, the low interest rate environment resulted in new volumes being added at a much lower rate than those maturing for both time deposits and borrowed funds. 30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following table shows the major categories of average assets and average liabilities together with their respective interest income or expense and the rates earned and paid by Webster. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 Fully Tax- Fully Tax- Average Equivalent Average Equivalent (Dollars in thousands) Balance Interest (b) Yield Balance Interest (b) Yield - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Loans $ 6,996,981 111,495 6.39% $ 6,943,051 138,631 7.99% Securities 4,044,428 59,902 5.98(a) 3,500,761 58,216 6.67(a) ------------ ------- ------------ --------- Total interest-earning assets 11,041,409 171,397 6.24 10,443,812 196,847 7.55 Noninterest-earning assets 881,237 869,976 ------------ ------------ TOTAL ASSETS $ 11,922,646 $ 11,313,788 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Deposits $ 7,023,570 39,613 2.29% $ 6,853,563 59,436 3.52% Borrowings 3,633,984 34,997 3.85 3,308,348 49,465 5.98 ------------ ------- ------------ --------- Total interest-bearing liabilities 10,657,554 74,610 2.82 10,161,911 108,901 4.32 Noninterest-bearing liabilities 86,796 81,485 ------------ ------------ TOTAL LIABILITIES 10,744,350 10,243,396 Capital securities and preferred stock of subsidiary corporation 159,577 166,244 SHAREHOLDERS' EQUITY 1,018,719 904,148 ------------ ------------ Total liabilities and shareholders' equity $ 11,922,646 $ 11,313,788 ============ ============ Less: Fully-taxable equivalent adjustments (304) (235) ------- --------- Net interest income 96,483 87,711 ======= ========= Interest-rate spread 3.42% 3.23% ==== ==== Net yield on average interest-earning assets 3.51% 3.37% ==== ==== </TABLE> (a) For purposes of this computation, unrealized gains of $39.0 million and $10.7 million for March 2002 and 2001, respectively are excluded from the average balance for rate calculations. (b) On a fully tax-equivalent basis. 31
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Net interest income also can be understood in terms of the impact of changing rates and changing volumes. The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume) and (iii) the net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. THREE MONTHS ENDED MARCH 31, 2002 V. 2001 - -------------------------------------------------------------------------------- Increase (decrease) due to (In thousands) Rate Volume Total - -------------------------------------------------------------------------------- Interest on interest-earning assets: Loans, net $(28,197) 1,061 (27,136) Securities and short-term investments (6,574) 8,260 1,686 - -------------------------------------------------------------------------------- Total (34,771) 9,321 (25,450) - -------------------------------------------------------------------------------- Interest on interest-bearing liabilities: Deposits (21,303) 1,480 (19,823) FHLB advances and other borrowings (18,964) 4,496 (14,468) - -------------------------------------------------------------------------------- Total (40,267) 5,976 (34,291) - -------------------------------------------------------------------------------- Net change in fully taxable-equivalent net interest income 5,496 3,345 8,841 - -------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES The provision for loan losses was $4.0 million, for the three month period ended March 31, 2002 compared to $3.2 million for the respective period in 2001. Management performs a quarterly review of the loan portfolio and based on this review determines the level of provision necessary to maintain the allowance for loan losses at an adequate level. Based upon management's quarterly review, the provision for the first quarter of 2002 was increased to $4.0 million from $3.2 million a year ago. Several factors influenced the increase, including the increasing commercial portfolio and the slowing of growth in the general economy. For further information see the "Loan Portfolio Review and Allowance for Loan Loss Methodology" included in the "Lending Activities" section of Management's Discussion and Analysis of Financial Condition and Results of Operations within this Report. At March 31, 2002, the allowance for loan losses totaled $98.9 million and represented 210% of nonaccrual loans as compared to $97.3 million and 169% respectively, at December 31, 2001. At March 31, 2002 and December 31, 2001, the allowance for loan losses represented 1.37% and 1.40% of total outstanding loans, respectively. At March 31, 2001, the allowance for loan losses totaled $95.0 million and represented 202% of nonaccrual loans, and 1.33% of total outstanding loans. NONINTEREST INCOME Total noninterest income for the three months ended March 31, 2002 totaled $42.2 million, compared to $39.5 million for the same period in 2001. When the three month periods are compared, noninterest income increased for the current period by $2.7 million primarily due to higher income from insurance revenues of $2.4 million, fees and service charges of $2.6 million and $573,000 of deposit service fee income. The increase in insurance revenues was partly due to the acquisitions of Wolf Zackin and Benefit Plans Design insurance agencies in April 2001. The acquisition of Center Capital in March 2001, contributed to the higher level of loan fee income for the current period. These increases in noninterest income were partially offset by decreases of $1.1 million in other income, financial advisory revenue of $546,000 and $844,000 of lower realized net gains from the sale of securities. 32
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- NONINTEREST EXPENSE Total noninterest expense for the three months ended March 31, 2002 totaled $77.2 million compared to $78.2 million for the same period in 2001. The 2001 period included $3.7 million of branch reconfiguration expenses. On an adjusted basis, excluding the branch reconfiguration expense, noninterest expense increased $2.7 million in the current year period. This increase for the current year was primarily due to increases of $4.5 million for compensation and benefits expense and $1.0 million of other expense that were partially offset by a decrease in intangible asset amortization expense of $3.3 million. The increase in compensation and other expense for the current year is partly due to the acquisitions of Wolf Zackin and Benefit Plans Design insurance agencies in April 2001 and Center Capital in March 2001. The balance of the increase is attributable to merit increases and increased costs related to the medical and pension plans. The adoption of SFAS No. 142 in January 2002 eliminated the requirement to amortize goodwill but requires periodic review of goodwill for impairment. The implementation of SFAS No. 142 in the current period, resulted in goodwill amortization expense decreasing by $3.3 million when compared to the same expense one year earlier. See Note 13 of Notes to Consolidated Financial Statements contained elsewhere within this report for further information concerning SFAS No. 142. INCOME TAXES Total income tax expense for the three months ended March 31, 2002 was $18.1 million compared to $13.4 million for the same period in 2001. The effective tax rates for the three month periods ended March 31, 2002 and 2001 were approximately 31.4% and 33.1%, respectively. Tax expense for the current year period is higher than the corresponding prior year period primarily due to a higher level of income before taxes, while the effective tax rate decline is due, primarily, to the Company's January 1, 2002 adoption of the provisions of SFAS No. 142, regarding goodwill and other intangible asset amortization, as more fully discussed in Note 13 of Notes to Consolidated Financial Statements. Goodwill amortization expense, which ceased with the adoption of SFAS No. 142, was nondeductible for income tax purposes. FORWARD LOOKING STATEMENTS - -------------------------- This report contains forward-looking statements within the meaning of the Securities and Exchange Act of 1934, as amended. Actual results could differ materially from management expectations, projections and estimates. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of Webster's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting Webster's operations, markets, products, services and prices. Some of these and other factors are discussed in Webster's annual and quarterly reports previously filed with the Securities and Exchange Commission. Such developments could have an adverse impact on Webster's financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," on pages 25 and 26 under the caption "Asset/Liability Management and Market Risk". 33
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- (a) Not Applicable Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- (a) Not Applicable (b) Not Applicable (c) Not Applicable (d) Not Applicable Item 3. Defaults upon Senior Securities ------------------------------- (a) Not Applicable Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) Not Applicable Item 5. Other Information ----------------- (a) Not Applicable Item 6. Exhibits and Report on Form 8-K ------------------------------- (a) Exhibits Not Applicable (b) Reports on Form 8-K Webster filed the following Current Report on Form 8-K with the Securities and Exchange Commission during the quarter ended March 31, 2002: Current Report on Form 8-K, filed on February 11, 2002 (announcing the date of Webster's Annual Meeting of Shareholders). 34
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- EXHIBIT INDEX EXHIBIT NO. EXHIBIT DESCRIPTION - -------------------------------------------------------------------------------- Exhibits: Not applicable. 35
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WEBSTER FINANCIAL CORPORATION ----------------------------- Registrant Date: May 14, 2002 By: /s/ William J. Healy - ------------------ ---------------------------- William J. Healy Executive Vice President and Chief Financial Officer Principal Financial Officer 36