================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended DECEMBER 31, 2002.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________.
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2476
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT - Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ---------------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of Webster Financial Corporation as of June 28, 2002 was
$1,786,911,568.
The number of shares of common stock outstanding, as of March 4, 2003:
45,613,072.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 24, 2003.
================================================================================
WEBSTER FINANCIAL CORPORATION
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I
Page
----
Item 1. Business.....................................................................................................3
General.....................................................................................................3
Acquisitions................................................................................................3
Lending Activities..........................................................................................4
Insurance Services.........................................................................................11
Trust and Investment Services..............................................................................11
Financial Advisory Services................................................................................11
Investment Activities......................................................................................12
Sources of Funds...........................................................................................12
Subsidiaries...............................................................................................13
Employees..................................................................................................14
Market Area and Competition................................................................................14
Supervision and Regulation.................................................................................15
Taxation...................................................................................................16
Item 2. Properties..................................................................................................17
Item 3. Legal Proceedings...........................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.........................................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................18
Other Events...............................................................................................18
Item 6. Selected Financial Data.....................................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition & Results of Operations.........................21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................36
Item 8. Financial Statements and Supplementary Data.................................................................36
Index to Consolidated Financial Statements and Notes.......................................................36
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure........................79
PART III
Item 10. Directors and Executive Officers of the Registrant..........................................................79
Item 11. Executive Compensation......................................................................................80
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................80
Item 13. Certain Relationships and Related Transactions..............................................................80
Item 14. Controls and Procedures.....................................................................................81
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................81
Signatures...........................................................................................................85
Certifications.......................................................................................................86
Exhibits.............................................................................................................88
2
FORWARD LOOKING STATEMENTS
- --------------------------
This Annual 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. Such developments, or any combination thereof,
could have an adverse impact on Webster's financial position and results of
operations.
PART I
ITEM 1. BUSINESS
- ----------------
GENERAL
- -------
Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank (the "Bank"), Webster Insurance, Inc. ("Webster
Insurance"), Webster D&P Holdings, Inc. ("Duff & Phelps"), and Fleming, Perry &
Cox ("Fleming"), delivers financial services to individuals, families and
businesses located primarily in Connecticut and delivers equipment financing,
mortgage origination and financial advisory services to individuals and
companies located primarily in the Northeast and throughout the United States.
The Bank provides business and consumer banking, asset-based lending, mortgage
lending, trust, investment and insurance services through 111 banking offices,
219 ATMs and its Internet website (www.websteronline.com). Founded in 1935,
Webster Bank converted from a federal mutual to a federal stock institution in
1986.
Webster, on a consolidated basis, at December 31, 2002 and 2001 had total assets
of $13.5 billion and $11.9 billion, total securities of $4.1 billion and $4.0
billion and net loans receivable of $7.8 billion and $6.7 billion, respectively.
At December 31, 2002 and 2001, total deposits were $7.6 billion and $7.1
billion, respectively. At both December 31, 2002 and 2001, shareholders' equity
was $1.0 billion. During 2002, Webster repurchased 3,960,690 common shares at a
total cost of $138.5 million.
At December 31, 2002, the assets of Webster, on an unconsolidated basis ("Parent
Company"), consisted primarily of its investments in subsidiaries of $1.2
billion, investment securities of $63.7 million, cash and short-term investments
of $13.0 million, other direct investments of $17.1 million and loans receivable
of $4.0 million. Primary sources of income to Webster, on an unconsolidated
basis, are dividend payments received from the Bank and interest from and gains
on the sale of investment securities. Primary expenses are interest expense on
borrowings and capital securities and allocated operating expenses. See Notes 20
and 23 of Notes to Consolidated Financial Statements included elsewhere within
this report for additional information.
Deposits in the Bank are federally insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and at December 31, 2002 approximately 80% of the Bank's deposits
were subject to BIF assessment rates and 20% were subject to Savings Association
Insurance Fund ("SAIF") assessment rates. See the "Supervision and Regulation"
section under this Item for additional information.
Webster, as a holding company, and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision
("OTS"), as its primary federal regulator. The Bank is also subject to
regulation, examination and supervision by the FDIC as to certain matters.
Webster's executive offices are located at Webster Plaza, Waterbury, Connecticut
06702. The telephone number is (203) 578-2476.
ACQUISITIONS
- ------------
The following acquisitions were completed by Webster during 2002 and their
results of operations are included in the Consolidated Financial Statements for
periods subsequent to the date of acquisition.
FLEMING, PERRY & COX
In October 2002, Webster acquired Fleming, a financial planning and investment
services firm, to operate in partnership with Webster Financial Advisors. Based
in Norwalk, Connecticut, Fleming serves high net worth clients in the
Connecticut and surrounding states. Fleming offers financial planning,
investment management, risk management and tax and estate planning services.
Fleming operates as a direct subsidiary of Webster. The acquisition of Fleming
is another step by Webster in building a financial planning-based relationship
management group.
3
WHITEHALL BUSINESS CREDIT CORPORATION
In August 2002, Webster Bank acquired loans and certain assets from the
asset-based lending division of IBJ Whitehall Business Credit Corporation, a
subsidiary of The Industrial Bank of Japan Trust Company. These assets were
contributed to Whitehall Business Credit Corporation ("Whitehall"), which
operates as a subsidiary of the Bank with its main office in New York, New York
and additional offices in Braintree, Massachusetts and Atlanta, Georgia. Webster
acquired $451.1 million of outstanding loans and $59.5 million of letters of
credit. The acquisition of these assets and the formation of Whitehall further
develop Webster as a diversified service provider and strengthens its expanding
commercial lending products and services. At the time of the acquisition, the
Bank already had a successful Hartford, Connecticut asset-based lending
division.
For additional information on these and 2001 acquisitions, see Note 2 of Notes
to Consolidated Financial Statements included elsewhere within this report.
LENDING ACTIVITIES
- ------------------
GENERAL
Webster, through its consolidated Bank subsidiary, originates various types of
residential, commercial and consumer loans. Total loans receivable were $7.9
billion and $6.8 billion at December 31, 2002 and 2001, respectively. The Bank
offers commercial and residential permanent and construction mortgage loans,
commercial and industrial loans, equipment financing, asset-based loans and
various types of consumer loans including home equity lines of credit, home
equity loans and other types of small business and consumer loans. At December
31, 2002 and 2001, residential loans represented 43% and 50% of Webster's loan
portfolio, respectively.
RESIDENTIAL MORTGAGE LOANS AND MORTGAGE BANKING ACTIVITY
Webster is dedicated to providing a full compliment of residential mortgage loan
products that meet the financial needs of its customers. While its primary
lending markets are Connecticut and the northeastern United States, Webster's
markets also include all states except Alaska and Hawaii. Webster offers its
customers a full range of products including conventional conforming and jumbo
fixed rate loans, conforming and jumbo adjustable rate loans, Federal Housing
Authority ("FHA"), Veterans Administration ("VA") and state agency mortgage
loans through Connecticut Housing Finance Authority ("CHFA"). Various programs
are offered to support Webster's Community Reinvestment Act goals at the state
level. Types of properties consist of one-to-four family residences, owner and
non-owner occupied, second homes, construction, permanent and improved single
family building lots. Additionally, Webster provides certain customers with an
option to modify their existing loan in order to enhance portfolio retention
strategies. Webster's distribution channels for these loans include its network
of branches, referrals, loan officers, call center, as well as third party
licensed mortgage brokers in targeted areas of the United States through its
National Wholesale Lending Group. Established in 2001 as part of Webster Bank,
the National Wholesale Lending Group enhances the level of mortgage banking
activity through the development of third party originations throughout the
United States. In 2002, it originated $2.6 billion in total residential
mortgages compared to $1.3 billion in 2001.
The Bank originates both fixed rate and adjustable rate residential mortgage
loans. At December 31, 2002, approximately $1.1 billion, or 31%, of Webster's
total residential mortgage loans held in portfolio 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 generally be 2.75% above the constant
maturity one-year U.S. Treasury yield index. At December 31, 2002, approximately
$2.3 billion, or 69% of Webster's total residential mortgage loans had a fixed
rate. Approximately 85% of the residential mortgage portfolio is secured by
properties located in Connecticut.
At December 31, 2002, Webster had $11.3 million of mortgage servicing rights,
net, included in other assets, which had a market value of approximately $19.5
million. These servicing rights, are carried at the lower of cost or market
determined on an individual pool basis. The pools are tested for impairment
quarterly with any adjustment to the valuation allowance included in noninterest
income. Webster services approximately $1.4 billion of residential mortgage
loans for others. See Note 10 of Notes to Consolidated Financial Statements
included elsewhere within this report for additional information.
NATIONAL WHOLESALE LENDING
Webster continued to expand its National Wholesale Lending platform in 2002 and
tripled its prior year production results by originating $1.7 billion of
approved residential one-to-four family loans. These loans were originated
primarily by approved licensed mortgage brokers throughout the U.S. and
underwritten, closed and funded by the Bank. The majority of these loans were
sold into the secondary market as mortgage-backed securities. The increase in
residential loan volume was a direct result of Webster's national expansion
effort combined with a favorable interest rate environment. At December 31,
2002, Webster had $400.0 million of residential mortgage loans held for sale.
In 2002, National Wholesale Lending opened four new regional offices in Atlanta,
Georgia; Chicago, Illinois; Phoenix, Arizona and Seattle, Washington. These
offices collectively produced $768 million of closed loans in their first year
of operation, representing 45% of the total 2002 wholesale production. These
offices provide Webster with a local presence in these markets, helping attract
loan originations from these local brokers.
4
Additionally, the National Wholesale Lending Group began offering consumer loan
products in the form of home equity lines and second mortgages, producing $106.7
million in closed loan origination volume in 2002. With the maturity of these
offices and new product offerings in 2003, the wholesale platform expects
continued growth in origination volumes if interest rates remain in this
favorable interest rate environment.
Webster Bank underwrites residential mortgages in accordance with industry
standards and complies with the underwriting guidelines established for various
Federal (Fannie Mae, Freddie Mac, FHA, and VA loans) and State programs.
Specific private investor requirements may necessitate additional guidelines.
Underwriting of personal mortgages involves evaluation of the credit worthiness
of the borrower(s) and collateral through the use of independent credit
reporting agencies, analysis of personal financial information (application
data, financial statements, tax return filings), using electronic statistical
analysis and judgmental rules and obtaining and evaluating an independent
assessment of collateral value. Underwriting practices at Webster Bank
consistently follow generally accepted income standards and loan to value ratios
to allow for sale of the mortgages in the secondary market.
COMMERCIAL LENDING
The commercial loan portfolio grew 32% to $1,798.9 million at December 31, 2002
from $1,367.6 million a year earlier. Within the various lending units, loan
officers are responsible for following the underwriting guidelines set by Bank
and managing customer relationships in accordance with Bank policy. When a
lending opportunity arises, the loan officer is responsible for determining the
desirability of engaging in business with the borrower and in general, the
underwriting process should reveal the credit worthiness of the borrower and
protect the Bank's best interest. Credit underwriting requests are reviewed by
lending unit management with appropriate lending authority, and are then
presented to Credit Administration for final approval.
While every loan request entails different informational requirements, minimum
requirements have been established to properly underwrite a loan in order to
provide consistency to the underwriting and renewal process. Consistency is also
enhanced through a standard underwriting format and approval process, which
requires increasing authority as exposure or risks increase. Appropriate
analysis is performed for each credit action including, but not limited to,
analysis of financial performance (past and projected), the borrower's ability
to service debt at current and proposed levels, industry evaluation, evaluation
of guarantor financial condition (as applicable), and analysis of collateral
valuation. Credit analysis is enhanced by the use of a scoring model on loans up
to $250,000, which is used predominately in the Small Business Lending Unit.
Loan officers are held fully responsible for monitoring their loan portfolios.
These responsibilities include initial and continual risk rating of loans,
adherence to covenants, completeness and existence of documentation, maintenance
of the loan system, maintaining customer contact and updating the credit file
with substantive credit analysis. A quarterly review of the portfolio is
conducted by each officer to assign a risk rating grade to the loans and
identify potential impaired or nonaccrual loans. The assigned grades are
reviewed by both internal loan review and by the divisional credit policy
officer. In addition, the loan officer is responsible for reviewing the loan
annually to ensure that it continues to meet the quality standards of the Bank.
MIDDLE MARKET
The Middle Market Division provides a full array of financial services to a
diversified group of companies with revenues greater than $10 million, primarily
privately held and located within the State of Connecticut and nearby regions.
Reflective of the general downturn in the economy, lower utilization of existing
credit facilities and adherence to credit standards, total loans administered by
the Middle Market Division decreased to $538.9 million from $576.3 million
outstanding at the prior year end. Included in loans administered by the Middle
Market Division were $371.8 million and $356.6 million of commercial loans and
$167.1 million and $219.7 million of commercial real estate loans at December
31, 2002 and 2001, respectively. Typical loan facilities include lines of credit
for working capital, term loans to finance purchases of equipment and commercial
real estate loans for owner-occupied buildings. Unit and relationship managers
within the Middle Market Division average over 20 years of experience in the
Connecticut market.
In an effort to offer the broadest range of banking products to our customer
base, the Middle Market Division facilitates access to other specialists within
the Bank. These specialists include Webster Financial Advisors, Center Capital
Corporation, Webster Insurance and a team of cash management professionals
offering customized solutions and competitive products. Investment banking
services may be provided in close collaboration with Duff & Phelps, a subsidiary
of Webster. During 2002, the Middle Market Division funded loans of $112.4
million against commitments of $232.8 million, compared to funding of $102.2
million and commitments of $166.7 million a year earlier.
ASSET-BASED LENDING
In August 2002, Webster completed the purchase of certain loans and other assets
of IBJ Whitehall Business Credit Corporation, a subsidiary of The Industrial
Bank of Japan Trust Company. As part of the transaction, Webster retained
approximately 50 experienced asset-based lenders and operations staff. Organized
as a subsidiary of Webster Bank, Whitehall Business Credit Corporation
("Whitehall") has its offices in New York, New York; Braintree, Massachusetts
and Atlanta, Georgia. In the acquisition transaction, $451.1 million of
outstanding loans and $59.5 million of outstanding letters of credit were
acquired. This acquisition further deepened Webster's commitment to asset-based
lending. At the time of the acquisition, Webster already had a successful
Hartford, Connecticut asset-based lending division with $108.9 million in
outstanding loans at December 31, 2002.
5
Asset-based loans are generally secured by accounts receivable and inventories
of the borrower and, in some cases, also include additional collateral such as
property and equipment. At December 31, 2002 and 2001, total asset-based loans
were $465.4 million and $135.4 million, respectively. Approximately, 57% of the
commitments and 47% of the outstandings were to borrowers in the Northeast.
The Asset-Based Lending Division originates as agent, loans for its portfolio
and sells participations to other financial institutions. In addition, it
purchases participations from other banks and financial entities. In its
capacity as agent, it generally establishes depository relationships with the
borrower in the form of cash management accounts. At December 31, 2002, the
total of these deposits was $35.0 million. Asset-based loans funded in 2002 were
$78.8 million with commitments of $170.3 million.
SPECIALIZED LENDING
Webster participates in the syndicated loan market through a diversified
portfolio of loans, which represent transactions with large national borrowers
whose businesses command significant market share. These loans generally consist
of participations in revolving lines of credit or term loans with maturities up
to 7 years. Corporate utilization of the syndicated market has grown
dramatically in the last 10 years as a means of providing large credit
facilities to companies through consortiums of banks and other financial service
companies. Webster initially entered this market as a means of providing
geographic and industry diversification to the Bank's commercial loan portfolio.
It has staffed this function with highly knowledgeable individuals with
extensive experience in credit and leveraged lending at major banks and
insurance companies.
In addition to the underwriting criteria identified in Commercial Lending above,
concentration levels for each borrower in the Specialized Lending portfolio
generally will not exceed $10 million. The Bank's Chief Credit Policy Officer
and the head of Commercial Lending must approve exceptions to these limits. All
loans are evaluated in accordance with the Risk Assessment Policy of the Bank,
with external ratings (S&P and Moody's) used as additional guides. Loans in the
portfolio are actively monitored including quarterly credit reviews, analysis of
current financial statements and the comparison of results to other companies in
the same industry. Additionally, industries and sectors are also reviewed on a
regular basis to identify opportunities or developments that may impact the
portfolio.
During 2002, the Bank reduced its exposure to certain industries and sectors
through a combination of redirected cash flows and sales of loans. As part of
that strategy, during the fourth quarter, approximately $35 million of
telecommunications (wireless and other telecom) and cable loans were sold or
transferred to held for sale. Of this total, approximately $25 million had been
classified as nonperforming loans by the Shared National Credit ("SNC") Program
review during the third quarter of 2002. See "Asset Quality" and "Allowance for
Loan Losses" sections contained elsewhere within this report for additional
information.
At December 31, 2002 and 2001, the Specialized Lending Division administered
$299.8 million and $363.9 million of funded loans against commitments of $500.5
million and $568.1 million, respectively. Total funded loans represented
approximately 3.8% and 5.3% of total loans at December 31, 2002 and 2001,
respectively.
A summary of leveraged loans, by industry, administered by the Specialized
Lending Division follows:
Principal Balances Outstanding at December 31,
-------------------------------------------------------------
INDUSTRY/SECTOR (In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing $ 69,265 105,171
Advertising and publishing 46,885 46,171
Cable 39,820 58,364
Wireless communications 37,305 58,246
Other telecommunications (a) 27,943 35,858
Radio and TV broadcasting 16,700 21,161
Energy 9,396 --
Prescription medication distribution 9,192 --
Competitive local exchange carriers 8,863 16,275
All other 34,407 22,669
- ---------------------------------------------------------------------------------------------------------------------
Total $ 299,776 363,915
- ---------------------------------------------------------------------------------------------------------------------
(a) Includes towers and integrated communication providers.
Additionally, the portfolio contained $84.9 million and $46.4 million of funded
Collateralized Loan Obligations against commitments of $91.7 million and $52.0
million at December 31, 2002 and 2001, respectively. With the exception of one
unrated $8 million loan, these loans carry an investment grade rating by at
least one of the independent rating agencies.
In addition to the loans administered by the Specialized Lending Division, the
Bank had $384.3 million in loans subject to review by the SNC Program against
commitments of $1.1 billion at December 31, 2002. These loans are located
primarily in the Northeast region and are funded through the Middle Market,
Commercial Real Estate and Asset-Based Lending Divisions. In most cases, there
is a direct calling relationship with the borrower.
6
SMALL BUSINESS BANKING
Small Business Banking ("SBB") provides a full array of commercial loan and
deposit products to small businesses and their principals through the Bank's
branches located throughout Connecticut. The SBB target market for 2002 was
expanded to reach businesses with annual revenue of up to $10 million -
providing commercial loan products with relationship exposures of up to $2
million. This market segment represents a significant percentage of commercial
businesses located within the boundaries of Connecticut. SBB, through a
dedicated group of business bankers as well as through the Bank's branch
network, provides a full range of financial products and services to its
existing customer base as well as potential new customers. It also plays a major
role in supporting the Bank's Community Reinvestment Act goals by providing
credit facilities to a wide range of small businesses, including many local
not-for-profit organizations. A Fair Isaac-based credit scoring model is
utilized, in whole or in part, in loan approvals of up to $250,000 and SBB
offers a $100,000 same-day unsecured line of credit product. SBB provides a
comprehensive set of commercial loan products including lines of credit, letters
of credit, term loans, and commercial mortgage loans. In 2002, it implemented an
automated "early warning" system to aid in the identification of potential
portfolio or customer-level credit quality issues. Through recent expansion
efforts and focused training, SBB serves as a referral source for other Bank
products including cash management, insurance, international products and
investments. The Bank also offers Small Business Administration ("SBA")
guaranteed loans under its Preferred Lender Program status. As of September 30,
2002 (the fiscal year end for the SBA), Webster Bank ranked third among SBA
lenders with 64 loans totaling $9.4 million. Customers may also take advantage
of several loan programs provided through the Connecticut Development Authority.
SBB administered a portfolio of approximately $326.3 million at December 31,
2002, a 2% decrease from $333.0 million the prior year end. Included in its
portfolio are $157.0 million of commercial loans and $169.3 million of
commercial real estate loans. Webster is a leading Connecticut-based bank for
providing loans of up to $1 million to small businesses in the state. Loans
originated during 2002 and 2001 were $85.7 million and $77.7 million,
respectively.
An objective of SBB's strategic plan is to focus on deposit growth as part of
the overall customer relationship. The Bank has developed a variety of
innovative deposit products and marketing programs that are designed to meet
depositors' needs and attract both short-term and long-term deposits. At
December 31, 2002, total small business deposit balances totaled $864.0 million
up from $729.0 million a year earlier, an increase of 19%.
EQUIPMENT FINANCING
Center Capital Corporation ("Center Capital"), an equipment financing subsidiary
of the Bank acquired in March 2001, transacts business with end-users of
equipment, either by soliciting this business on a direct basis or through
referrals from various equipment manufacturers, dealers and distributors with
whom it has relationships. Center Capital has grown its portfolio to $420.0
million at December 31, 2002 from $320.7 million at December 31, 2001, an
increase of 31%. For 2002, Center Capital originated $234.8 million in equipment
financing transactions.
Center Capital markets its products nationally through a network of dedicated
equipment financing sales executives who are grouped by customer type or
collateral-specific business. During 2002, financing initiatives encompassed
five distinct industry/equipment niches, each operating as a division within
Center Capital; Construction and Transportation Equipment Financing,
Environmental Equipment Financing, Machine Tool Equipment Financing,
Professional Practices Equipment Financing, and Aviation Equipment Financing
(which was added in the second quarter of 2002).
Within each division, Center Capital seeks to finance equipment and structure
terms such that the collateral remains protected throughout the term of the
transaction. It has no residual value risk on the equipment it finances. In
instances where Center Capital is forced to repossess its collateral, the value
of the repossessed equipment may approximate or exceed the defaulted contract's
remaining balance. All credit underwriting, approval, servicing and collections
are performed centrally at its headquarters in Farmington, Connecticut.
COMMERCIAL REAL ESTATE LENDING
The Commercial Real Estate Division provides variable rate and fixed rate
financing alternatives for the purpose of acquiring, developing, constructing,
improving or refinancing commercial real estate where the property is the
primary collateral securing the loan and the income which is produced from the
property and its tenants is the primary repayment source. Typically the Bank
lends investment quality real estate, including apartments, anchored retail,
industrial and office properties. Loan types include construction, construction
mini-perm and permanent loans, and loan amounts range from $2 million to $15
million and are diversified by property type and geographic location. The
lending group consists of a team of professionals with a high level of expertise
and experience. The majority of the lenders have more than 15 years of national
lending experience in both construction and permanent lending with major banks
and insurance companies.
Commercial Real Estate ("CRE") loans increased 6% to $1,029.3 million at
December 31, 2002 from $975.0 million a year earlier. Included in the $1,029.3
million of outstanding CRE loans were $167.1 million administered by the Middle
Market Division and $169.3 million by the Small Business Division. They are
primarily owner-occupied commercial real estate loans to commercial customers.
The remaining $692.9 million of loans were administered by the division. During
2002, the division funded loans of $231.0 million against commitments of $365.0
million, compared to funding of $135.0 million against commitments of $214.0
million the previous year.
7
Over the last several years, the Bank has cultivated relationships with highly
qualified regional and national developers in order to diversify the portfolio
geographically as well as to seek repetitive business and cross sell
opportunities. The Bank controls risk by utilizing personnel familiar with the
demographics of the area during the credit review process. As a result, it is
able to obtain its desired geographical diversification, while maintaining
knowledge of the specific areas when making its credit decisions.
Included in the total CRE portfolio were commercial construction loans of $116.3
million and $82.8 million at December 31, 2002 and 2001, respectively. The
division also makes acquisition, development and construction loans to
residential builders. The collateral securing these loans is improved land,
contract homes and a limited number of speculative homes in subdivision. At
December 31, 2002, there were $66.1 million of such loans in the portfolio.
A breakdown of the CRE loan portfolio by property type is as follows:
At December 31, 2002
------------------------------------------------------------
PROPERTY TYPE (Dollars in thousands) Amount Percent
- -------------------------------------------------------------------------------------------------------------------
Industrial $ 229,661 22.3%
Office 213,756 20.8
Retail 102,991 10.0
Multi-family 79,334 7.7
Mixed-use 76,522 7.4
Residential Development 66,104 6.4
Healthcare 57,903 5.6
Other 203,061 19.8
- -------------------------------------------------------------------------------------------------------------------
Total $ 1,029,332 100.0%
- -------------------------------------------------------------------------------------------------------------------
CONSUMER LENDING
Webster Bank is dedicated to providing a convenient and competitive selection of
consumer loan products to its customers. It concentrates on providing its
customers a range of products including home equity loans and equity lines of
credit as well as second mortgages and direct installment lending programs.
There are no credit card loans in the consumer loan portfolio. The loan
distribution channels consist of the branch network, loan officers, call center,
as well as third party licensed mortgage brokers. Webster's National Wholesale
Lending Group began offering home equity loans, through its broker network in
regional offices located in Phoenix, Arizona; Atlanta, Georgia; Chicago,
Illinois and Seattle, Washington during 2002. Additionally, consumer loan
products may be offered periodically through direct mail programs. The Bank also
provides the convenience of the Internet for equity loan applications that are
available in most states. Consumer loan products are underwritten in accordance
with accepted industry guidelines including, but not limited to, the evaluation
of the credit worthiness of the borrower(s) and collateral. Webster utilizes
independent credit reporting agencies and the Fair Isaac scoring model and the
analysis of personal financial information to determine the credit worthiness of
potential borrowers. Also, Webster obtains and evaluates an independent
appraisal of collateral value to determine the adequacy of the collateral.
Consumer loan volume increased significantly in 2002 and, at December 31,
consumer loans totaled $1.7 billion and represented 21% of the total loan
portfolio, compared to $1.1 billion or 16%, a year earlier. This growth is
attributable to the popularity of home equity products in this low interest rate
environment and the expansion of lending through a network of brokers in its
regional offices and in contiguous states.
CREDIT RISK MANAGEMENT
Webster Bank manages and controls risk in the loan portfolio through adherence
to consistent standards. Webster has written credit policies which establish
underwriting standards, place limits on exposure and set other limits or
standards as deemed necessary and prudent. Exceptions to the underwriting
policies arise periodically and to insure proper identification and disclosure,
Webster has established additional approval requirements and a tracking
requirement for all qualified exceptions. In addition, regular reports are made
to senior management and the Board of Directors regarding the credit quality of
the loan portfolio.
Credit Administration, which is independent of the loan production areas,
oversees the loan approval process, ensures adherence to credit policies and
monitors efforts to reduce nonperforming and classified assets.
Webster also has a Loan Review Department, which is independent of the loan
production areas and Credit Administration, that performs ongoing independent
reviews of the risk management process, adequacy of loan documentation and
assigned loan risk ratings. The results of its reviews are reported directly to
the Audit Committee of the Board of Directors.
Webster also has an Internal Audit function, which periodically reviews
Webster's business units to ensure compliance with corporate policies. The
results of these audits are reported directly to the Audit Committee of the
Board of Directors.
8
SELECTED LOAN MATURITY SCHEDULE
-------------------------------
The following table sets forth the contractual maturity and interest-rate
sensitivity of residential and commercial construction mortgage loans and
commercial loans at December 31, 2002. The contractual maturities below are
gross expected receipts from borrowers and do not reflect deferred costs and
discounts.
CONTRACTUAL MATURITY
- -------------------------------------------------------------------------------------------------------------------
One Year More than One More Than
(In thousands) or Less to Five Years Five Years Total
- -------------------------------------------------------------------------------------------------------------------
Contractual Maturity
Construction loans:
Residential mortgage $ 140,712 -- -- 140,712
Commercial mortgage 32,166 54,530 29,606 116,302
Commercial loans 253,735 1,208,915 337,265 1,799,915
- -------------------------------------------------------------------------------------------------------------------
Total $ 426,613 1,263,445 366,871 2,056,929
- -------------------------------------------------------------------------------------------------------------------
Interest-Rate Sensitivity
Fixed rate $ 150,807 459,794 50,036 660,637
Variable rate 275,806 803,651 316,835 1,396,292
- -------------------------------------------------------------------------------------------------------------------
Total $ 426,613 1,263,445 366,871 2,056,929
- -------------------------------------------------------------------------------------------------------------------
9
The following table sets forth the composition of the Bank's loan portfolio in
amounts and percentages at the dates shown.
At December 31,
2002 2001 2000
-----------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,134,109 40.2% $ 3,058,662 45.5% $ 3,760,792 55.3%
Construction 142,387 1.8 223,583 3.3 302,776 4.4
Multi-family units 109,711 1.4 104,038 1.5 65,482 1.0
- ------------------------------------------------------------------------------------------------------------
Total 3,386,207 43.4 3,386,283 50.3 4,129,050 60.7
- ------------------------------------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 1,378,936 17.7 1,046,874 15.6 1,207,398 17.8
Equipment financing 419,962 5.4 320,704 4.7 -- --
- ------------------------------------------------------------------------------------------------------------
Total 1,798,898 23.1 1,367,578 20.3 1,207,398 17.8
- ------------------------------------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 913,030 11.7 892,145 13.3 784,817 11.5
Commercial construction 116,302 1.5 82,831 1.2 72,216 1.1
- ------------------------------------------------------------------------------------------------------------
Total 1,029,332 13.2 974,976 14.5 857,033 12.6
- ------------------------------------------------------------------------------------------------------------
Consumer loans
Home equity credit loans 1,661,864 21.3 1,038,350 15.5 609,293 8.9
Other consumer 36,338 0.5 56,113 0.8 89,514 1.3
- ------------------------------------------------------------------------------------------------------------
Total 1,698,202 21.8 1,094,463 16.3 698,807 10.2
- ------------------------------------------------------------------------------------------------------------
Total loans (a) 7,912,639 101.5 6,823,300 101.4 6,892,288 101.3
Less: allowance for loan losses (116,804) (1.5) (97,307) (1.4) (90,809) (1.3)
- ------------------------------------------------------------------------------------------------------------
Loans, net $ 7,795,835 100.0% $ 6,725,993 100.0% $ 6,801,479 100.0%
- ------------------------------------------------------------------------------------------------------------
At December 31,
1999 1998
----------------------------------------------
(Dollars in thousands) Amount % Amount %
- -------------------------------------------------------------------------------
Residential mortgage loans:
1-4 family units $ 3,537,038 58.8% $ 3,669,804 66.8%
Construction 302,310 5.0 200,417 3.6
Multi-family units 52,573 0.9 689 --
- -------------------------------------------------------------------------------
Total 3,891,921 64.7 3,870,910 70.4
- -------------------------------------------------------------------------------
Commercial loans:
Commercial non-mortgage 915,035 15.2 548,734 10.0
Equipment financing -- -- -- --
- -------------------------------------------------------------------------------
Total 915,035 15.2 548,734 10.0
- -------------------------------------------------------------------------------
Commercial real estate:
Commercial real estate 695,520 11.5 548,487 10.0
Commercial construction 45,648 0.8 67,717 1.2
- -------------------------------------------------------------------------------
Total 741,168 12.3 616,204 11.2
- -------------------------------------------------------------------------------
Consumer loans
Home equity credit loans 492,684 8.2 458,981 8.3
Other consumer 47,064 0.8 68,081 1.2
- -------------------------------------------------------------------------------
Total 539,748 9.0 527,062 9.5
- -------------------------------------------------------------------------------
Total loans (a) 6,087,872 101.2 5,562,910 101.1
Less: allowance for loan losses (72,658) (1.2) (65,201) (1.1)
- -------------------------------------------------------------------------------
Loans, net $ 6,015,214 100.0% $ 5,497,709 100.0%
- -------------------------------------------------------------------------------
(a) Net of deferred costs and discounts.
10
INSURANCE SERVICES
- ------------------
Through its wholly-owned subsidiary, Webster Insurance, Webster offers a full
range of insurance products to both businesses and individuals. A regional
insurance brokerage agency with three operating divisions: business and
professional insurance, financial services and individual and family insurance.
Insurance products and services include: commercial and personal property and
casualty insurance; life, health, disability and long-term care insurance for
individuals and businesses; annuities and investment products; risk management
services and pension and 401(k) plan administration. Webster Insurance is the
largest insurance agency based in Connecticut and is headquartered in
Wallingford with offices in several other Connecticut communities, including
Westport, Waterford and Vernon. Revenues for the year 2002 were $27.1 million,
an increase of $5.3 million, or 24%, over the prior year.
In January 2003, Webster announced the acquisition of The Mathog & Moniello
Companies, an East Haven, Connecticut-based property and casualty agency and one
of the largest workers compensation agencies in New England. Mathog & Moniello
specializes in providing risk management products and services to self-insured
businesses and groups. The agency has approximately $11.0 million in annual
revenues. With this acquisition, Webster Insurance now ranks among the nation's
top ten bank-owned insurance agencies as measured by annual revenues.
TRUST AND INVESTMENT SERVICES
- -----------------------------
The Bank offers trust and investment services through its wholly-owned
subsidiaries Webster Trust Company, N.A. ("Webster Trust") and Webster
Investment Services, Inc. ("WIS"). For the year ended December 31, 2002, revenue
from both subsidiaries was $15.9 million, compared to $18.3 million in the
previous year. This decrease was due to the decline in value in the stock market
and the shift in investor sentiment to more short-term liquid investments.
Webster Trust provides investment management and a comprehensive range of trust,
custody, estate and administrative services to high-net-worth individuals, small
to medium size companies and not-for-profit organizations (endowments and
foundations). At December 31, 2002 and 2001, there were approximately $1.1
billion and $1.1 billion of trust assets held, of which $797.0 million and
$796.3 million were under management, respectively. These assets are not
included in the Consolidated Financial Statements, since the Bank does not own
them.
Through WIS, the Bank offers securities services including brokerage and
investment advice and is a registered investment advisor. WIS has over 100
registered representatives offering customers an expansive array of investment
products including stocks and bonds, mutual funds, managed accounts and
annuities. In 2002 and 2001, $260 million and $310 million of such products were
sold, respectively.
Webster Financial Advisors ("WFA") was established to provide consumers with a
team of professionals who offer a full range of financial services for
high-net-worth individuals and institutions. WFA offers clients a comprehensive
package of products to meet all their financial needs. Services include
investment management, trust and estate planning, retirement wealth management,
tax planning and sophisticated credit and banking solutions. WFA also offers
institutional services to Connecticut businesses and not-for-profit
organizations. Based in Waterbury, it also has offices in several Connecticut
communities, including Hartford, New Haven and Stamford.
In October 2002, Webster acquired Fleming, Perry and Cox, a financial planning
and investment service firm, to be part of Webster Financial Advisors. Based in
Norwalk, Connecticut, Fleming offers financial planning, investment management,
risk management and tax and estate planning services.
During 2002, Trust and Investment Services were combined into a primary line of
business. This business line which includes WFA, Webster Trust, WIS, Fleming and
Private Banking provides comprehensive wealth management services for
individuals and institutions.
FINANCIAL ADVISORY SERVICES
- ---------------------------
Duff & Phelps provides expertise in middle-market mergers and acquisitions,
private placements, fairness opinions, valuations, ESOP and ERISA advisory
services and special financial advisory services to public and private companies
located primarily throughout the United States. Total financial advisory
services revenues for the year 2002 and 2001 were $19.3 million and $15.5
million, respectively.
During 2002, Duff & Phelps focused its efforts on valuation work rather than
mergers and acquisition which are more transactional in nature. The goal is to
establish a larger base of stable recurring fee revenue. A group of the
valuation experts within the firm have focused on SFAS No. 141 and SFAS No. 142
consulting engagements.
11
INVESTMENT ACTIVITIES
- ---------------------
Webster, either directly or through the Bank, maintains an investment portfolio
that is primarily structured to provide a source of liquidity for operating
needs, to generate interest income and to provide a means to balance
interest-rate sensitivity. The investment portfolio may be classified into three
major categories consisting of: available for sale, held to maturity and trading
securities. On January 1, 2001, as permitted by the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133, Webster reclassified all held
to maturity securities to available for sale. At December 31, 2002, the combined
investment portfolios of Webster and the Bank totaled $4.1 billion, with $4.0
billion and $63.7 million held by the Bank and Parent Company, respectively. At
December 31, 2001, the combined investment portfolios of the Bank and Parent
Company totaled $4.0 billion, with $3.9 billion and $83.2 million held by the
Bank and Parent Company, respectively. At December 31, 2002 and 2001, the Bank's
portfolio consisted primarily of mortgage-backed securities. At December 31,
2002 and 2001, the Parent Company's portfolio was classified as available for
sale and consisted primarily of equity and corporate trust preferred securities.
See Note 4 of Notes to Consolidated Financial Statements contained elsewhere
within this report for security maturity data, as well as other additional
information.
The Bank may acquire, hold and transact various types of investment securities
in accordance with applicable federal regulations, state statutes and within the
guidelines of its internal investment policy. The type of investments that the
Bank may invest in include: interest-bearing deposits of federally insured
banks, federal funds, U.S. government treasury and agency securities, including
mortgage-backed securities ("MBS") and collateralized mortgage obligations
("CMOs"), private issue MBSs and CMOs, municipal securities, corporate debt,
commercial paper, banker's acceptances, trust preferred securities, mutual funds
and equity securities subject to restrictions applicable to federally chartered
institutions. Webster's asset/liability management objectives also influence
investment activities at both the Parent Company and Bank. While there may be no
statutory limit on certain categories of investments, the OTS may establish an
individual limit on such investments, if the concentration in such investments
presents a safety and soundness concern.
The Bank has the ability to use the investment portfolio as well as
interest-rate financial instruments, within internal policy guidelines, to hedge
and manage interest-rate risk as part of its asset/liability strategy. See Note
15 of Notes to Consolidated Financial Statements contained elsewhere within this
report.
The securities portfolios of Parent Company and the Bank are managed by the
Bank's Treasury Group in accordance with regulatory guidelines and established
internal corporate investment policies. These policies and guidelines include
limitations on aspects such as investment grade, concentrations and investment
type to help manage risk associated with investing in securities.
SOURCES OF FUNDS
- ----------------
Cash flows from deposits, loan and mortgage-backed security repayments,
securities sales proceeds and maturities, borrowings and earnings are the
primary sources of the Bank's funds available for use in its lending and
investment activities and in meeting its operational needs. While scheduled loan
and security repayments are a relatively stable source of funds, deposit flows
and loan and investment security prepayments are influenced by prevailing
interest rates and local economic conditions. The Bank's borrowings primarily
include Federal Home Loan Bank ("FHLB") advances and repurchase agreement
borrowings. See Notes 12 and 13 of Notes to Consolidated Financial Statements
contained elsewhere within this report for further borrowing information.
The Bank attempts to control the flow of funds in its deposit accounts according
to its need for funds and the cost of alternative sources of funding. A Retail
Pricing Committee meets regularly to determine pricing and marketing
initiatives. Webster influences the flow of funds primarily by the pricing of
deposits, which is affected to a large extent by competitive factors in its
market area and asset/liability management strategies.
The main sources of liquidity at the Parent Company are dividends from the Bank,
interest and dividends on securities and net proceeds from borrowings and
capital offerings. The main outflows of funds are dividend payments to common
shareholders and interest expense on capital securities, senior notes and other
borrowings.
DEPOSIT ACTIVITIES
The Bank continues to develop a variety of deposit programs designed to meet
customer's financial needs. A key strategic goal is to retain existing core
deposit balances while attracting new customers to grow both short and long term
deposits. During the third quarter, in an effort to attract new deposits, a High
Performance Checking account program was introduced that offers a full line of
accounts with varying features including both "free checking" without interest
as well as several interest-bearing accounts. Savings accounts include both
statement and passbook accounts as well as money market account and premium rate
money market accounts. In addition, a variety of certificate of deposits that
include both short and long-term maturity as well as options such as six month
deferred interest payments and "bump-up" rate options are offered to consumers.
The Bank continues to offer special IRA products, which include savings
accounts, certificate of deposits and rollover for individuals who receive lump
sum distributions. Checking and savings products offer a variety of features
including ATM and check card use, direct deposit, ACH payments, combined
statements, automated telephone banking services, Internet-based banking, bank
by mail as well as overdraft protection via a line of credit or transfer from
another deposit account.
12
The Bank receives retail and commercial deposits through its main office and 110
other banking offices throughout Connecticut. Deposit customers can access their
account in a variety of ways including branch banking, ATMs, web banking,
telephone banking or the Internet. Effective advertising, good service and
competitive pricing policies are strategies that attract and retain deposits. In
addition, the Bank also receives commercial deposits in the same manner and
offers a variety of commercial accounts to meet business customers' financial
needs.
Although not an integral part of its deposit gathering strategies, from time to
time, brokered deposits are used as a means of funds generation. As with any
other funding source, the Bank considers its needs, relative cost and
availability in determining the suitability of brokered deposits. At December
31, 2002, outstanding brokered deposits totaled $12.9 million.
Customer services also include 219 ATM facilities with membership in NYCE and
PLUS networks and provide 24-hour access to linked accounts. The Internet
banking service allows, among other things, customers the ability to open an
account, transfer money between accounts, review statements, check balances and
pay bills through the use of a personal computer. The telephone banking service
provides automated customer access to account information 24 hours per day,
seven days per week, and to service representatives at certain established
hours. Customers can transfer account balances, process stop payments and
address changes, place check reorders, open deposit accounts, inquire about
account transactions and request general information about the Bank's products
and services. The Bank's services provide for automatic loan payment features
from its accounts as well as for direct deposit of Social Security, payroll, and
other retirement benefits. See Note 11 of Notes to Consolidated Financial
Statements contained elsewhere within this report for additional deposit
information.
BORROWINGS
The Bank is a member of the Federal Home Loan Bank ("FHLB") system which
functions in a reserve credit capacity for regulated, federally insured
depository institutions and certain other home financing institutions. Members
of the system are required to own capital stock in the FHLB and are authorized
to apply for advances on the security of their FHLB stock and certain home
mortgages and other assets (principally securities, which are obligations of, or
guaranteed by, the United States Government or its agencies) provided certain
creditworthiness standards have been met. Under its current credit policies, the
FHLB limits advances based on a member's assets, total borrowings and net worth.
The Bank utilizes long-term and short-term FHLB advances as a source of funding
to meet liquidity and planning needs when the cost of these funds are favorable
as compared to alternate funding sources. At December 31, 2002 and 2001, FHLB
advances totaled $2.2 billion and $2.5 billion and represented 49% and 72%,
respectively, of total outstanding borrowed funds.
Additional funding sources are available through securities sold under agreement
to repurchase, purchased federal funds and lines of credit with correspondent
banks. Outstanding borrowings through securities sold under agreement to
repurchase totaled $1.5 billion and $571.7 million at December 31, 2002 and
2001, respectively and represented 32% and 16% of total borrowed funds,
respectively. Other borrowings were $839.0 million and $430.5 million at
December 31, 2002 and 2001 and represented 19% and 12%, respectively, of total
borrowed funds. See Notes 12 and 13 of Notes to Consolidated Financial
Statements contained elsewhere within this report for further borrowing
information.
In January 2003, Webster Bank completed an offering of $200.0 million of
subordinated notes. The notes have an interest rate of 5.875% and mature on
January 15, 2013. The offering enables Webster to increase its total risk-based
capital ratio and fund strategic growth initiatives. See Note 24 of Notes to
Consolidated Financial Statements contained elsewhere within this report.
In November 2000, Webster Bank completed a registered offering of $126.0 million
of 8.72% Senior Notes due 2007 (the "Senior Notes"). The net proceeds from the
notes were used for general corporate purposes. The Senior Notes are not
redeemable prior to the maturity date of November 30, 2007.
Additional funding is also provided by capital securities of subsidiary trusts.
During 1997, Webster and a purchased entity formed statutory business trusts,
which issued $150.0 million of trust securities and invested the proceeds in an
equivalent amount of subordinated debt of Webster. The trust securities, which
carry rates ranging from 9.36% to 10%, mature in 2027. During 2002, Webster
repurchased $28.7 million of the capital securities and, at December 31, 2002,
the remaining outstanding balance totaled $121.3 million.
SUBSIDIARIES
- ------------
Below is a brief description of certain other subsidiaries of Webster and the
Bank.
The Bank's investment in Webster Mortgage Investment Corporation ("WMIC"), a
passive investment subsidiary, totaled $3.8 billion and $2.5 billion at December
31, 2002 and 2001, respectively. The primary function of this subsidiary is to
provide servicing on passive investments, which include loans secured by real
estate. During 2002, $2.1 billion of residential, commercial real estate and
home equity loans were sold or transferred to WMIC from the Bank. This passive
investment company derives state income tax benefits for the Bank.
13
The Bank's investment in Webster Preferred Capital Corporation, a real estate
investment trust ("REIT"), totaled $621.4 million and $918.8 million at December
31, 2002 and 2001, respectively. The Bank owns 100% of the REIT's common stock,
while the preferred stock is held by third-party investors. The REIT's strategy
is to acquire, hold and manage real estate mortgage assets. During 2002, the
Bank received a $300.0 million return of capital dividend from the REIT, as
these excess funds were not needed for the daily operation of the subsidiary. No
loans were sold or transferred to the REIT from the Bank during 2002.
Retail Banking
Retail banking services are chiefly provided by Webster's subsidiaries, Webster
Bank and Webster Insurance. Webster Insurance offers a full range of insurance
products to both businesses and individuals through its three operating
divisions: business and professional insurance, financial services and
individual and family insurance. The Bank or its subsidiaries provide business
and consumer banking, asset-based lending, mortgage lending, trust, investment
and insurance services through 111 banking offices and investment offices
including trust and investment services, 219 ATMs and the Internet. Among the
Bank's retail banking activities are the following significant subsidiaries.
Commercial Lending
Webster Bank provides additional commercial lending capabilities through its
subsidiaries, Center Capital and Whitehall. Center Capital is an equipment
financing concern which provides funding to end users of equipment in five
distinct industry niches. Whitehall is an asset-based lender whose loans are
generally secured by accounts receivable and inventories of the borrower.
Trust and Investment Services
Webster provides comprehensive wealth management services for individuals and
institutions through Bank subsidiaries Webster Trust, Webster Investment
Services and Fleming, Perry and Cox.
EMPLOYEES
- ---------
At December 31, 2002, Webster had 2,708 employees (including 280 part-time
employees), none of whom were represented by a collective bargaining group.
Webster maintains a comprehensive employee benefit program providing, among
other benefits, group medical and dental insurance, life insurance, disability
insurance, a pension plan, an employee 401(k) investment plan and an employee
stock purchase plan. Management considers Webster's relations with its employees
to be good. See Note 18 of Notes to Consolidated Financial Statements contained
elsewhere within this report for additional information on certain benefit
programs.
MARKET AREA AND COMPETITION
- ---------------------------
At December 31, 2002, Webster had 111 branch offices, which includes: 31 banking
offices, including its main office, in New Haven County; 49 banking offices in
Hartford County; 16 banking offices in Fairfield County; 8 banking offices in
Litchfield County; 4 banking offices in Middlesex County; 2 banking offices in
Tolland County and 1 banking office in New London County. The Bank's market area
has a diversified economy with the workforce employed primarily in
manufacturing, financial services, healthcare, industrial and technology
companies.
The Bank faces substantial competition for deposits and loans throughout its
market areas. The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations, automated services and office hours. Competition for
deposits comes primarily from other savings institutions, commercial banks,
credit unions, mutual funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees, the
quality and range of lending services and personalized service. Competition for
origination of first mortgage loans comes primarily from other savings
institutions, mortgage banking firms, mortgage brokers, commercial banks and
insurance companies. The Bank faces competition for deposits and loans, both
retail and commercial, throughout its market area not only from local
institutions but also from out-of-state financial institutions which have opened
loan production offices or which solicit each business in its market area.
Webster Financial Advisors has offices in Hartford, New Haven, Stamford and
Waterbury, Connecticut. Webster Investment Service's administrative, operations
and compliance departments are headquartered in Bristol, Connecticut with sales
offices located throughout Webster's branch network. Webster Insurance is
headquartered in Wallingford, Connecticut with offices in Harrison, New York;
East Haven, Vernon, Westport, West Hartford and Waterford, Connecticut. Duff &
Phelps is headquartered in Chicago, Illinois with offices in Los Angeles,
California; New York, New York and Seattle, Washington. Center Capital is
headquartered in Farmington, Connecticut with offices in Blue Bell,
Pennsylvania; Schaumburg, Illinois; Westboro, Massachusetts; Bedford, Texas and
Brookfield, Connecticut. Whitehall is headquartered in New York, New York with
offices in Braintree, Massachusetts and Atlanta, Georgia. The National Wholesale
Lending Group maintains offices in Atlanta, Georgia; Chicago, Illinois; Phoenix,
Arizona and Seattle, Washington.
14
SUPERVISION AND REGULATION
- --------------------------
Webster, as a savings and loan holding company, and Webster Bank, as a federally
chartered savings bank, are subject to extensive regulation, supervision, and
examination by the OTS as their primary federal regulator. The Bank also is
subject to regulation, supervision, and examination by the FDIC and as to
certain matters by the Board of Governors of the Federal Reserve System. Webster
Trust, as a national bank engaged in trust activities, is subject to extensive
regulation, supervision and examination by the Office of the Comptroller of the
Currency ("OCC"). Webster Investment Services, Inc. ("WIS") is registered as a
broker-dealer and investment advisor and is subject to extensive regulation,
supervision, and examination by the Securities and Exchange Commission ("SEC").
WIS also is a member of the National Association of Securities Dealers, Inc.
("NASD"), and is subject to its regulation. Fleming, Perry and Cox ("Fleming")
also is registered as an investment advisor and is a member of the NASD, and it
is subject to extensive regulation, supervision and examination by the SEC and
to regulation by the NASD. WIS is authorized to engage as a broker-dealer and
the Bank as an underwriter of municipal securities, and as such they are subject
to regulation by the Municipal Securities Rulemaking Board. Webster Insurance is
a licensed insurance agency with offices in the state of Connecticut and is
subject to registration and supervision by the State of Connecticut Department
of Insurance.
The Bank is subject to substantial regulatory restrictions on its ability to pay
dividends to the Parent Company. Under OTS capital distribution regulations, the
Bank may pay dividends to Webster without prior regulatory approval so long as
it meets its applicable regulatory capital requirements before and after payment
of the dividends and its total dividends do not exceed its net income to date
over the calendar year plus retained net income over the preceding two years.
The OTS has discretion to prohibit any otherwise permissible capital
distributions on general safety and soundness grounds, and must be given 30 days
advance notice of all capital distributions, during which time it may object to
any proposed distribution. At December 31, 2002, the Bank had the ability to pay
dividends of $96.3 million to Webster without the prior approval of the OTS.
Under the Gramm-Leach-Bliley Act, all financial institutions, including Webster,
the Bank, Webster Trust, and their subsidiaries, are required to establish
policies and procedures to restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request and to protect customer data
from unauthorized access. Webster has developed such policies and procedures for
itself and its subsidiaries, including the Bank and Webster Trust, and believes
it is in compliance with all privacy provisions of the Gramm-Leach-Bliley Act.
Under the International Money Laundering Abatement and Anti-Terrorism Financing
Act of 2001, adopted as Title III of the USA PATRIOT Act, all financial
institutions, including Webster, the Bank, and Webster Trust, are required to
take certain measures to identify their customers, prevent money laundering,
monitor customer transactions and report suspicious activity to U.S. law
enforcement agencies. Financial institutions also are required to respond to
requests for information from federal banking regulatory authorities and law
enforcement agencies, and information-sharing among financial institutions is
encouraged by an exemption for complying financial institutions from the privacy
provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial
institutions that hold correspondent accounts for foreign banks or provide
private banking services to foreign individuals are required to take measures to
avoid dealing with certain foreign individuals or entities, including foreign
banks with profiles that raise money laundering concerns, and dealings with
"shell banks," defined as a foreign bank with no physical presence in any
country, are barred altogether. The Secretary of the Treasury has adopted
regulations to implement several of these provisions. All financial institutions
also are required to establish internal anti-money laundering programs. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank and
Webster Trust, which applies to Webster. Webster, the Bank, and Webster Trust
have in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and
they engage in very few transactions of any kind with foreign financial
institutions or foreign persons.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
("Act"). The stated goals of the Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws.
The Act is the most far-reaching U.S. securities legislation enacted in some
time. It generally applies to all companies, both U.S. and non-U.S., that file
or are required to file periodic reports with the SEC under the Securities
Exchange Act of 1934 ("Exchange Act"). Given the extensive SEC role in
implementing rules relating to many of the Act's new requirements, the final
scope of these requirements remains to be determined.
The Act includes very specific additional disclosure requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller
General. The Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
15
The Act addresses, among other matters:
o audit committees for all reporting companies;
o certification of financial statements by the chief executive officer and
the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
o a prohibition on insider trading during pension plan black out periods;
o disclosure of off-balance sheet transactions;
o expedited filing requirements for Forms 4's;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o "real time" filing of periodic reports;
o the formation of a public accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities laws.
The Act contains provisions which became effective upon enactment on July 30,
2002 and provisions which will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.
AVAILABILITY OF SEC FILINGS
Webster's financial reports can be accessed free of charge through its website
(www.wbst.com or www.websteronline.com) within 24 hours of filing with the SEC.
The SEC maintains an Internet site (www.sec.gov) in which all forms filed
electronically may be accessed. Webster's financial reports are also available
upon written request to the Company.
TAXATION
- --------
FEDERAL
Except for Duff & Phelps, LLC, and the Bank's REIT subsidiary, Webster and its
subsidiaries file a consolidated calendar year U.S. Corporation Income Tax
Return in accordance with the provisions of the Internal Revenue Code and U.S.
Treasury Regulations. Duff & Phelps, LLC, and the Bank's REIT subsidiary are
required to file separate federal tax returns.
Webster's federal income tax returns have been examined by the Internal Revenue
Service ("IRS"), and the respective statute of limitation periods have expired,
for all tax years through 1998. During 2001, the IRS completed its examination
of the REIT's 1997 and 1998 tax returns, resulting in no adjustment. During
2002, the IRS completed its examination of Webster's consolidated 1997 and 1998
tax returns, resulting in no significant adjustments. Also during 2002, the IRS
commenced an examination of Webster's consolidated 1999, 2000 and 2001 tax
returns.
STATE/LOCAL
With the Bank's 2001 acquisition of Center Capital, its 2002 acquisition of
Whitehall and the continued expansion of its National Wholesale Lending
activities, the Company has become subject to various forms of state and local
taxation throughout the United States. Prior to 2002, Webster was subject to
minimal state taxation, principally in Connecticut.
In Connecticut, legislation enacted in 1998 provided for the formation of a
Passive Investment Company ("PIC") by a financial service company ("FSC"). The
legislation, effective in 1999, allows for the exemption of a PIC, and a
qualified FSC's receipt of dividend income from a PIC, from the Connecticut
Corporation Business Tax. The Bank, a qualified FSC, formed a PIC subsidiary
(Webster Mortgage Investment Corporation) that began operation during 1999.
For additional information related to Webster's income taxes, see Note 8 of
Notes to Consolidated Financial Statements contained elsewhere within this
report.
16
ITEM 2. PROPERTIES
- ------------------
At December 31, 2002, Webster had 111 branch offices, which includes: 31 banking
offices, including its main office, in New Haven County; 49 banking offices in
Hartford County; 16 banking offices in Fairfield County; 8 banking offices in
Litchfield County; 4 banking offices in Middlesex County; 2 banking offices in
Tolland County and 1 banking office in New London County. Of these, 54 offices
are owned and 57 offices are leased. Lease expiration dates range from 1 to 85
years with renewal options of 3 to 35 years. Additionally, the Bank maintains
four trust offices: one in Fairfield County, one in Hartford County and two in
New Haven County.
Webster also maintains offices through the following subsidiaries. Webster
Insurance has offices in Harrison, New York; East Haven, Vernon, Wallingford,
Waterford, Westport and West Hartford, Connecticut. Duff & Phelps has offices in
Chicago, Illinois; Los Angeles, California; New York, New York and Seattle,
Washington. Center Capital has offices in Blue Bell, Pennsylvania; Schaumburg,
Illinois; Westboro, Massachusetts; Bedford, Texas; Brookfield, Connecticut and
is headquartered in Farmington, Connecticut. Whitehall is headquartered in New
York, New York with offices in Braintree, Massachusetts and Atlanta, Georgia.
The National Wholesale Lending Group maintains offices in Atlanta, Georgia;
Chicago, Illinois; Phoenix, Arizona and Seattle, Washington.
The total net book value of properties and furniture and fixtures owned and used
for banking and trust offices at December 31, 2002 was $84.7 million. The
following table provides detail for the total net book value amount.
(In thousands) At December 31, 2002
- -------------------------------------------------------------------------------
Land & improvements, net $ 11,646
Buildings & improvements, net 38,005
Leasehold improvements, net 5,732
Furniture & equipment, net 29,300
- -------------------------------------------------------------------------------
Total $ 84,683
- -------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material pending legal proceedings, other than ordinary routine
litigation incident to the registrant's business, to which the Company is a
party or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
During the fourth quarter of 2002, no matters were submitted to a vote of our
security holders.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
MARKET INFORMATION
On October 17, 2002, the common shares of Webster began trading on the New York
Stock Exchange under the symbol "WBS". Prior to October 17, 2002, the shares
traded on the Nasdaq National Market System under the symbol "WBST".
The following table sets forth the quarterly high, low and dividends declared
per share of common stock for the years ended December 31, 2002 and 2001,
respectively. On March 17, 2003, the closing market price of Webster common
stock was $35.52. Webster increased its quarterly dividend in the second quarter
of 2001 to $.17 per share and to $.19 per share in the second quarter of 2002.
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK (PER SHARE)
Market Price Dividends
2002 High Low Declared
- -------------------------------------------------------------------------------------------------------------------
First quarter $ 37.45 $ 31.18 $ 0.17
Second quarter 39.96 36.77 0.19
Third quarter 38.89 31.95 0.19
Fourth quarter 35.46 30.65 0.19
Market Price Dividends
2001 High Low Declared
- -------------------------------------------------------------------------------------------------------------------
First quarter $ 30.31 $ 26.44 $ 0.16
Second quarter 33.74 27.75 0.17
Third quarter 37.06 28.16 0.17
Fourth quarter 34.08 29.23 0.17
HOLDERS
Webster had approximately 11,000 shareholders of common stock at March 4, 2003.
The number of shareholders of record was determined by Webster's stock transfer
agent, American Stock Transfer and Trust Company.
DIVIDENDS
Payment of dividends from the Bank to Webster is subject to certain regulatory
and other restrictions. Payment of dividends by Webster on its stock is subject
to various restrictions, none of which is expected to limit any dividend policy
that the Board of Directors may in the future decide to adopt. Under Delaware
law, Webster may pay dividends out of its surplus or, in the event there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If the capital of the corporation has
diminished by depreciation in the value of its property or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, no dividends may be paid out of net
profits until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets has been repaired. See "Supervision and Regulation" section contained
elsewhere within this report for additional information on dividends.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The information is incorporated by reference to the Company's definitive proxy
statement for its annual meeting of shareholders to be held on April 24, 2003.
OTHER EVENTS
The annual meeting of shareholders of Webster will be held on Thursday, April
24, 2003.
18
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
December 31,
----------------------------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CONDITION
Total assets $ 13,468,004 11,857,382 11,249,508 9,931,744 9,836,029
Loans, net 7,795,835 6,725,993 6,801,479 6,015,214 5,497,709
Securities 4,124,997 3,999,133 3,405,080 3,066,901 3,662,829
Goodwill and intangible assets 297,359 320,051 326,142 138,829 83,227
Deposits 7,606,122 7,066,471 6,981,128 6,232,696 6,347,644
FHLB advances and other borrowings 4,455,669 3,533,364 3,030,225 2,788,445 2,575,608
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts 121,255 150,000 150,000 150,000 150,000
Preferred stock of subsidiary corporation 9,577 9,577 49,577 49,577 49,577
Shareholders' equity 1,035,458 1,006,467 890,374 635,667 626,454
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
Net interest income $ 405,728 367,479 326,516 303,513 282,611
Provision for loan losses 29,000 14,400 11,800 9,000 8,103
Noninterest income 185,572 162,098 128,821 92,630 82,638
Noninterest expenses:
Acquisition-related expenses 1,965 -- -- 9,500 20,993
Branch reconfiguration -- 3,703 -- -- --
Other noninterest expenses 326,358 305,229 267,130 234,961 208,440
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 328,323 308,932 267,130 244,461 229,433
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
method 233,977 206,245 176,407 142,682 127,713
Income taxes 73,965 69,430 58,116 47,332 49,694
- ---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 160,012 136,815 118,291 95,350 78,019
Extraordinary item - early extinguishment of
debt (net of taxes) -- (1,209) -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (7,280) (2,418) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 152,732 133,188 118,291 95,350 78,019
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net income per share - Basic $ 3.21 2.71 2.58 2.14 1.72
Net income per share - Diluted 3.16 2.68 2.55 2.10 1.69
Dividends declared per common share 0.74 0.67 0.62 0.47 0.44
Book value per common share 22.69 20.48 18.19 14.09 14.02
Tangible book value per common share 16.18 13.97 11.53 11.02 12.16
Diluted weighted-average shares 48,392 49,743 46,428 45,393 46,118
KEY PERFORMANCE RATIOS
Return on average assets 1.22% 1.15 1.11 0.98 0.77
Return on average shareholders' equity 14.72 13.88 16.72 15.33 12.82
Net interest margin 3.50 3.48 3.29 3.32 2.97
Interest-rate spread 3.43 3.38 3.17 3.19 2.83
Fee revenue as a percentage of total revenue 28.56 29.19 26.13 22.55 18.84
Average shareholders' equity to average assets 8.27 8.32 6.65 6.38 6.04
Dividend payout ratio 23.42 25.00 24.31 22.38 26.04
ASSET QUALITY RATIOS
Allowance for loan losses/total loans 1.48% 1.43 1.32 1.19 1.17
Net charge-offs/average loans 0.18 0.14 0.07 0.09 0.32
Nonperforming loans/total loans 0.55 0.84 0.60 0.64 0.57
Nonperforming asset/total assets 0.37 0.53 0.39 0.44 0.38
19
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------------------
Selected quarterly data for 2002 and 2001 follows:
First* Second* Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
2002:
- -----
Interest income $ 171,093 173,367 173,999 173,575
Interest expense 74,610 70,802 71,409 69,485
- -------------------------------------------------------------------------------------------------------------------
Net interest income 96,483 102,565 102,590 104,090
Provision for loan losses 4,000 4,000 5,000 16,000
Gains on sale of investment securities, net 3,405 1,126 4,912 13,934
Fee revenue 38,078 38,489 41,195 44,433
Noninterest expenses 76,199 78,843 84,129 89,152
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting method 57,767 59,337 59,568 57,305
Income taxes 18,152 18,765 19,144 17,904
- -------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 39,615 40,572 40,424 39,401
Cumulative effect of change in method of accounting
(net of taxes) (7,280) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 32,355 40,572 40,424 39,401
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ .66 .83 .85 .86
- -------------------------------------------------------------------------------------------------------------------
Diluted .65 .82 .84 .85
- -------------------------------------------------------------------------------------------------------------------
* The first and second quarters of 2002 were restated upon the adoption of SFAS
No. 123 on July 1, 2002 and SFAS No. 147 on September 30, 2002, as required
by the Statements.
2001:
- -----
Interest income $ 196,612 194,457 188,628 177,538
Interest expense 108,901 104,013 95,012 81,830
- -------------------------------------------------------------------------------------------------------------------
Net interest income 87,711 90,444 93,616 95,708
Provision for loan losses 3,200 3,200 4,000 4,000
Gains on sale of investment securities, net 4,249 1,794 2,566 2,012
Fee revenue 35,237 40,309 37,925 38,006
Noninterest expenses 78,220 76,304 77,266 77,142
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting method 45,777 53,043 52,841 54,584
Income taxes 15,167 18,539 17,810 17,914
- -------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and cumulative
effect of change in accounting method 30,610 34,504 35,031 36,670
Extraordinary item - early extinguishment of debt
(net of taxes) (1,209) -- -- --
Cumulative effect of change in method of accounting
(net of taxes) (2,418) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 26,983 34,504 35,031 36,670
- -------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ .55 .70 .71 .75
- -------------------------------------------------------------------------------------------------------------------
Diluted .54 .69 .70 .74
- -------------------------------------------------------------------------------------------------------------------
The first quarter of 2001 included in noninterest expense a nonrecurring charge
of $3.7 million for branch reconfiguration expenses.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Webster Financial Corporation and the notes thereto
(collectively, the "Financial Statements").
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments, are as follows:
ALLOWANCE FOR LOAN LOSSES
Arriving at an appropriate level of allowance for loan losses involves a high
degree of judgment. The Company's allowance for loan losses provides for
probable losses based upon evaluations of known and inherent risks in the loan
portfolio. Management uses historical information to assess the adequacy of the
allowance for loan losses as well as the prevailing business environment; as it
is affected by changing economic conditions and various external factors, which
may impact the portfolio in ways currently unforeseen. The allowance is
increased by provisions for loan losses and by recoveries of loans previously
charged-off and reduced by loans charged-off. For a full discussion of the
Company's methodology of assessing the adequacy of the allowance for loan
losses, see the "Asset Quality" section elsewhere within this Management's
Discussion and Analysis of Financial Condition and Results of Operation.
INCOME TAXES
The Company accounts for income taxes by deferring income taxes based on
estimated future tax effects of differences between the tax and book basis of
assets and liabilities considering the provisions of enacted tax laws. These
differences result in deferred tax assets and liabilities, which are included in
the Company's consolidated balance sheets. The Company must also assess the
likelihood that any deferred tax assets will be recovered from future taxable
income and establish a valuation allowance for those assets determined to not
likely be recoverable. Management judgment is required in determining the amount
and timing of recognition of the resulting deferred tax assets and liabilities.
The actual realization of the assets could differ materially from that
recognized if actual factors and conditions differ from those used by
management. These factors and conditions include federal and state tax laws and
regulations and future level of Webster's taxable income.
VALUATION OF GOODWILL/INTANGIBLE ASSETS AND ANALYSIS FOR IMPAIRMENT
Webster, in part, has increased its market share through acquisitions accounted
for under the business combinations method of accounting, as well as from the
purchase of financial institution's branches and selected assets (not entire
institution). For acquisitions under the purchase method and the acquisition of
financial institution branches, the Company is required to record assets
acquired and liabilities assumed at their fair value which is an estimate
determined by the use of internal or other valuation techniques. These valuation
estimates result in goodwill and other intangible assets. Goodwill is subject to
ongoing periodic impairment tests and is evaluated using various fair value
techniques including multiples of price/equity and price/earnings ratios. For a
discussion of impairment testing methodology, see Note 9 of Notes to
Consolidated Financial Statements included elsewhere within this report.
PENSION AND OTHER POST RETIREMENT BENEFITS
The determination of the Company's obligation and expense for pension and other
post-retirement benefits is dependent upon certain assumptions used by actuaries
in calculating such amounts. Key assumptions used in the actuarial valuations
include the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation and health care costs. Actual results could
differ from the assumptions and market driven rates may fluctuate. Significant
differences in actual experience or significant changes in the assumptions may
materially affect the future pension and other post-retirement obligations and
expense.
21
The following table shows the major categories of average assets and average
liabilities together with their respective fully taxable-equivalent interest
income or expense and the average yield or cost, for the three years ended
December 31, 2002.
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001
Average Average Average Average
(Dollars in thousands) Balance Interest Yields Balance Interest Yields
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, net (a) $ 7,451,356 454,672(b) 6.10% $ 6,896,580 515,465(b) 7.47%
Loans held for sale 177,942 9,730 5.47 72,901 4,465 6.12
Securities and short-term investments 4,047,754 228,857 5.75(c) 3,667,917 238,423 6.56(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 11,677,052 693,259 5.97(c) 10,637,398 758,353 7.15(c)
Other assets 870,900 896,052
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 12,547,952 $ 11,533,450
- ---------------------------------------------------------------------------------------------------------------------------------
Savings and escrow $ 1,629,558 20,591 1.26% $ 1,505,110 26,699 1.77%
Money market savings, NOW and DDA 2,825,081 28,930 1.02 2,217,320 29,861 1.35
Time deposits 2,810,220 96,641 3.44 3,207,112 159,775 4.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 7,264,859 146,162 2.01 6,929,542 216,335 3.12
FHLB advances 2,337,688 102,789 4.40 2,011,440 112,784 5.61
Repurchase agreements and other borrowings 1,555,552 26,195 1.68 1,258,247 49,475 3.93
Senior notes 126,000 11,160 8.86 126,000 11,162 8.86
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 11,284,099 286,306 2.54 10,325,229 389,756 3.77
Other liabilities 76,914 87,530
Capital securities and minority interest 149,666 161,221
Shareholders' equity 1,037,273 959,470
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 12,547,952 406,953 $ 11,533,450 368,597
- ---------------------------------------------------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (1,225) (1,118)
------- -------
Net interest income 405,728 367,479
Interest rate spread 3.43%(c) 3.38%(c)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.50%(c) 3.48%(c)
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
- ------------------------------------------------------------------------------------------
2000
Average Average
(Dollars in thousands) Balance Interest Yields
- ------------------------------------------------------------------------------------------
Loans, net (a) $ 6,530,404 517,791(b) 7.93%
Loans held for sale 11,255 538 4.78
Securities and short-term investments 3,298,959 220,961 6.51(c)
- ------------------------------------------------------------------------------------------
Total interest-earning assets 9,840,618 739,290 7.44(c)
Other assets 799,597
- ------------------------------------------------------------------------------------------
Total assets $ 10,640,215
- ------------------------------------------------------------------------------------------
Savings and escrow $ 1,509,414 31,036 2.06%
Money market savings, NOW and DDA 1,821,948 19,894 1.09
Time deposits 3,308,228 173,364 5.24
- ------------------------------------------------------------------------------------------
Total deposits 6,639,590 224,294 3.38
FHLB advances 2,047,743 128,447 6.27
Repurchase agreements and other borrowings 935,629 56,744 6.06
Senior notes 31,142 2,910 9.34
- ------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,654,104 412,395 4.27
Other liabilities 78,870
Capital securities and minority interest 199,577
Shareholders' equity 707,664
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 10,640,215 326,895
- ------------------------------------------------------------------------------------------
Less: fully taxable-equivalent adjustment (379)
-------
Net interest income 326,516
Interest rate spread 3.17%(c)
- ------------------------------------------------------------------------------------------
NET INTEREST MARGIN 3.29%(c)
- ------------------------------------------------------------------------------------------
(a) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(b) Includes amortization of net deferred loan costs (net of fees) and premiums
(net of discounts) of: $3.7 million, $1.7 million, and $1.5 million in 2002,
2001 and 2000, respectively.
(c) Unrealized gains (losses) on available-for-sale securities are excluded from
the average yield calculations. Unrealized gains (losses) averaged $68.5
million, $33.9 million and ($96.5 million) for 2002, 2001 and 2000,
respectively.
22
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF 2002 AND 2001 YEARS
For the year 2002, net income was $152.7 million, or $3.16 per diluted common
share, an increase of $19.5 million, or 14.7%, compared to net income of $133.2
million or $2.68 per share for the previous year. The improvement was the result
of increased net interest income and noninterest income that more than offset
increases in the provision for loan losses and noninterest expenses. Net
interest income rose to $405.7 million for 2002, an increase of $38.2 million,
or 10.4%. The net interest margin rose to 3.50% during 2002 from 3.48% the prior
year. Noninterest income reached $185.6 million, an increase of $23.5 million,
or 14.5%, when compared to $162.1 million the previous period. Noninterest
expenses increased $19.4 million, or 6.3%, from the previous year. The provision
for loan losses increased $14.6 million to $29.0 million for 2002 due to the
fourth quarter sale and writedown of class