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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended JUNE 30, 2003.
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: 001-31486
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
--------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(203) 578-2476
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 45,668,459
- ------------------------------ ----------------------------------
Class Outstanding at July 31, 2003
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
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PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements (unaudited)
Consolidated Statements of Condition at June 30, 2003 and December 31, 2002 3
Consolidated Statements of Income for the three and six months ended June 30, 2003
and 2002 4
Consolidated Statements of Comprehensive Income for the three and six months ended
June 30, 2003 and 2002 6
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2003
and 2002 7
Consolidated Statements of Cash Flows for the six months ended June 30, 2003
and 2002 8
Notes to Consolidated Interim Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities and Use of Proceeds 46
Item 3. Defaults upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 48
Item 6. Exhibits and Reports on Form 8-K 48
SIGNATURE 49
EXHIBITS 50
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 1. INTERIM FINANCIAL STATEMENTS
- -------------------------------------
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
- -------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands, except share and per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from depository institutions $ 254,645 266,463
Short-term investments 20,671 15,596
Securities: (Note 4)
Trading, at fair value 3,893 5,752
Available for sale, at fair value 4,395,400 4,119,245
Loans held for sale (Note 5) 321,055 405,157
Loans, net (Notes 6 and 7) 8,590,707 7,795,835
Accrued interest receivable 54,034 54,601
Goodwill (Note 9) 256,465 236,478
Cash surrender value of life insurance 176,324 172,066
Premises and equipment, net 85,062 84,683
Intangible assets (Note 9) 60,524 60,881
Deferred tax asset, net (Note 8) 16,201 14,951
Prepaid expenses and other assets 217,591 236,296
- ---------------------------------------------------------------------------------------------------------
Total assets $ 14,452,572 13,468,004
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 10) $ 8,085,702 7,606,122
Federal Home Loan Bank advances (Note 11) 2,185,830 2,163,029
Other borrowings (Note 12) 2,480,666 2,166,640
Senior notes and subordinated debt (Note 13) 326,000 126,000
Accrued expenses and other liabilities 155,233 239,923
- ---------------------------------------------------------------------------------------------------------
Total liabilities 13,233,431 12,301,714
- ---------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities
of subsidiary trusts (Note 17) 110,255 121,255
Preferred stock of subsidiary corporation 9,577 9,577
Shareholders' equity (Note 14):
Common stock, $.01 par value:
Authorized - 200,000,000 shares at June 30, 2003
and December 31, 2002;
Issued - 49,512,045 shares at June 30, 2003 and
49,506,970 December 31, 2002 495 495
Paid-in capital 414,458 415,067
Retained earnings 769,827 707,531
Less: Treasury stock, at cost, 3,872,028 shares at June 30,
2003 and 3,880,973 shares at December 31, 2002 (134,157) (134,318)
Unearned compensation (3,790) (3,913)
Accumulated other comprehensive income 52,476 50,596
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Total shareholders' equity 1,099,309 1,035,458
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 14,452,572 13,468,004
- ---------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $114,734 112,502 227,944 223,082
Securities and short-term investments 45,772 59,340 97,517 118,938
Loans held for sale 4,231 1,525 8,723 2,440
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 164,737 173,367 334,184 344,460
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 10) 28,750 37,005 58,168 76,618
Borrowings 35,368 33,797 70,721 68,794
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 64,118 70,802 128,889 145,412
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 100,619 102,565 205,295 199,048
Provision for loan losses (Note 7) 5,000 4,000 10,000 8,000
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Net interest income after provision for loan losses 95,619 98,565 195,295 191,048
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Deposit service charges 17,529 14,924 34,419 28,730
Insurance revenue 9,980 6,376 20,944 13,812
Loan fees 4,723 4,211 10,628 8,096
Financial advisory services 5,229 4,357 10,660 8,316
Wealth and investment services 4,521 4,068 9,099 8,455
Gain on sale of loans and loan servicing, net 4,066 1,239 6,837 1,632
Gain on sale of securities, net 8,666 1,126 11,299 4,531
Increase in cash surrender value of life insurance 2,143 2,267 4,258 4,469
Other income 1,423 1,047 3,284 3,057
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Total noninterest income 58,280 39,615 111,428 81,098
- ----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Compensation and benefits 50,506 41,248 101,067 81,396
Occupancy 7,672 6,212 15,771 12,497
Furniture and equipment 7,575 6,812 15,096 13,380
Intangible amortization (Note 9) 3,968 4,004 7,930 8,042
Marketing 3,236 2,438 6,721 4,862
Professional services 2,994 2,820 5,472 5,147
Capital securities and dividends on preferred stock of
subsidiary corporation (Note 17) 2,958 3,753 6,096 7,585
Acquisition expenses -- 616 -- 616
Other expenses 14,290 10,940 27,852 21,517
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 93,199 78,843 186,005 155,042
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
change in accounting method 60,700 59,337 120,718 117,104
Income taxes 20,090 18,765 40,171 36,917
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting method 40,610 40,572 80,547 80,187
Cumulative effect of change in method of accounting
(net of tax benefit of $3,920) (Note 9) -- -- -- (7,280)
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,610 40,572 80,547 72,907
- ----------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED), CONTINUED
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting method $ 0.89 0.83 1.77 1.65
Cumulative effect of change in method of accounting -- -- -- (0.15)
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.89 0.83 1.77 1.50
- ----------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of change in
accounting method $ 0.88 0.82 1.74 1.62
Cumulative effect of change in method of accounting -- -- -- (0.15)
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 0.88 0.82 1.74 1.47
- ----------------------------------------------------------------------------------------------------------------------
Dividends paid per common share $ 0.21 0.19 0.40 0.36
AVERAGE SHARES OUTSTANDING:
Basic 45,446 48,631 45,453 48,717
Diluted 46,242 49,585 46,217 49,584
See accompanying Notes to Consolidated Interim Financial Statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income $ 40,610 40,572
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
year (net of income tax effect of $1,517, and
$32,890, for 2003 and 2002, respectively) 2,261 49,692
Reclassification adjustment for net gains included in
net income (net of income tax effect of $3,416
and $439 for 2003 and 2002, respectively) (5,150) (663)
Reclassification adjustment for cashflow hedge amortization
included in net income (net of tax effect of $15)(Note 13) (27) --
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (2,916) 49,029
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Comprehensive income $ 37,694 89,601
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income $ 80,547 72,907
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during
year (net of income tax effect of $4,657, and
$23,555 for 2003 and 2002, respectively) 6,987 35,046
Reclassification adjustment for net gains included in
net income (net of income tax effect of $4,456
and $1,833 for 2003 and 2002, respectively) (6,719) (2,716)
Deferred gain on cash flow hedge (Note 13) 1,690 --
Reclassification adjustment for cashflow hedge amortization
included in net income (net of tax effect of $27) (Note 13) (51) --
- ----------------------------------------------------------------------------------------------------------------
Other comprehensive income 1,907 32,330
- ----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 82,454 105,237
- ----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- --------------------------------------------------------------------------------
Employee
Stock Accumulated
Ownership Other
Unearned Plan Shares Compre-
Common Paid-in Retained Treasury Compen- Purchased hensive
(In thousands, except per share data) Stock Capital Earnings Stock sation With Debt Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 495 415,194 590,254 (10,141) (3,998) (286) 14,949 1,006,467
Net income for the six months
ended June 30, 2002 -- -- 72,907 -- -- -- -- 72,907
Dividends paid:
$.36 per common share -- -- (17,623) -- -- -- -- (17,623)
Allocation of ESOP shares -- 571 -- -- -- 286 -- 857
Exercise of stock options -- (948) -- 5,252 -- 4,304
Common stock repurchased -- -- -- (33,011) -- -- -- (33,011)
Stock-based compensation -- 703 (17) 731 134 -- -- 1,551
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 32,330 32,330
Other, net -- (59) -- -- -- -- -- (59)
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Balance, June 30, 2002 $ 495 415,461 645,521 (37,169) (3,864) -- 47,279 1,067,723
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SIX MONTHS ENDED JUNE 30, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 495 415,067 707,531 (134,318) (3,913) -- 50,596 1,035,458
Net income for the six months
ended June 30, 2003 -- -- 80,547 -- -- -- -- 80,547
Dividends paid:
$.40 per common share -- -- (18,251) -- -- -- -- (18,251)
Exercise of stock options -- (1,358) -- 5,060 -- -- -- 3,702
Common stock repurchased -- -- -- (5,795) -- -- -- (5,795)
Stock-based compensation -- 1,740 -- 896 123 -- -- 2,759
Net unrealized gain on securities
available for sale, net of taxes -- -- -- -- -- -- 268 268
Repurchase of capital trust securities -- (991) -- -- -- -- -- (991)
Hedge deferred gain, net of
amortization -- -- -- -- -- -- 1,612 1,612
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Balance, June 30, 2003 $ 495 414,458 769,827 (134,157) (3,790) -- 52,476 1,099,309
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 80,547 72,907
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 10,000 8,000
Depreciation and amortization 15,288 10,606
Amortization of securities premiums, net 8,059 465
Amortization of loan premiums, net 1,734 4,835
Amortization of intangible assets 7,930 8,042
Cumulative effect of change in accounting method, net -- 11,200
Gains on sale of foreclosed properties, net (67) (237)
Gains on sale of securities, net (11,175) (4,549)
Gain on sale of loans and servicing, net (6,837) (1,632)
Increase in cash surrender value of life insurance (4,258) (4,469)
(Gains) losses on trading securities, net (124) 18
Decrease (increase) in trading securities 1,983 (181)
Loans originated for sale (1,513,786) (501,223)
Proceeds from sale of loans originated for sale 1,604,725 535,346
Decrease (increase) in interest receivable 567 (2,255)
Decrease (increase) in prepaid expenses and other assets 17,238 (6,360)
Decrease in accrued expenses and other liabilities, net (96,286) (6,828)
Other, net -- (396)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 115,538 123,289
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (2,318,567) (939,629)
Principal collected on securities 1,092,061 633,628
Maturities of securities 621 3,550
Proceeds from sales of securities, available for sale 953,595 204,649
Increase short-term investments, net (5,075) (19,602)
Increase in loans, net (772,448) (510,132)
Proceeds from sale of foreclosed properties 1,051 3,850
Purchases of premises and equipment, net (7,618) (7,667)
Net cash paid for acquisitions (27,447) --
Other, net -- (660)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,083,827) (632,013)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in deposits 479,580 271,118
Proceeds from FHLB advances 20,261,731 5,766,914
Repayment of FHLB advances (20,238,930) (6,101,109)
Increase in other borrowings, net 286,776 658,480
Subordinated debt issuance 200,000 --
Cash dividends to common shareholders (18,251) (17,623)
Redemption of capital securities (12,342) (15,000)
Exercise of stock options 3,702 4,304
Common stock repurchased (5,795) (33,011)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 956,471 534,073
- ------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (11,818) 25,349
Cash and cash equivalents at beginning of period 266,463 218,908
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 254,645 244,257
- ------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED), CONTINUED
- -----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 38,748 36,530
Interest paid 124,142 139,083
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties 2,588 1,672
- -----------------------------------------------------------------------------------------------------
Assets acquired and liabilities assumed were as follows:
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SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002
- -----------------------------------------------------------------------------------------------------
Fair value of noncash assets acquired in purchase acquisitions $ 43,058 --
Fair value of liabilities assumed in purchase acquisitions 42,514 --
See accompanying Notes to Consolidated Interim Financial Statements.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
- -------------------------------------------------------------
The Consolidated Interim Financial Statements include the accounts of Webster
Financial Corporation ("Webster" or the "Company") and its subsidiaries. The
Consolidated Interim Financial Statements and Notes thereto have been prepared
in conformity with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant intercompany transactions have been eliminated in consolidation.
Amounts in prior period financial statements are reclassified whenever necessary
to conform to current period presentations. The results of operations for the
three and six months ended June 30, 2003 are not necessarily indicative of the
results which may be expected for the year as a whole.
The preparation of the Consolidated Interim Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, as of the date of the Consolidated Interim Financial Statements and
the reported amounts of revenues and expenses for the periods presented. The
actual results of Webster could differ from those estimates. Material estimates
that are susceptible to near-term changes include the determination of the
allowance for loan losses, the valuation allowance for the deferred tax asset
and the determination of the obligation for pension and other post retirement
benefits. These Consolidated Interim Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and Notes thereto
included in Webster's Annual Report on Form 10-K for the year ended December 31,
2002.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2: STOCK-BASED COMPENSATION
- --------------------------------
At June 30, 2003 and 2002, Webster had a fixed stock-based employee and
non-employee director compensation plan. During 2002, effective January 1, 2002,
Webster adopted the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", for all employee and non-employee
stock options granted, modified, or settled January 1, 2002 and thereafter.
Therefore, the cost related to this stock-based compensation included in the
determination of net income for 2002 is less than that which would have been
recognized if the fair value based method had been applied to all option grants
since the original effective date of SFAS No. 123. Awards under the plans, in
general, vest over periods ranging from 3 to 4 years. Webster also grants
restricted stock to employees and directors.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to stock option awards in each
of the periods presented.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Net income, as reported $40,610 40,572 80,547 72,907
Add: Stock option compensation expense included
in reported net income, net of related tax effects 537 332 1,006 332
Deduct: Total stock option compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,051) (1,043) (2,034) (1,754)
- ----------------------------------------------------------------------------------------------------------------
Pro forma net income $40,096 39,861 79,519 71,485
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 0.89 0.83 1.77 1.50
- pro forma 0.88 0.82 1.75 1.47
- ----------------------------------------------------------------------------------------------------------------
Diluted - as reported $ 0.88 0.82 1.74 1.47
- pro forma 0.87 0.80 1.72 1.44
- ----------------------------------------------------------------------------------------------------------------
The fair value of each option is determined as of the grant date using the
Black-Scholes Option-Pricing Model with the following weighted-average
assumptions used for grants issued during the second quarter and first six
months of 2003: expected option term of 8.6 and 8.7 years, expected dividend
yield of 2.15%, expected volatility of 31.75%, expected forfeiture rate of
4.46%, and weighted risk-free interest rate of 3.97%, respectively. For the
second quarter and first six months of 2002, the following weighted-average
assumptions were: expected option term of 8.2 years, expected dividend yield of
2.15%, expected volatility of 33.47%, expected forfeiture rate of 3.15%, and
weighted risk-free interest rate of 5.16% and 5.22% respectively. The
Black-Scholes model was developed to estimate the fair value of traded options,
which have different characteristics than employee stock options. In addition,
changes to the subjective input assumptions can result in materially different
fair market value estimates. Therefore, this model may not necessarily provide a
reliable single measure of the fair value of employee stock options.
The cost of restricted stock granted is reflected in compensation and benefits
expense and totaled $394,158 and $303,467, net of taxes, for the three month
ended June 30, 2003 and 2002, and $789,158 and $727,467, net of taxes, for the
six month ended June 30, 2003 and 2002, respectively.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3: ACQUISITIONS
- --------------------
The following acquisitions were announced by Webster during the first six months
of 2003. The results of operations of the acquired companies are included in the
Consolidated Statements of Income subsequent to the date of acquisition.
On January 6, 2003, Webster announced that it acquired The Mathog and Moniello
Holding Co., Inc. ("Mathog"). Mathog is a commercial property and casualty
insurance agency that specializes in providing risk management products and
services to self-insured businesses and groups. Mathog is based in East Haven,
Connecticut with offices in West Hartford, Connecticut and Harrison, New York.
On January 24, 2003, Webster Bank acquired Budget Installment Corp. ("BIC"). BIC
is an insurance premium financing company based in Rockville Centre, New York.
BIC finances commercial property and casualty premiums for businesses that pay
their insurance premiums on an installment basis. A majority of its borrowers
are located in the New York City and Northern New Jersey areas.
On June 5, 2003, Webster announced that it had reached a definitive agreement to
acquire North American Bank and Trust Company in a combination cash and stock
transaction valued at approximately $30 million, or $11.25 per common share of
North American stock. North American Bank is a state-chartered, commercial bank
with $195 million in assets and 8 offices in the Greater Waterbury region. Its
branch offices are located in Bristol, Monroe, Stratford, Waterbury, Wolcott and
Wethersfield, Connecticut. The definitive agreement is subject to approval by
regulatory authorities and North American shareholders. Webster expects the
transaction to close in the fourth quarter of 2003.
NOTE 4: SECURITIES
- ------------------
A summary of available for sale securities follows:
JUNE 30, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Fair Amortized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO:
Government Agency $ 106,669 -- (2,575) 104,094 -- -- -- --
Municipal bonds and notes 122,752 6,740 (253) 129,239 104,676 4,388 (39) 109,025
Corporate bonds and notes 242,064 2,429 (2,127) 242,366 181,810 1,432 (6,029) 177,213
Equity securities (a) 178,832 12,020 (1,406) 189,446 177,051 5,234 (1,616) 180,669
Mortgage-backed securities (b) 3,659,787 72,644 (2,176) 3,730,255 3,571,160 81,487 (309) 3,652,338
- --------------------------------------------------------------------------------------------------------------------------------
Total $4,310,104 93,833 (8,537) 4,395,400 $4,034,697 92,541 (7,993) 4,119,245
- --------------------------------------------------------------------------------------------------------------------------------
(a) As of June 30, 2003, the fair value of equity securities consisted of
Federal Home Loan Bank ("FHLB") stock of $152.4 million, and common stock
of $37.0 million. The fair value of equity securities at December 31, 2002
consisted of FHLB stock of $150.0 million, preferred stock of $5.8 million
and common stock of $24.9 million.
(b) Includes mortgage-backed securities comprised of Fannie Mae, Freddie Mac,
Government National Mortgage Association and non-agency issued
mortgage-backed securities.
As part of its continuous review of the investment portfolio, management
evaluates unrealized losses on securities for declines in value that are other
than temporary in nature. During the six months ended June 30, 2003, Webster did
not identify any declines in value that were other than temporary in nature.
During the same period of 2002, Webster recorded a write down of $1.8 million
for two equity holdings, whose value decline was deemed to be other than
temporary in nature.
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5: LOANS HELD FOR SALE
- ---------------------------
Loans held for sale totaled $321.1 million and $405.2 million at June 30, 2003
and December 31, 2002. The residential loan portion was $320.5 million and
$400.0 million, respectively for each period. Commercial loans of $0.6 million
at June 30, 2003 and $5.2 million at December 31, 2002 comprised the remainder.
At June 30, 2003 and December 31, 2002, residential mortgage origination
commitments totaled $1.0 billion and $518.4 million, respectively. Residential
commitments outstanding at June 30, 2003 consisted of adjustable rate and fixed
rate mortgages of $37.7 million and $997.3 million, respectively, at rates
ranging from 3.6% to 6.8%. Residential commitments outstanding at December 31,
2002 consisted of adjustable rate and fixed rate mortgages of $31.8 million and
$486.6 million, respectively, at rates ranging from 4.3% to 7.8%. Commitments to
originate loans generally expire within 60 days. At June 30, 2003 and December
31, 2002, Webster also had outstanding commitments to sell residential mortgage
loans of $782.2 million and $533.2 million, respectively.
At June 30, 2003 and December 31, 2002, Webster serviced, for the benefit of
others, residential and commercial loans totaling approximately $929.4 million
and $1.6 billion, respectively.
NOTE 6: LOANS, NET
- ------------------
A summary of loans, net follows:
- --------------------------------------------------------------------------------------
(Dollars in thousands) JUNE 30, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------
Amount % Amount %
------ ---- ------ ---
Residential mortgage loans $ 3,541,922 41.2% $ 3,386,207 43.4%
Commercial loans:
Commercial non-mortgage 984,187 11.5 913,536 11.8
Asset-based loans 560,006 6.5 465,400 5.9
Equipment financing 465,916 5.4 419,962 5.4
- --------------------------------------------------------------------------------------
Total commercial loans 2,010,109 23.4 1,798,898 23.1
Commercial real estate 1,144,429 13.3 1,029,332 13.2
Consumer loans:
Home equity credit lines 1,393,357 16.2 1,235,723 15.9
Fixed home equity loans 589,390 6.9 426,141 5.4
Other consumer 30,739 0.4 36,338 0.5
- --------------------------------------------------------------------------------------
Total consumer loans 2,013,486 23.5 1,698,202 21.8
- --------------------------------------------------------------------------------------
Total loans 8,709,946 101.4 7,912,639 101.5
Less: allowance for loan losses (119,239) (1.4) (116,804) (1.5)
- --------------------------------------------------------------------------------------
Loans, net $ 8,590,707 100.0% $ 7,795,835 100.0%
- --------------------------------------------------------------------------------------
At June 30, 2003, loans net included $1.9 million of net discounts and $27.7
million of deferred costs. At December 31, 2002, loans net included $13.1
million of net discounts and $27.1 million of deferred costs. The unadvanced
portions of closed loans totaled $63.4 million and $56.9 million at June 30,
2003 and December 31, 2002, respectively.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 2003 and December 31, 2002, unused portions of home equity credit
lines extended were $1.1 billion and $1.0 billion, respectively. Unused
commercial lines of credit, letters of credit, standby letters of credit,
equipment financing commitments and outstanding commercial loan commitments
totaled $1.7 billion at June 30, 2003 and December 31, 2002. Consumer loan
commitments totaled $56.4 million and $42.4 million at June 30, 2003 and
December 31, 2002, respectively.
Webster is a party to financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and commitments to sell residential first mortgage loans and
commercial loans. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
Consolidated Statements of Condition. See Note 16 for further discussion.
The estimated fair value of commitments to extend credit is considered
insignificant at June 30, 2003 and December 31, 2002. Future loan commitments
represent residential and commercial mortgage loan commitments, commercial loan
and equipment financing commitments, letters of credit and commercial and home
equity unused credit lines. Rates for these loans are generally established
shortly before closing. The rates on home equity lines of credit generally vary
with the prime rate.
A majority of the Bank's outstanding letters of credit are performance standby
letters of credit within the scope of FASB Interpretation No. ("FIN") 45. These
are irrevocable undertakings by the Bank, as guarantor, to make payments in the
event a specified third party fails to perform under a nonfinancial contractual
obligation. Most of the Bank's performance standby letters of credit arise in
connection with lending relationships and have a term of one year or less. The
risk involved in issuing stand-by letters of credit is essentially the same as
the credit risk involved in extending loan facilities to customers, and they are
subject to the same credit origination, portfolio maintenance and management
procedures in effect to monitor other credit and off-balance sheet products. At
June 30, 2003, Webster's standby letters of credit totaled $132.4 million.
NOTE 7: ALLOWANCE FOR LOAN LOSSES
- ---------------------------------
The following table provides a summary of the activity in the allowance for loan
losses:
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $118,596 98,930 116,804 97,307
Provisions charged to operations 5,000 4,000 10,000 8,000
Allowance for purchased loans -- -- 146 --
- ---------------------------------------------------------------------------------------------------------------
Subtotal 123,596 102,930 126,950 105,307
- ---------------------------------------------------------------------------------------------------------------
Total charge-offs 4,872 3,789 8,746 6,430
Total recoveries 515 557 1,035 821
- ---------------------------------------------------------------------------------------------------------------
Net charge-offs 4,357 3,232 7,711 5,609
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period $119,239 99,698 119,239 99,698
- ---------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.20% 0.18 0.18 0.16
- ---------------------------------------------------------------------------------------------------------------
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8: DEFERRED TAX ASSET, NET
- -------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2003 and
December 31, 2002 are summarized below. Temporary differences result from the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A 100% valuation allowance has been applied to the State
of Connecticut ("Connecticut") deferred tax assets due to uncertainties of
realization.
- --------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowance for loan losses and other loss allowances $ 44,492 42,128
Intangibles 11,979 12,139
Accrued compensation and benefits 9,597 9,824
Net operating loss and credit carryforwards 8,033 7,913
Loan discounts 6,283 7,866
Depreciation and amortization 1,257 1,432
Equipment financing costs 631 1,060
Other assets-investments 1,040 716
Other accrued expenses 1,246 1,575
Other deductible items 642 314
- --------------------------------------------------------------------------------------------------------
Total deferred tax assets 85,200 84,967
Less: valuation allowance for full amount of Connecticut portions (10,399) (10,497)
- --------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 74,801 74,470
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Net unrealized gain on securities available for sale 33,786 33,585
Intangibles 14,910 13,203
Compensation and benefits 3,580 4,926
Mortgage servicing rights 2,420 4,328
Loan premiums and deferred fees 1,748 2,301
Equipment financing depreciation 1,329 314
Accrued dividends 479 525
Other taxable items 348 337
- --------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 58,600 59,519
- --------------------------------------------------------------------------------------------------------
Deferred tax asset, net $ 16,201 14,951
- --------------------------------------------------------------------------------------------------------
Management believes that Webster will realize its net deferred tax asset, based
upon its recent historical and anticipated future levels of pre-tax income.
There can be no absolute assurance, however, that Webster will generate any
specific level of future income.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9: GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------
During 2002 in conjunction with the implementation of SFAS No. 142, Webster
performed a reevaluation of the remaining useful lives of all previously
recognized other intangible assets with finite useful lives and found no
adjustment necessary to the amortization periods used. Webster also found that
no reclassifications of intangible assets were required. The review of the
carrying value of goodwill was completed during the second quarter of 2002. As a
result, it was determined that a portion of the goodwill related to the
acquisition of Duff & Phelps, LLC was impaired. Accordingly, a one-time
transitional charge of $11.2 million ($7.3 million after taxes,) was recognized
retroactive to January 1, 2002, in accordance with the provisions of SFAS No.
142. The valuation analysis utilized a discounted cash flow analysis that valued
a stream of free cash flows, including a terminal value, to estimate an imputed
value for Duff & Phelps. The imputed value was impacted by the extremely
challenging business environment and especially by the slowdown in mergers and
acquisitions activity, which comprised a significant portion of their revenues
at the date of Webster's purchase. No other portion of goodwill or other
intangible assets was determined to be impaired. Webster's annual evaluation of
goodwill and intangible assets will be performed during the third quarter.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". SFAS No. 147 amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions", and allows the
provisions of SFAS No. 142 to be applied to the purchase acquisitions of
financial institutions if certain criteria are met. Webster adopted SFAS No. 147
during the third quarter of 2002 with application effective as of January 1,
2002, as permitted by this statement. The reported net income for the second
quarter of 2002 was adjusted to reverse the effects of recorded amortization, in
accordance with the provision of SFAS No. 147. In addition, $20.3 million of
unidentified intangible assets related to these branch purchases was
reclassified from intangible assets (which is subject to amortization) to
goodwill (which is subject to impairment analysis) retroactive to January 1,
2002.
The following tables set forth the carrying values of goodwill and intangible
assets, net of accumulated amortization.
- -------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------
Intangible assets:
Balances subject to amortization:
Core deposit intangibles $ 52,515 60,146
Other identified intangibles 7,274 --
Balances not subject to amortization:
Pension assets 735 735
- -------------------------------------------------------------------------------
Total intangible assets $ 60,524 60,881
- -------------------------------------------------------------------------------
Balances not subject to amortization:
Goodwill $256,465 236,478
- -------------------------------------------------------------------------------
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Identified intangible assets were acquired as part of the Mathog and BIC
business combinations. These intangibles, which totaled $7.6 million at
acquisition, have estimated lives ranging from two to twenty-five years with a
weighted average life of sixteen years. None of the acquired identified
intangibles were exempt from amortization.
Changes in the carrying amount of goodwill for the six months ended June 30,
2003:
Wealth and
Retail* Commercial Investment
(In thousands) Banking Banking Services Total
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $206,067 21,055 9,356 236,478
Purchase price adjustments -- 635 (23) 612
Purchased business transactions 16,222 3,153 -- 19,375
- -------------------------------------------------------------------------------------------------
Balance at June 30, 2003 $222,289 24,843 9,333 256,465
- -------------------------------------------------------------------------------------------------
*Includes insurance operations
Amortization of intangible assets for the three and six months ended June 30,
2003, totaled $4.0 million and $7.9 million, respectively. Estimated annual
amortization expense of current intangible assets with finite useful lives,
absent any impairment or change in estimated useful lives, is summarized below.
(In thousands)
- -------------------------------------------------------------------------------------------------
FOR YEARS ENDING DECEMBER 31,
2003 (full year) $ 15,866
2004 15,872
2005 15,872
2006 11,698
2007 3,642
2008 and thereafter 4,770
- -------------------------------------------------------------------------------------------------
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10: DEPOSITS
- -----------------
The following table summarizes deposits at the dates indicated.
- --------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
% of % of
(In thousands) Amount total Amount total
- --------------------------------------------------------------------------------------------------------
Demand deposits $1,035,389 12.8% $ 982,735 12.9%
NOW accounts 1,064,336 13.2 945,145 12.4
Money market deposit and savings accounts 3,365,781 41.6 2,987,595 39.3
Time deposits 2,620,196 32.4 2,690,647 35.4
- --------------------------------------------------------------------------------------------------------
Total $8,085,702 100.0% $7,606,122 100.0%
- --------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(In thousands) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
NOW accounts $ 1,009 1,110 2,018 2,185
Money market deposit and savings accounts 10,340 10,907 20,535 21,347
Time deposits 17,401 24,988 35,615 53,086
- ----------------------------------------------------------------------------------------------------------
Total $28,750 37,005 58,168 76,618
- ----------------------------------------------------------------------------------------------------------
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11: FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances payable to the Federal Home Loan Bank ("FHLB") are summarized as
follows:
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
Total Total
(In thousands) Outstanding Callable Outstanding Callable
- ---------------------------------------------------------------------------------------------------------------
FIXED RATE:
0.95% to 6.67% due in 2003 $ 405,489 -- 381,655 --
3.27% to 6.78% due in 2004 750,128 -- 750,194 --
2.97% to 6.25% due in 2005 149,657 100,000 150,085 100,000
4.68% to 6.31% due in 2006 51,750 -- 52,028 --
4.88% to 6.98% due in 2007 702,226 500,000 702,273 500,000
4.49% to 5.93% due in 2008 29,199 27,000 29,396 27,000
5.50% due in 2009 5,000 5,000 5,000 5,000
8.44% due in 2010 450 -- 475 --
6.60% due in 2011 1,931 -- 2,024 --
5.49% due in 2013 10,000 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------------------
2,105,830 642,000 2,083,130 642,000
VARIABLE RATE:
5.76% due in 2004 80,000 -- 80,000 --
- ---------------------------------------------------------------------------------------------------------------
2,185,830 642,000 2,163,130 642,000
Unamortized discount on FHLB advances -- -- (101) --
- ---------------------------------------------------------------------------------------------------------------
Total advances, net $2,185,830 642,000 2,163,029 642,000
- ---------------------------------------------------------------------------------------------------------------
Webster Bank ("Bank") had additional borrowing capacity of approximately $1.3
billion from the FHLB at June 30, 2003 and $669.7 million at December 31, 2002.
Advances are secured by a blanket security agreement. This agreement requires
the Bank to maintain as collateral certain qualifying assets, principally
residential mortgage loans and securities. At June 30, 2003 and December 31,
2002, investment securities were not fully utilized as collateral. If all
securities had been used for collateral, additional borrowing capacity at June
30, 2003 and December 31, 2002 would be approximately $2.2 billion and $2.1
billion. At June 30, 2003 the Bank was in compliance with the FHLB collateral
requirements. As of June 30, 2003, $1.1 billion of fixed rate advances were
converted to floating rate through the use of interest rate swaps. See Note 16
of Notes to Consolidated Interim Financial Statements for further information.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: OTHER BORROWINGS
- -------------------------
The following table summarizes balances for other borrowings:
- ----------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(In thousands) 2003 2002
- ----------------------------------------------------------------------------------
Securities sold under agreement to repurchase $1,995,909 1,453,596
Federal funds purchased 426,300 291,105
Treasury tax and loan 40,357 403,148
Other 18,100 18,791
- ----------------------------------------------------------------------------------
Total $2,480,666 2,166,640
- ----------------------------------------------------------------------------------
Repurchase agreements are primarily collateralized by U.S. Government Agency
mortgage-backed securities. The quarter average balance for borrowings under
short-term repurchase agreements exceeded 30% of total shareholders' equity at
June 30, 2003.
Information concerning short-term repurchase agreements as of the end of the
current period is presented below:
- ----------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
(Dollars in thousands) 2003 2002
- ----------------------------------------------------------------------------------
Quarter end balance $1,260,171 1,453,596
Quarter average balance 1,086,886 1,465,644
Highest month end balance during quarter 1,260,171 1,636,177
Weighted-average maturity (in months) 2.3 2.0
Weighted-average interest rate 1.08% 1.40%
Amortized cost of collateral $1,246,949 1,504,820
Fair value of collateral 1,266,631 1,539,731
NOTE 13: SENIOR NOTES AND SUBORDINATED DEBT
- -------------------------------------------
On January 14, 2003, the Bank completed an offering of $200 million of
subordinated notes. The notes bear an interest rate of 5.875% and mature on
January 15, 2013. The securities were offered in minimum denominations of
$250,000 to institutional investors. The subordinated notes were rated
investment grade by the major rating agencies. The notes constitute new funding
and will supplement the Bank's existing regulatory capital. At June 30, 2003 and
December 31, 2002, Webster Bank was a well-capitalized institution for
regulatory purposes. The Bank entered into a futures derivative contract in
anticipation of the debt issuance to hedge the fixed rate on the subordinated
notes. The contract qualified as a cash flow hedge under the guidelines of SFAS
No. 133. The gain of $1.7 million recognized on the futures contract transaction
is being amortized over the life of the subordinated notes as a reduction of
interest expense.
In November 2000, Webster completed a private placement of $126 million of
unsecured Senior Notes due in 2007. The net proceeds were used for general
corporate purposes.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14: SHAREHOLDERS' EQUITY
- -----------------------------
Applicable regulations of the Office of Thrift Supervision ("OTS") require
federal savings banks, such as the Bank, to satisfy certain minimum capital
requirements, including a leverage capital requirement (expressed as a ratio of
core or Tier 1 capital to adjusted total assets) and risk-based capital
requirements (expressed as a ratio of core or Tier 1 capital and total capital
to total risk-weighted assets). As an OTS regulated institution, the Bank is
also subject to a minimum tangible capital requirement (expressed as a ratio of
tangible capital to adjusted total assets). At June 30, 2003, the Bank exceeded
all OTS regulatory capital requirements and met the requirements for a "well
capitalized" institution.
The following table provides information on the Bank's capital ratios as of June
30, 2003 and December 31, 2002.
OTS Minimum FDIC Minimum
Actual Capital Requirements Well Capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
AT JUNE 30, 2003
Bank's equity (to total assets) $ 1,178,468 8.23%
Non-includable subsidiaries (2,103)
Goodwill and other intangibles (251,551)
Unrealized gain on certain AFS securities, net (45,686)
Cash flow hedging gain (1,612)
- --------------------------------------------------------------------------------------------------------------------------------
Tangible capital (to adjusted total assets) 877,516 6.28 279,453 2.00% No Requirement
Tier 1 capital (to adjusted total assets), net 877,516 6.28 558,906 4.00 698,632 5.00%
- --------------------------------------------------------------------------------------------------------------------------------
Tier 1 Risk-based capital
(to risk-weighted assets) 877,516 9.34 375,974 4.00 563,961 6.00
Qualifying subordinated debt 200,000
Allowable allowance for loan losses 115,733
- --------------------------------------------------------------------------------------------------------------------------------
Total Risk-based capital (to risk-
weighted assets) $ 1,193,249 12.70% 751,949 8.00% 939,936 10.00%
- --------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
Bank's equity (to total assets) $ 1,140,160 8.54%
Tangible capital (to adjusted total assets) 835,049 6.42 $260,101 2.00% No Requirement
Tier 1 capital (to adjusted total assets), net 835,049 6.42 520,201 4.00 $650,252 5.00%
Tier 1 Risk-based capital
(to risk-weighted assets) 835,049 9.41 354,989 4.00 532,484 6.00
Total Risk-based capital
(to risk-weighted assets) 945,993 10.66 709,979 8.00 887,473 10.00
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15: BUSINESS SEGMENTS
- --------------------------
Webster has three segments for purposes of reporting business line results.
These segments include Retail Banking, Commercial Banking and Wealth and
Investment Services. The balance of the activity is reflected in Corporate. The
methodologies and organizational hierarchies that define the business segments
are periodically reviewed and revised. The June 30, 2002 results have been
restated, to reflect changes in the methodologies and organizational structure
adopted and reflected in the results for the three and six months ended June 30,
2003. The following table presents the statement of income and total assets for
Webster's reportable segments.
THREE MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 70,881 20,219 829 8,690 100,619
Provision for loan losses 1,871 4,339 40 (1,250) 5,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 69,010 15,880 789 9,940 95,619
Noninterest income 34,518 11,227 4,632 7,903 58,280
Noninterest expense 55,945 13,876 6,167 17,211 93,199
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 47,583 13,231 (746) 632 60,700
Income tax expense (benefit) 15,749 4,379 (247) 209 20,090
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 31,834 8,852 (499) 423 40,610
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,672,333 2,770,243 65,655 4,944,341 14,452,572
THREE MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 60,832 14,539 516 26,678 102,565
Provision for loan losses 1,924 2,568 25 (517) 4,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 58,908 11,971 491 27,195 98,565
Noninterest income 24,156 7,378 4,201 3,880 39,615
Noninterest expense 49,066 11,220 5,756 12,801 78,843
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in method
of accounting 33,998 8,129 (1,064) 18,274 59,337
Income tax expense (benefit) 10,750 2,570 (336) 5,781 18,765
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 23,248 5,559 (728) 12,493 40,572
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $5,928,673 2,013,200 46,666 4,502,391 12,490,930
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 137,845 38,905 1,524 27,021 205,295
Provision for loan losses 3,782 8,417 77 (2,276) 10,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 134,063 30,488 1,447 29,297 195,295
Noninterest income 68,665 22,740 9,348 10,675 111,428
Noninterest expense 109,714 29,587 12,398 34,306 186,005
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 93,014 23,641 (1,603) 5,666 120,718
Income tax expense (benefit) 30,955 7,868 (533) 1,881 40,171
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 62,059 15,773 (1,070) 3,785 80,547
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $6,672,333 2,770,243 65,655 4,944,341 14,452,572
SIX MONTHS ENDED JUNE 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
WEALTH AND
RETAIL COMMERCIAL INVESTMENT CONSOLIDATED
(IN THOUSANDS) BANKING BANKING SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 118,125 28,861 896 51,166 199,048
Provision for loan losses 4,018 5,071 48 (1,137) 8,000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 114,107 23,790 848 52,303 191,048
Noninterest income 48,824 13,814 8,929 9,531 81,098
Noninterest expense 95,915 22,648 11,901 24,578 155,042
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and cumulative effect of change in
method of accounting 67,016 14,956 (2,124) 37,256 117,104
Income tax expense (benefit) 21,123 4,714 (669) 11,749 36,917
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in method
of accounting 45,893 10,242 (1,455) 25,507 80,187
Cumulative effect of change in method
of accounting (net of taxes) -- (7,280) -- -- (7,280)
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 45,893 2,962 (1,455) 25,507 72,907
- ----------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 5,928,673 2,013,200 46,666 4,502,391 12,490,930
Retail Banking
- --------------
The Retail Banking segment includes insurance services, small business lending,
consumer lending and the Bank's deposit generation and direct banking
activities, which include the operation of automated teller machines and
telebanking customer support and sales. The Retail Banking segment also includes
the Bank's residential real estate lending, loan servicing and secondary
marketing activities. The growth in net interest income compared to a year ago
can be attributed to the increase in consumer loans and loans held for sale. The
Mathog acquisition, the increase in residential mortgage originations along with
the growth in deposits as a result of the High Performance Checking product have
improved the level of noninterest income.
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Commercial Banking
- ------------------
The Commercial Banking segment includes the Bank's middle market, specialized,
equipment financing, asset-based and commercial real estate lending, deposit and
cash management activities. The results for 2003 reflect the results of our
acquisitions of Whitehall and BIC as well as the growth in equipment financing,
middle market and commercial real estate loans. These additions significantly
added to the segment's net interest income and noninterest income as compared to
June 2002. The results for 2002 include a $7.3 million, net of tax, charge for
the adoption of SFAS No. 142.
Wealth and Investment Services
- ------------------------------
During 2002, Wealth and Investment Services were combined into a primary line of
business, which includes Webster Financial Advisors, Webster Trust Company,
N.A., Webster Investment Services and Fleming, Perry and Cox, to provide
comprehensive wealth management services for individuals and institutions.
The Wealth and Investment Services segment includes all trust and personal
financial planning activities, including Webster Trust Company, N.A., and the
investment services of Webster Investment Services. The primary source of
revenue for this line of business are fees from trust management activities and
investment product sales.
Corporate
- ---------
Corporate includes the Treasury unit, which is responsible for managing the
wholesale investment portfolio and funding needs. It also includes expenses not
allocated to the business lines, the residual impact of methodology allocations
such as the provision for loan losses and funds transfer pricing offsets.
Management uses certain methodologies to allocate income and expenses to the
business lines. Funds transfer pricing assigns interest income and interest
expense to each line of business on a matched maturity funding concept based on
each business's assets and liabilities. The provision for loan losses is
allocated to business lines on an "expected loss" basis. Expected loss is an
estimate of the average loss rate that individual credits will experience over
an economic cycle, based on historical loss experiences and the grading assigned
each loan. This economic cycle methodology differs from that used to determine
our consolidated provision for loan losses, which is based on an evaluation of
the adequacy of the allowance for loan losses considering the risk
characteristics in the portfolio at a point in time. The difference between the
sum of the provisions for each line of business determined using the expected
loss methodology and the consolidated provision is included in Corporate.
Indirect expenses are allocated to segments. These expenses include
administration, finance, technology and processing operations and other support
functions. Taxes are allocated to each segment based on the effective rate for
the period shown.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS
-----------------------------------------
At June 30, 2003, Webster had outstanding interest rate swaps with a notional
amount of $1.2 billion. These swaps are to hedge FHLB advances and subordinated
debt and qualify for fair value hedge accounting under SFAS No. 133. The swaps
are used to transform FHLB advances and subordinated debt from fixed rate to
floating rate. Of the total, $200 million of the interest rate swaps mature in
2003, $650 million in 2004, $200 million in 2007 and $100 million in 2013, and
an equivalent amount of the hedged debt matures on these dates. See Note 13 for
additional derivative information related to Webster's issuance of subordinated
debt in the first quarter.
The Bank transacts certain derivative products with its customer base. These
customer derivatives are offset with matching derivatives with other
counterparties in order to minimize the Bank's risk. The Bank's exposure with
respect to these derivatives is largely limited to nonperformance by either of
the parties in the transaction - the Bank's customer or the other counterparty.
The notional amount of customer derivatives and the offsetting counterparty
derivatives each totaled $103.3 million at June 30, 2003.
The Bank currently utilizes certain derivative instruments, primarily forward
sales of mortgage-backed securities ("MBSs"), in its efforts to manage risk of
loss associated with its mortgage loan commitments and mortgage loans held for
sale. Prior to the closing and funds disbursement on a single-family residential
mortgage loan, the Bank generally extends an interest-rate locked commitment to
the borrower. At June 30, 2003, the Company had rate locks of approximately
$680.8 million and its residential mortgage held for sale portfolio totaled
$320.5 million. During such time, the Bank is subject to risk that market rates
of interest may change. If market rates rise, investors generally will pay less
to purchase such loans resulting in a reduction in the Bank's gain on sale of
the loans or, possibly, a loss. In an effort to mitigate such risk, the Bank
enters into forward delivery sales commitments pursuant to which it agrees to
deliver whole mortgage loans to various investors or issue MBSs. These forward
sales, which include mandatory forward commitments of approximately $694.0
million, and best efforts forward commitments of approximately $88.2 million at
June 30, 2003, establish the price the Bank will receive upon the sale of the
related mortgage loan, thereby mitigating certain interest rate risk. The Bank
will still have certain execution risk, that is, risk related to its ability to
close and deliver to its investors the mortgage loans it has committed to sell.
The derivative activities associated with the Bank's loans held for sale
portfolio qualify as a fair value hedge under SFAS No. 133. The Bank has
established a highly effective relationship between its loans held for sale
portfolio and certain of its forward sales commitments.
The interest rate locked loan commitments are recorded at fair value, with
changes in fair value recorded in current period earnings. To the extent that
loans held for sale are not allocated to the previously discussed forward sales
commitments, the changes in the fair value of the forward sales commitments are
also recorded to current period earnings. The value of the interest rate locked
commitments and forward sales commitments will be adjusted monthly based upon
market interest rates and the level of locked loan commitments and unallocated
forward sales commitments. Generally, the value of the locked loan commitment
will increase in a falling rate environment and decrease in a rising interest
rate environment. The opposite is true for the forward loan sale commitment. The
goal of the Bank is to offset the change in the market value of the locked loan
commitments with the change in the market value of the forward loan sales
commitments.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly. In
particular, this Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", and (4) amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts as either derivatives or
hybrid instruments.
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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This Statement is effective for contracts entered into or modified after June
30, 2003, with certain exceptions and for hedging relationships designated after
June 30, 2003. All provisions of this Statement should be applied prospectively
with certain exceptions. Webster will adopt the provisions of this Statement
effective July 1, 2003 and does not expect any material impact on its financial
statements.
NOTE 17: CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
- ----------------------------------------------------------------------------
SUBSIDIARY TRUSTS
- -----------------
During 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster holds a 100% interest. Trust I exists for the sole
purpose of issuing trust securities and investing the proceeds in an equivalent
amount of subordinated debentures of the Company. On January 31, 1997, Trust I
completed a $100.0 million underwritten public offering of 9.36%
Corporation-Obligated Mandatorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is the $100.0
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997.
On April 1, 1997, Eagle Financial Capital Trust I, subsequently renamed Webster
Capital Trust II ("Trust II"), completed a $50.0 million private placement of
10.00% capital securities. Proceeds from the issue were invested by Trust II in
junior subordinated deferrable debentures issued by Eagle due in 2027. These
debentures represent the sole assets of Trust II. Webster holds a 100% interest
in Trust II.
The subordinated debt securities are unsecured obligations of Webster and are
subordinate and junior in right of payment to all present and future senior
indebtedness. Webster has entered into a guarantee, which together with its
obligations under the subordinated debt securities and the declaration of trust
governing Trust I and Trust II, including its obligations to pay costs,
expenses, debts and liabilities (other than trust securities), provides a full
and unconditional guarantee of amounts on the capital securities. The capital
securities qualify as Tier I capital under regulatory capital definitions.
During the second quarter 2003, Webster purchased $11.0 million of its capital
securities that were issued by Trusts I and II. Of the $11.0 million purchased,
$6.0 million had been issued by Trust I and, as of June 30, 2003, Trust I had
remaining capital securities of $75.3 million and $5.0 million had been issued
by Trust II and, as of June 30, 2003, had remaining capital securities of $35.0
million. Refer to Webster's 2002 Annual Report filed on Form 10-K for further
information concerning Trusts I and II.
Expense of the securities, including amortization of issuance costs, for the
three months ended June 30, 2003 and 2002 was $2.8 million and $3.5 million,
respectively, and for the six months ended June 30, 2003 and 2002, was $5.7
million and $7.2 million, respectively.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
is effective for all freestanding financial instruments entered into or modified
after May 31, 2003. For all other freestanding financial instruments, it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. SFAS No. 150 applies to three categories of free standing
financial instruments (mandatorily redeemable instruments, instruments with
repurchase obligations and instruments with obligations to issue a variable
number of shares). Instruments within the scope of SFAS No. 150 must be
classified as liabilities in the Statement of Condition. This statement also
requires detailed information on each instrument covered by its provisions. An
adjustment for the cumulative effect of a change in accounting principle should
be reported as of the beginning of the quarter of adoption for outstanding
contracts entered prior to June 1, 2003. Therefore, as of July 1, 2003, Webster
is required to classify its Corporation-obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trusts as liabilities. Currently, these are classified
as a separate line item between total liabilities and stockholders' equity on
the Consolidated Statements of Condition. In addition, the interest cost of
these securities, which, as of June 30, 2003 is included in noninterest expenses
on the Consolidated Statements of Income will be classified as interest expense
on borrowings under this ruling. The adoption of this Statement by Webster will
not impact net earnings but will affect financial measurements that use interest
expense as a component.
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 2003, Webster Preferred Capital Corporation, a subsidiary of Webster
Bank, had outstanding $10.0 million of Series B 8.625% cumulative redeemable
preferred stock. Dividend expense on the preferred stock for the three month
periods ended June 30, 2003 and 2002 was $215,000 and for six months ended June
30, 2003 and 2002 was $431,000.
NOTE 18: NEW ACCOUNTING STANDARDS
- ---------------------------------
FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51" establishes accounting guidance for
consolidation of variable interest entities ("VIE") that function to support the
activities of the primary beneficiary. The primary beneficiary of a VIE is the
entity that absorbs a majority of the VIE's expected losses, receives a majority
of the VIE's expected residual returns, or both, as a result of ownership,
controlling interest, contractual relationship or other business relationship
with a VIE. Prior to the implementation of FIN 46, VIEs were generally
consolidated by an enterprise when the enterprise had a controlling financial
interest through ownership of a majority of voting interest in the entity. The
provisions of FIN 46 were effective immediately for all arrangements entered
into after January 31, 2003, and are otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Corporation will adopt
FIN 46 on July 1, 2003. In its current form, FIN 46 may require the Corporation
to deconsolidate its investment in Trust I and II in future financial
statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The amendments (i) reflect
decisions of the Derivatives Implementation Group; (ii) reflect decision made by
FASB in conjunction with other projects dealing with the financial instruments;
and (iii) addresses implementation issues related to the application of the
definition of a derivative. SFAS No. 149 also modifies various other existing
pronouncements to conform with the changes made to SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003, with all provisions
applied prospectively. Adoption of SFAS 149 on July 1, 2003 did not have a
significant impact on the Company's financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS 150 establishes standards for how an
issuer clarifies, measures and discloses in its financial statements certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify financial instruments that are within its
scope as liabilities, in most circumstances. Such financial instruments include
(i) financial instruments that are issued in the form of shares that are
mandatorily redeemable; (ii) financial instruments that embody an obligation to
repurchase the issuer's equity shares, or are indexed to such obligation, and
that require the issuer to settle the obligation by transferring assets; (iii)
financial instruments that embody an obligation that the issuer may settle by
issuing a variable number of its equity shares if, at inception, the monetary
value of the obligation is predominantly based on a fixed amount, variations in
something other than the fair value of the issuer's equity shares or variations
inversely related to changes in the fair value of the issuer's equity shares;
and (iv) certain freestanding financial instruments. SFAS 150 is effective for
contracts entered into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. Adoption of SFAS 50 on July 1, 2003 is not expected to have a significant
impact on the Company's results of operations.
27
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19: SUBSEQUENT EVENTS
- --------------------------
On July 22, 2003, Webster announced that its Board of Directors authorized the
repurchase of up to approximately 2.3 million shares of its common stock. These
shares represent 5% of Webster's 45.6 million common shares outstanding at June
30, 2003.
On July 23, 2003, Webster Insurance, a wholly-owned subsidiary of Webster,
announced the acquisition of LJF Insurance Services, Inc., ("LJF"), a full
service insurance agency with offices in Southport and Norwalk, Connecticut. LJF
has served the Fairfield County of Connecticut for more than 100 years. This
acquisition will serve to further expand Webster's insurance services to the
lower Fairfield County area.
28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products, services and prices. Some of these and other factors are discussed in
Webster's annual and quarterly reports previously filed with the Securities and
Exchange Commission. Such developments could have an adverse impact on Webster's
financial position and results of operations.
GENERAL - DESCRIPTION OF BUSINESS
- ---------------------------------
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 primarily in Connecticut and equipment financing, mortgage
origination and financial advisory services to public and private companies
throughout the United States. Webster Bank provides business and consumer
banking, mortgage lending, trust and investment services and insurance services
through 111 banking and other offices, 219 ATM's and its Internet website
(www.websteronline.com). The Bank was founded in 1935 and converted from a
federal mutual to a federal stock institution in 1986. Since October 17, 2002,
Webster's common stock has traded on the New York Stock Exchange under the
symbol of "WBS". Prior to that date, Webster's common stock traded on the NASDAQ
under the symbol of "WBST". Webster's financial reports can be accessed through
its website within 24 hours of filing with the SEC.
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. Webster
believes that its 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 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 envir