FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
For the Fiscal Year Ended December 31, 2005.
OR
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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)
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Delaware
(State or other jurisdiction of incorporation or organization)
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06-1187536
(I.R.S. Employer Identification No.) |
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Webster Plaza, Waterbury, Connecticut
(Address of principal executive offices)
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06702
(Zip Code) |
Registrant’s telephone number, including area code: (203) 465-4364
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
Common Stock, $.01 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act – Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act of 1933. Yes þ No o .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes o No þ.
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. Yes þ No o.
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 check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer (as defined in Exchange Act Rule 12B-2). Large accelerated filer þ
Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12B-2. Yes o No þ .
The aggregate market value of voting and non-voting common equity held by non-affiliates of Webster
Financial Corporation as of June 30, 2005 was $2,408,943,750.
The number of shares of common stock outstanding, as of February 24, 2006: 53,203,481.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 20, 2006.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
WEBSTER FINANCIAL CORPORATION
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
2
Forward Looking Statements
This Annual Report contains forward-looking statements within the meaning of the Securities
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”), a bank holding company and financial
holding company under the Bank Holding Company Act of 1956, as amended, was incorporated under the
laws of Delaware in 1986. Webster, on a consolidated basis, at December 31, 2005 had assets of
$17.8 billion and shareholders’ equity of $1.6 billion. Webster’s principal assets are all of the
outstanding capital stock of Webster Bank, National Association (“Webster Bank”), and Webster
Insurance, Inc. (“Webster Insurance”). Webster, through its various non-banking financial services
subsidiaries, delivers financial services to individuals, families and businesses throughout
southern New England and eastern New York State, and equipment financing, asset-based lending,
mortgage origination and insurance premium financing throughout the United States. Webster Bank
provides commercial banking, retail banking, health savings accounts (“HSAs”), consumer financing,
mortgage banking, trust and investment services through 157 banking offices, 304 ATMs and its
Internet website (www.websteronline.com). In 2004, Webster Bank converted from a federal
savings bank to national bank charter, regulated by the Office of the Comptroller of the Currency.
Webster’s common stock is traded on the New York Stock Exchange under the symbol “WBS”.
Webster’s mission statement is the foundation of our operating principles. Stated simply as “We
Find A Way” to help individuals, families and businesses achieve their financial goals. The Company
operates with a local market orientation and a vision to be the leading regional financial services
provider in the markets we serve. Its operating objectives include developing customer
relationships through cross-sale opportunities to fuel internal growth, increasing the products and
services currently offered and expanding geographically in contiguous markets.
Webster facilitates cooperation across its business segments through its Sales Council, which
consists of sales teams, organized by geography or industry specialty, that approach our markets to
deliver the totality of Webster’s capabilities with a unified approach. These teams consist of
members from each business segment, meet regularly to share opportunities, and call jointly on
customers and prospects. Since creation of the Sales Council in 1999, cross-sell revenues from the
teams have on average doubled every year.
Retail Banking
Retail Banking is the largest line of business within the Webster franchise and is dedicated to
serving the needs of 400,000 consumer households and 60,000 small business customers in southern
New England and eastern New York State. Our distribution network is comprised of 157 banking
offices and 304 ATMs in Connecticut, Massachusetts, Rhode Island and New York. We also serve our
customer base with a full range of telephone and internet banking services.
Webster’s Retail Segment is intent on growing its customer base through the acquisition of new
relationships and the retention and expansion of existing customer relationships. There is a strong
focus on core deposit growth, which provides a low-cost funding source for the bank in addition to
an increasing stream of fee revenues. As of December 31, 2005, core deposits totaled $11.2 billion
and increased $0.8 billion or 7.9% from the previous year. Revenue growth is also achieved by
offering additional products and services to meet customer needs and deepen customer relationships.
Webster’s successful execution of this strategy is evidenced by its #2 ranking in deposit market
share in its primary market of Connecticut.
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Retail Banking also includes the Business & Professional Banking division (“B&P”). B&P is focused
on the development and delivery of a full array of credit and deposit-related products targeted to
small businesses and professional services firms with annual revenue up to $10 million. B&P markets
and sells to these customers through a combination of direct sales (‘Business Bankers’) and
branch-delivered efforts. As of December 31, 2005, B&P loans totaled $713 million and deposits were
$1.3 billion. This compares to $698 million in loans and $1.2 billion in deposits at December 31,
2004. Our small business lending effort is focused on those customers with borrowing needs from
$25,000 to $2 million. Webster was recognized in 2005 by the Connecticut district of the Small
Business Administration as the state’s leading bank SBA 504 lender; this was the third consecutive
year Webster was recognized for this accomplishment.
An important element of Webster’s Retail growth strategy is disciplined de novo branch expansion in
attractive markets. Eight branches were added to the network in 2005, adding $273 million in new
deposits during the year, with a contiguous expansion into lower Fairfield County and Westchester
County, New York. We also continued our expansion into Rhode Island and southeastern Massachusetts
with additional branch openings to complement our market entry with the 2004 acquisition of
FIRSTFED AMERICA BANCORP, INC. Through the de novo branch expansion program, a total of 19 de novo
branches have been opened since 2002, adding a total of $572 million in deposits through December
31, 2005.
The rapidly rising costs of health care have fostered the increased popularity of high-deductible
health insurance plans and health savings accounts. In September 2004, Webster agreed to acquire
HSA Bank, the largest bank custodian of health savings accounts in the United States. The
acquisition was completed in February 2005. At the time of the agreement, HSA Bank had
approximately $95 million of health savings account deposits and at the date of completion of the
acquisition HSA Bank had approximately $155 million in such deposits. During 2005, these deposits
grew to $210 million and we expect them to continue to grow as the popularity of health savings
accounts continues to increase.
Commercial Banking
Webster’s Commercial Banking group takes a direct relationship approach to providing lending,
deposit and cash management services to middle-market companies in our four-state franchise
territory and commercial real estate loans principally in the Northeast. Additionally, it serves as
a primary referral source to our Insurance, Wealth Management and Retail operations. Asset-based
lending is located primarily in the Northeast with a national presence, and equipment financing is
provided to customers across the United States. This well diversified portfolio, which totaled $4.7
billion at December 31, 2005, up from $4.3 billion the prior year end, is maintained and monitored
under a strategy designed to mitigate credit risk, while maximizing returns.
Middle-Market Banking
The Middle-Market Division delivers Webster’s full array of financial services to a diversified
group of companies with revenues greater than $10 million, primarily privately held and located
within southern New England. 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 their markets. The middle-market loan portfolio increased by 26.6% to a total
portfolio of $1.3 billion at December 31, 2005 from a portfolio of $1.0 billion a year earlier.
Commercial Real Estate Lending
The Commercial Real Estate Division provides (primarily in Webster’s core markets) 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 generated from the property is the primary repayment source.
Typically it lends on investment quality real estate, including apartments, anchored retail,
industrial and office properties. Loan types include construction, construction mini-perm and
permanent loans, in amounts that 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 construction and permanent lending with major banks and insurance
companies. The commercial real estate lending portfolio increased by 5.4% to a total portfolio of
$1.8 billion at December 31, 2005 from $1.7 billion a year earlier.
Asset-Based Lending
Webster Business Credit Corporation (“WBCC”) is Webster Bank’s asset-based lending subsidiary with
headquarters in New York, New York and regional offices in South Easton, Massachusetts; Chicago,
Illinois; Atlanta, Georgia; Baltimore, Maryland; Memphis, Tennessee; and Hartford, Connecticut.
Asset-based loans are generally secured by accounts receivable of the borrower and, in some cases,
also include additional collateral such as inventories, property and equipment. The asset-based
lending portfolio increased by 20.6% to a total portfolio of $661 million at December 31, 2005 from
$548 million a year earlier.
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Equipment Financing
Center Capital Corporation (“Center Capital”), an equipment financing subsidiary of Webster Bank,
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. The equipment financing portfolio increased by 24.2% to a total portfolio of
$780 million at December 31, 2005 from $628 million a year earlier, marking its fifth year of
greater than 20 percent growth.
Center Capital markets its products nationally through a direct sales force of equipment financing
professionals who are grouped by customer type or collateral-specific business line. During 2005,
financing initiatives encompassed four distinct industry/equipment niches, each operating as a
division: Construction and Transportation Equipment Financing, Environmental Equipment Financing,
Machine Tool Equipment Financing and General Aviation Equipment Financing.
Within each division, Center Capital seeks to finance equipment that retains good value throughout
the term of the underlying transaction. Little, if any, residual value risk is taken and, in many
instances, financing terms cover only half of the financed equipment’s useful life. As such, and in
exceptional instances where it is forced to repossess its collateral, that equipment may have value
equal to or in excess of the defaulted contract’s remaining balance. All credit underwriting,
contract preparation and closings, as well as servicing (including collections) are performed
centrally at Center Capital’s headquarters in Farmington, Connecticut.
Insurance Premium Financing
Budget Installment Corporation (“BIC”), headquartered in Rockville Centre, New York, provides
insurance premium financing products covering commercial property and casualty policies. Its
dedicated staff of insurance premium financing professionals works directly with local, regional
and national insurance agents and brokers to market BIC’s financing products to customers
nationwide. BIC’s portfolio increased by 6.3% to a total portfolio of $85 million at December 31,
2005, from $80 million a year earlier.
Deposit and Cash Management Services
Webster offers a wide range of deposit and cash management services for clients ranging from sole
proprietors to large corporations. For depository needs we offer products ranging from core
checking and money market accounts, to treasury sweep options including repurchase agreements and
euro dollar deposits. For clients with more sophisticated cash management needs, available services
include ACH origination and payment services such as lockbox for receipts posting, positive pay for
fraud control and controlled disbursement for cash forecasting. All of these services are available
through our on-line banking system Webster Web-Link(tm), which uses image technology to provide
online information to our clients.
Consumer Finance
Webster’s Consumer Finance division provides a convenient and competitive selection of residential
first mortgages, home equity loans and direct installment lending programs through Webster Bank and
its wholly-owned subsidiary, People’s Mortgage Company (“PMC”). Webster Bank’s loan distribution
channels consist of the branch network, loan officers, call center, and third party licensed
mortgage brokers. Additionally, loan products may be offered periodically through direct mail
programs. The division also provides the convenience of the Internet for equity loan applications
that are available in most states. PMC engages in mortgage banking activities throughout New
England and the mid-Atlantic region.
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.
Independent credit reporting agencies and the Fair Isaac scoring model and the analysis of personal
financial information are utilized to determine the credit worthiness of potential borrowers. Also,
the Consumer Finance division obtains and evaluates an independent appraisal of collateral value to
determine the adequacy of the collateral.
Residential Mortgage and Mortgage Banking
Consumer Finance is dedicated to providing a full complement of residential mortgage loan products
that are available to meet the financial needs of Webster’s customers. While the Company’s primary
lending markets are Connecticut, southern New England and the mid-Atlantic region, we also lend
nationally through our National Wholesale Lending Group. We offer customers 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 the Connecticut Housing Finance Authority (“CHFA”). Various programs are offered to support
the 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. Customer loans are normally retained in the residential mortgage
portfolio with servicing retained. Non-customer loans are sold in the secondary market on a
servicing-released basis.
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The National Wholesale Lending production is originated by approved licensed mortgage brokers
located throughout the United States and is underwritten, closed and funded by Webster Bank. The
majority of this production is sold into the secondary market on a servicing released basis. The
National Wholesale channel is headquartered in Cheshire, Connecticut and has three other regional
offices located outside of the state in Chicago, Illinois; Phoenix, Arizona; and Seattle,
Washington.
PMC loan production is also originated by licensed professionals working in its regional locations.
Loans are sold in the secondary market on a servicing-released basis.
Total residential mortgage originations for the group were $2.7 billion in 2005 and $2.6 billion in
2004. The total gain on sale of residential mortgages originated and sold in the secondary market
was $11.1 million for 2005 and $10.9 million for 2004.
Consumer Loans
Webster Bank provides an array of consumer loan products to its customers. It concentrates on
offering a range of products including home equity loans and 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 consumer loan portfolio grew 5.1% to $2.8 billion at December 31, 2005 from
$2.6 billion a year earlier.
Credit Risk Management
Webster Bank manages and controls risk in its loan portfolio through adherence to consistent
standards. Written credit policies 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, additional
approval requirements and a tracking requirement for all qualified exceptions have been
established. In addition, regular reports are made to senior management and the Board of Directors
regarding the credit quality of the loan portfolio.
Risk Management, which is independent of the loan production areas, oversees the loan approval
process, ensures adherence to credit policies and monitors efforts to reduce classified and
nonperforming assets.
The Loan Review Department, which is independent of the loan production areas and loan approval,
performs ongoing independent reviews of the risk management process, adequacy of loan documentation
and assigns loan risk ratings. The results of its reviews are reported directly to the Audit
Committee of the Board of Directors.
Insurance
Webster Insurance offers a full range of insurance products to both businesses and individuals. A
regional insurance agency, Webster Insurance provides insurance products and services that include:
commercial and personal property and casualty insurance; life, health, disability and long-term
care insurance; annuities and investment products; third party worker’s compensation claims
administration and risk management services. It is the largest insurance agency based in
Connecticut and is headquartered in Wallingford with offices in several other Connecticut
communities, including Westport, Waterford, Vernon, East Haven as well as an office in Harrison,
New York. In 2004, as part of the FIRSTFED acquisition, Webster acquired FIRSTFED Insurance Agency,
LLC, which provides insurance products in the Massachusetts and Rhode Island markets. For the year
ended December 31, 2005, Webster Insurance’s revenue was $44.0 million, an increase of $0.5 million
or 1.2% over the prior year.
Webster Insurance receives contingent payments under standard agreements written by the insurance
carriers; this is the standard practice throughout the industry. Contingent payments to Webster
Insurance represent compensation incremental to commissions, typically based on the claims
experience of the insureds and/or the volume of business written. As of the date of this report,
Webster has not been notified of any changes by its insurance carriers regarding the practice of
paying contingent payments.
Wealth and Investment Services
There are two business lines within Wealth and Investment Services providing investment and
advisory services to affluent and high-net worth individuals and institutions. Webster Financial
Advisors (“WFA”) targets high-net worth clients, not-for-profit organizations and business clients
with investment management, trust, credit and deposit products and financial planning services. WFA
takes a comprehensive view when dealing with clients in order to fully serve their short and
long-term financial objectives. We offer proprietary and non-proprietary investment products
through WFA and the J. Bush & Co. division. WFA provides several different levels of financial
planning expertise including specialized services with our subsidiary, Fleming, Perry & Cox. At
December 31, 2005 and 2004, there were approximately $2.4 billion and $1.9 billion of client assets
under management and administration, of which $1.4 billion and $1.1 billion were under management,
respectively. These assets are not included in the Consolidated Financial Statements.
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Webster Investment Services, Inc. (“WIS”) offers securities services, including brokerage and
investment advice, and is a registered investment advisor with over 100 registered representatives
offering affluent customers an expansive array of investment products including stocks and bonds,
mutual funds, managed accounts and annuities. Brokerage and online investing services are available
for customers who prefer to access and manage their own investments. At December 31, 2005 and
2004, there were $1.5 billion and $1.3 billion of assets under administration, respectively. These
assets are not included in the Consolidated Financial Statements.
For the year ended December 31, 2005, revenue for the combined business units was $23.2 million, an
increase of $0.9 million or 4.3% over the prior year.
Information Technology Investment
During 2005, Webster converted its core systems processing to Fidelity Information Services, Inc.
(“Fidelity”) platform, to provide information technology, application processing and item
processing services under a ten-year agreement. Webster is using the new software for core data
processing services, enhancing both capacity and speed for customer benefit in consumer,
commercial, mortgage and small business accounts in Fidelity’s application service provider
environment. The migration to the new technology platform was completed in the fourth quarter of
2005. Webster recognized one-time conversion and infrastructure costs of $8.1 million in 2005.
The new system will enhance sale and service delivery capabilities across Webster’s lines of
business. Additionally, leveraging the processing capacity of Fidelity’s data centers will provide
Webster with the ability to continue to grow and expand its customer base.
Business Segments
For segment reporting information, see Note 20 of Notes to Consolidated Financial Statements in
Item 8 hereof.
Acquisitions
The Company’s growth and increased market share have been achieved through both internal growth and
acquisitions. We continually evaluate acquisition opportunities that complement our mission
statement. Acquisitions typically involve the payment of a premium over book and market values.
Acquisitions commonly result in one-time charges against earnings for costs to close the
transaction, although cost-savings, especially incident to in-market acquisitions, are achieved.
The following acquisition and sale transactions were completed during 2005. The results of
operations of the acquired companies are included in the Consolidated Financial Statements for
periods subsequent to the date of acquisition.
Eastern Wisconsin Bancshares, Inc.
On September 7, 2004, Webster announced its entry into the health savings account business through
a definitive agreement to acquire Eastern Wisconsin Bancshares, Inc. (“EWBI”), the holding company
for State Bank of Howards Grove (“State Bank”), headquartered in Howards Grove, Wisconsin. This
transaction closed on February 28, 2005. The acquisition made Webster one of the largest custodians
and administrators of health savings accounts in the United States. The purchase price was
approximately $27 million in cash. State Bank had $163 million in assets and $144 million in
deposits, including $95 million in health savings account deposits, at the time of the agreement.
Health saving accounts totaled $155.4 million at the time of the closing in February 2005.
A definitive agreement was announced on February 8, 2005 whereby Webster would divest State Bank’s
two retail branches and related loans and deposits and retain the health savings account operation.
The health savings account division operates under the name of HSA Bank, a division of Webster
Bank. The State Bank branch sale closed on April 15, 2005.
J. Bush & Co.
On June 29, 2005, Webster announced the completion of its acquisition of the assets of J. Bush &
Co., a New Haven-based investment management firm. J. Bush & Co., which retained its name and
operates as a division of Webster’s Wealth and Investment Advisors group, brought to Webster over
$200 million in assets under management. These assets are not included in the Consolidated
Financial Statements.
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Subsidiaries
Webster’s direct subsidiaries include Webster Bank, Webster Insurance and Fleming, Perry & Cox,
Inc. Webster also owns all of the outstanding common stock in the following unconsolidated
financial vehicles that have issued trust preferred securities: Webster Capital Trust I and II,
Webster Statutory Trust I, People’s Bancshares Capital Trust II and Eastern Wisconsin Bancshares
Capital Trust I and II. See Notes 14 and 21 of Notes to Consolidated Financial Statements for
additional information.
The following is a brief description of Webster Bank and its principal direct and indirect
subsidiaries.
Retail Banking
Webster Bank is the primary source of retail activity within the consolidated group. Webster Bank
provides banking services through 157 banking offices, 304 ATMs and the Internet. Insurance
activities are conducted through Webster Insurance. Residential mortgage origination activity is
conducted through both Webster Bank and People’s Mortgage Corporation.
Commercial Lending
Webster provides various commercial lending products through subsidiaries of Webster Bank to
clients throughout the United States. Webster Business Credit Corporation provides asset-based
lending services, Budget Installment Corporation finances insurance premiums for commercial
entities and Center Capital provides equipment financing. Webster Growth Capital provides mezzanine
financing for small to middle-market companies.
Investment Planning and Securities Brokerage Activities
Brokerage and investment products are offered by Webster Investment Services, which is also a
registered investment advisor. Fleming, Perry & Cox, Inc., a subsidiary of Webster, provides
financial planning services for high net worth individuals.
Other Subsidiaries
Webster Mortgage Investment Corporation is a passive investment subsidiary whose primary function
is to provide servicing on passive investments, such as residential and commercial mortgage loans
purchased from Webster Bank. Webster Preferred Capital Corporation is a real estate investment
trust, which acquires, holds and manages mortgage assets, principally residential mortgage loans
acquired from Webster Bank. Additionally, Webster has various other subsidiaries that are not
significant to the consolidated entity.
Executive Officers of the Registrant
See Part III, Item 10 of this Form 10-K for information about our executive officers.
Employees
At December 31, 2005, Webster had 3,181 full-time equivalent employees including 426 part-time and
other employees. The turnover rate for 2005 was 24.2%. None of the employees was 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 and an employee 401(k) investment plan. Management considers relations with its
employees to be good. See Note 18 of Notes to Consolidated Financial Statements contained elsewhere
within the Report for additional information on certain benefit programs.
Competition
We are subject to strong competition from banks and other financial institutions, including savings
and loan associations, finance companies, credit unions, consumer finance companies and insurance
companies. Certain of these competitors are larger financial institutions with substantially
greater resources, lending limits, larger branch systems and a wider array of commercial banking
services than Webster. Competition from both bank and non-bank organizations is expected to
continue.
The banking industry is also experiencing rapid changes in technology. In addition to improving
customer services, effective use of technology increases efficiency and enables financial
institutions to reduce costs. Technological advances are likely to increase competition by enabling
more companies to provide cost effective products and services.
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Webster 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.
Supervision and Regulation
Webster is a bank holding company and is registered with the Board of Governors of the Federal
Reserve System (“Federal Reserve”) under the Bank Holding Company Act (“BHCA”). As such, the
Federal Reserve is Webster’s primary federal regulator, and Webster is subject to extensive
regulation, supervision and examination by the Federal Reserve. Webster is subject to the capital
adequacy guidelines of the Federal Reserve, which are applied on a consolidated basis. These
guidelines require bank holding companies having the highest regulatory ratings for safety and
soundness to maintain a minimum ratio of Tier 1 capital to total average assets (or “leverage
ratio”) of 3%. All other bank holding companies are required to maintain an additional capital
cushion of 100 to 200 basis points. The Federal Reserve capital adequacy guidelines also require
bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4%
and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. At December 31,
2005, Webster was well capitalized under the capital adequacy guidelines. The Federal Reserve also
may set higher minimum capital requirements for a bank holding company whose circumstances warrant
it, such as a bank holding company anticipating significant growth. The Federal Reserve has not
advised Webster that it is subject to any special capital requirement.
Any bank holding company that fails to meet the minimum capital adequacy guidelines applicable to
it is considered to be undercapitalized and is required to submit an acceptable plan to the Federal
Reserve to achieve capital adequacy. The Federal Reserve considers a bank holding company’s capital
ratios and other indicators of capital strength when evaluating proposals to expand banking or
nonbanking activities, and it may restrict the ability of an undercapitalized bank holding company
to pay dividends to its shareholders.
Webster also has made a declaration to the Federal Reserve of its status as a financial holding
company under the Gramm-Leach-Bliley Act (“GLBA”). As a financial holding company, Webster is
authorized to engage in certain financial activities that a bank holding company may not engage in.
Currently, Webster engages in certain insurance agency activities pursuant to this authority. If a
financial holding company fails to remain well capitalized and well managed, the company and its
affiliates may not commence any new activity that is authorized particularly for financial holding
companies. If a financial holding company remains out of compliance for 180 days or such longer
period as the Federal Reserve permits, the Federal Reserve may require the financial holding
company to divest either its insured depository institutions or all its nonbanking subsidiaries
engaged in activities not permissible for a bank holding company. If a financial holding company
fails to maintain a “satisfactory” or better record of performance under the Community Reinvestment
Act, it may not commence any new activity authorized particularly for financial holding companies,
but may continue to make merchant banking and insurance company investment in the ordinary course
of business.
Webster Bank is a national association chartered by the Office of the Comptroller of the Currency
(“OCC”). The OCC is its primary federal regulator, and it is subject to extensive regulation,
supervision, and examination by the OCC. In addition, as to certain matters, Webster Bank is
subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Federal
Reserve. Webster Bank is subject to leverage and risk-based capital requirements and minimum
capital guidelines of the OCC that are similar to those applicable to Webster. At December 31,
2005, Webster Bank was in compliance with all minimum capital requirements. There also are
substantial regulatory restrictions on Webster Bank’s ability to pay dividends to Webster. Under
OCC regulations, Webster 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 for the calendar year to date plus
retained net income for the preceding two years. At December 31, 2005, Webster Bank was in
compliance with all applicable minimum capital requirements and had the ability to pay dividends to
Webster of $186.8 million without the prior approval of the OCC. Its deposits are insured up to
regulatory limits by the FDIC and are subject to corresponding deposit insurance assessments to
maintain the FDIC insurance funds.
9
Any bank that is less than well-capitalized is subject to certain mandatory prompt corrective
actions by its primary federal regulatory agency, as well as other discretionary actions, to
resolve its capital deficiencies. The severity of the actions required to be taken increases as the
bank’s capital position deteriorates. A bank holding company must guarantee that a subsidiary bank
will meet its capital restoration plan, up to an amount equal to 5% of the subsidiary bank’s assets
or the amount required to meet regulatory capital requirements, whichever is less. In addition,
under Federal Reserve policy, a bank holding company is expected to serve as a source of financial
strength for, and to commit financial resources to support its subsidiary banks. Any capital loans
made by a bank holding company to a subsidiary bank are subordinated to the claims of depositors in
the bank and to certain other indebtedness of the subsidiary bank. In the event of the bankruptcy
of a bank holding company, any commitment by the bank holding company to a federal banking
regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and would be entitled to priority of payment.
Webster Bank is authorized by the OCC to engage in trust activities subject to the OCC’s
regulation, supervision, and examination. Webster Bank provides trust and related fiduciary
services to its customers. 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”). Fleming, Perry and Cox (“Fleming”)
is registered as an investment advisor and is subject to extensive regulation, supervision and
examination by the SEC. WIS and Fleming also are members of the National Association of Securities
Dealers, Inc. (“NASD”) and are subject to its regulation. WIS is authorized to engage as a
broker-dealer and Webster Bank is authorized to engage 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 New York and
is subject to registration and supervision by the State of Connecticut Department of Insurance.
Transactions between Webster Bank and its affiliates, including Webster, are governed by sections
23A and 23B of the Federal Reserve Act and Federal Reserve regulations thereunder. Generally,
sections 23A and 23B are intended to protect insured depository institutions from suffering losses
arising from transactions with non-insured affiliates, by limiting the extent to which a bank or
its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates
of the bank in the aggregate, and by requiring that such transactions be on terms that are
consistent with safe and sound banking practices. Sections 23A and 23B also regulate transactions
by a bank with its financial subsidiaries that it may operate as a result of the expanded authority
granted under GLBA.
Under GLBA, all financial institutions, including Webster, Webster Bank, and several of their
affiliates and 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. In addition, the Fair and Accurate Credit
Transactions Act of 2003 (“FACT Act”) includes many provisions concerning national credit reporting
standards, and permits consumers, including customers of Webster, to opt out of information sharing
among affiliated companies for marketing purposes. The FACT Act also requires banks and other
financial institutions to notify their customers if they report negative information about them to
a credit bureau or if they are granted credit on terms less favorable than those generally
available. The Federal Reserve and the Federal Trade Commission are granted extensive rulemaking
authority under the FACT Act, and Webster Bank and its affiliates are subject to these provisions.
Webster has developed policies and procedures for itself and its subsidiaries, including Webster
Bank, and believes it is in compliance with all privacy, information sharing, and notification
provisions of GLBA and the FACT Act.
Under Title III of the USA PATRIOT Act, all financial institutions, including Webster, Webster
Bank, and several of their affiliates and subsidiaries, 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. Information sharing among financial institutions for the above purposes is encouraged by
an exemption granted to complying financial institutions from the privacy provisions of GLBA 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 are prohibited from dealing with foreign “shell banks” and
persons from jurisdictions of particular concern. The primary federal banking regulators and the
Secretary of the Treasury have 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, such as Webster or Webster Bank, in combating money
laundering activities is a factor to be considered in any application submitted by the financial
institution under the Bank Merger Act and the BHCA. Webster and Webster Bank 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.
10
The Sarbanes-Oxley Act (“SOA”) was adopted for the stated purpose to increase corporate
responsibility, enhance penalties for accounting and auditing improprieties at publicly traded
companies, and protect investors by improving the accuracy and reliability of corporate disclosures
pursuant to the securities laws. SOA is the most far-reaching U.S. securities legislation enacted
in several years. It applies generally to all companies that file or are required to file periodic
reports with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”), including Webster.
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. In addition, the federal banking
regulators have adopted generally similar requirements concerning the certification of financial
statements by bank officials.
Beginning in March 2005, home mortgage lenders, including banks, were required under the Home
Mortgage Disclosure Act to make available to the public expanded information regarding the pricing
of home mortgage loans, including the “rate spread” between the interest rate on loans and certain
Treasury securities and other benchmarks. The availability of this information has led to increased
scrutiny of higher-priced loans at all financial institutions to detect illegal discriminatory
practices and to the initiation of a limited number of investigations by federal banking agencies
and the U.S. Department of Justice. Webster has no information that it or its affiliates is the
subject of any investigation.
The Bankruptcy Abuse Prevention and Consumer Protection Act amended the U.S. Bankruptcy Code
effective October 17, 2005. Under the new law, the ability of consumers to discharge their debts in
bankruptcy is limited by a needs-based test, and more debtors than in the past are expected to
enter into repayment programs with their creditors. The law also provides for pre-bankruptcy credit
counseling, limits certain homestead exemptions, limits the discharge of debt incurred for the
purchase of certain luxury items, and extends from 6 years to 8 years the minimum time between
successive bankruptcy discharges.
The Federal Deposit Insurance Reform Act of 2005 was signed into law on February 8, 2006 and gives
the FDIC increased flexibility in assessing premiums on banks and savings associations, including
Webster Bank, to pay for deposit insurance and in managing its deposit insurance reserves. This
replaces the current system, under which the FDIC is prohibited from assessing a premium on the
best risk-rated banks and thrifts as long as the ratio of reserves to insured deposits in the
appropriate insurance fund is more than 1.25%, but is required to assess a significant premium to
quickly restore the reserve ratio when is falls below this mark. The reform legislation provides a
credit to all insured institutions, based on the amount of their insured deposits at year-end 1996,
to offset the premiums that they may be assessed, combines the FDIC’s Bank Insurance Fund and
Savings Association Insurance Fund to form a single Deposit Insurance Fund, increases deposit
insurance to $250,000 for Individual Retirement Accounts, and authorizes inflation-based increases
in deposit insurance on other accounts every 5 years, beginning in 2011. The FDIC also is directed
to conduct studies regarding further deposit insurance reform.
Periodic disclosures by companies in various industries of the loss or theft of computer-based
nonpublic customer information has led to the introduction in Congress of several bills to
establish national standards for the safeguarding of such information and the disclosure of
security breaches. Several committees of both houses of Congress have announced plans to conduct
hearings on data security and related issues.
During 2005, several states’ Attorneys General, including the Attorneys General of the states of
New York and Connecticut, continued investigations and enforcement actions against a number of
insurance brokers. These matters generally involved allegations that the insurance brokers had
undisclosed conflicts of interest and made recommendations to clients concerning the purchase of
insurance that was not the clients’ best interests. Recent settlement agreements entered into
between insurance brokers and some Attorneys General typically included significant penalties and
the imposition of disclosure requirements on the broker. Webster is not aware that it has been the
subject of any such investigation.
During 2005, the National Association of Insurance Commissioners (the “NAIC”) also issued a
proposed Compensation Disclosure Amendment to its 2004 Producer Licensing Model Act. In June 2005,
the first section of this Model Act was accepted and reaffirmed but the second section, which
proposed requiring all insurance producers to make additional disclosures, was dropped from the
final recommended model. While individual state insurance commissioners are not required to accept
and implement any proposed NAIC guidelines, they are encouraged to conform.
11
Bills with varying provisions relating to producer compensation disclosure were also introduced in
a number of states during 2005. Some states introduced bills based on the NAIC model. Other states,
like Connecticut, adopted legislation that required more disclosures than the NAIC model. The
Insurance Producer Compensation Disclosure Act adopted by the State of Connecticut on June 2, 2005,
prohibits an insurance broker who receives compensation from the customer for the initial placement
of insurance from also receiving compensation from the insurance company or other third party for
that placement of insurance unless the broker has provided the prescribed disclosure to the
customer and obtained the customer’s consent. This legislation became effective on October 1, 2005.
Available Information
Webster makes available free of charge on its website (www.wbst.com or www.websteronline.com) its
annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as practicable after it electronically files such material with, or furnishes
it to the Securities and Exchange Commission. Information on Webster’s website is not incorporated
by reference into this report.
Statistical Disclosure
The information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding
Companies” is located on the pages noted below.
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I. |
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Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differentials |
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23, 24 |
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Investment Portfolio |
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30, 57-61 |
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Loan Portfolio |
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30-32, 61,62 |
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Summary of Loan Loss Experience |
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34, 35, 63 |
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Deposits |
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68, 69 |
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Return on Equity and Assets |
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19 |
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Short-Term Borrowings |
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69-71 |
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ITEM 1A. Risk Factors
An investment in Webster’s common stock is subject to various risks inherent in its business. The
material risks and uncertainties that management believes affect the Company are described below.
The risks and uncertainties described below are not the only ones facing the Webster. Additional
risks and uncertainties that management is not aware of, or that it currently deems immaterial, may
also impair business operations.
If any of the following risks actually occur, Webster’s financial condition and results of
operations could be materially and adversely affected. If this were to happen, the value of the
Webster’s common stock could decline significantly.
Webster’s Business Strategy Of Growth Through Acquisitions Could Have An Impact On Its Earnings And
Results Of Operations That May Negatively Impact The Value Of The Company’s Stock
In recent years, Webster has focused, in part, on growth through acquisitions. In fiscal 2005,
Webster acquired two businesses. In February 2005, Webster Bank completed the acquisition of
Eastern Wisconsin Bancshares, Inc., the holding company for State Bank of Howards Grove,
headquartered in Howards Grove, Wisconsin. Webster sold the two branches of the State Bank and
retained the health savings account business which operates as a division of Webster Bank under the
name of HSA Bank. In June 2005, Webster acquired the assets and employees of J. Bush & Co., a New
Haven based investment management firm which operates as a division of Webster’s Wealth and
Investment Advisors group.
From time to time in the ordinary course of business, Webster engages in preliminary discussions
with potential acquisition targets. As of the date of this filing, there are no binding or
definitive agreements, plans, arrangements or understandings for any such acquisitions by Webster.
The consummation of any future acquisitions may dilute stockholder value.
Although our business strategy emphasizes internal expansion combined with acquisitions, there can
be no assurance that, in the future, we will successfully identify suitable acquisition candidates,
complete acquisitions and successfully integrate acquired operations into our existing operations
or expand into new markets. There can be no assurance that acquisitions will not have an adverse
effect upon our operating results while the operations of the acquired businesses are being
integrated into our operations. In addition, once integrated, acquired operations may not achieve
levels of profitability comparable to those achieved by our existing
operations, or otherwise perform as expected. Further, transaction-related expenses may adversely
affect our earnings. These adverse effects on our earnings and results of operations may have a
negative impact on the value of the Webster’s stock.
12
The Company Operates In A Highly Competitive Industry and Market Area
Webster faces substantial competition in all areas of its operations from a variety of different
competitors, many of which are larger and may have more financial resources. Such competitors
primarily include national, regional, and community banks within the various markets in which we
operate. We also face competition from many other types of financial institutions, including,
without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance
companies, factoring companies and other financial intermediaries. The financial services industry
could become even more competitive as a result of legislative, regulatory and technological changes
and continued consolidation. Banks, securities firms and insurance companies can merge under the
umbrella of a financial holding company, which can offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and underwriting) and merchant
banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer
products and services traditionally provided by banks, such as automatic transfer and automatic
payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be able to achieve economies of
scale and, as a result, may offer a broader range of products and services as well as better
pricing for those products and services than the Webster can.
The ability of Webster to compete successfully depends on a number of factors, including, among
other things:
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The ability to develop, maintain and build upon long-term customer relationships based
on top quality service, high ethical standards and safe, sound assets. |
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The ability to expand our market position. |
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The scope, relevance and pricing of products and services offered to meet customer needs and demands. |
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The rate at which Webster introduces new products and services relative to its competitors. |
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Customer satisfaction with Webster’s level of service. |
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Industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken the Company’s competitive
position, which could adversely affect the growth and profitability, which, in turn, could have a
material adverse effect on the Company’s financial condition and results of operations.
Webster’s Business Strategy Of Shifting Its Asset Mix To Reduce The Residential Mortgage Loan
Portfolio And Increase Commercial And Consumer Loans Involves Risks
In recent years, Webster has focused on shifting its asset mix to reduce the residential mortgage
loan portfolio and increase commercial and consumer loans. At the end of 2005, commercial loans
were $4.7 billion, including commercial and industrial loans at $2.9 billion, up 11 percent from a
year ago, and commercial real estate loans at $1.8 billion, up 5 percent. Consumer loans, primarily
home equity loans and lines, increased 5 percent to $2.8 billion at December 31, 2005 compared to
$2.6 billion a year ago. Commercial, commercial real estate and consumer loans comprised 61 percent
of total loans at December 31, 2005 compared to 59 percent a year ago. Commercial and consumer
lending typically results in greater yields than traditional residential mortgage lending; however,
it also entails more credit risk. Generally speaking, the losses on commercial and consumer
portfolios are more volatile and less predictable than residential mortgage lending, and,
consequently, the credit risk associated with such portfolios is higher.
Webster’s Allowance For Credit Losses May Be Insufficient
Webster maintains an allowance for credit losses, which is established through a provision for
credit losses charged to expense, that represents management’s best estimate of probable losses
that could be incurred within the existing portfolio of loans and unfunded credit commitments. The
allowance, in the judgment of management, is necessary to reserve for estimated credit losses and
risks inherent in the loan portfolio and unfunded commitments. The level of the allowance reflects
management’s continuing evaluation of: industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political and regulatory conditions
and unidentified losses inherent in the current loan portfolio. The determination of the
appropriate level of the allowance for credit losses inherently involves a high degree of
subjectivity and requires Webster to make significant estimates of current credit risks and future
trends, all of which may undergo material changes. Changes in economic conditions affecting
borrowers, new information regarding existing loans, identification of additional problem loans and
other factors, both within and outside of Webster’s control, may require an increase in the
allowance for credit losses. In addition, bank regulatory agencies periodically review Webster’s
allowance for credit losses and may require an increase in the provision for credit losses or the
recognition of further loan charge-offs, based on judgments different than those of management. In
addition, if charge-offs in future periods exceed the allowance for credit losses, Webster will
need additional provisions to increase the allowance for credit losses. Any increases in the
allowance for credit losses will result in a decrease in net income and, possibly, capital, and may
have a material adverse effect on the Webster’s financial condition and results of operations. See
the section captioned “Allowance for Credit Losses” in Item 7. of Management’s
Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in the
Report for further discussion related to the process for determining the appropriate level of the
allowance for credit losses.
13
Changes In Interest Rates Could Impact Webster’s Earnings And Results Of Operations Which Could
Negatively Impact The Value Of Webster’s Stock
Webster’s consolidated results of operations depend, to a large extent, on the level of its net
interest income, which is the difference between interest income from interest-earning assets, such
as loans and investments, and interest expense on interest-bearing liabilities, such as deposits
and borrowings. If interest-rate fluctuations cause the cost of interest-bearing liabilities to
increase faster than the yield on interest-earning assets, then net interest income for Webster
will decrease. If the cost of interest-bearing liabilities declines faster than the yield on
interest earning assets, then net interest income for Webster will increase.
Webster measures its interest-rate risk using simulation analyses with particular emphasis on
measuring changes in net income and net economic value in different interest-rate environments. The
simulation analyses incorporate assumptions about balance sheet changes, such as asset and
liability growth, loan and deposit pricing and changes due to the mix and maturity of such assets
and liabilities. Other key assumptions relate to the behavior of interest rates and spreads,
prepayments of loans and the run-off of deposits. These assumptions are inherently uncertain and,
as a result, the simulation analyses cannot precisely estimate the impact that higher or lower rate
environments will have on net interest income. Actual results will differ from simulated results
due to timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and
market conditions, as well as changes in management’s strategies.
While various monitors of interest-rate risk are employed, Webster is unable to predict future
fluctuations in interest rates or the specific impact thereof. The market values of most of our
financial assets are sensitive to fluctuations in market interest rates. Fixed-rate investments,
mortgage-backed securities and mortgage loans typically decline in value as interest rates rise.
Prepayments on mortgage-backed securities may adversely affect the value of such securities and the
interest income generated by them.
Changes in interest rates can also affect the amount of loans that we originate, as well as the
value of our loans and other interest-earning assets and our ability to realize gains on the sale
of such assets and liabilities. Prevailing interest rates also affect the extent to which our
borrowers prepay their loans. When interest rates increase, borrowers are less likely to prepay
their loans, and when interest rates decrease, borrowers are more likely to prepay loans. Funds
generated by prepayments might be reinvested at a less favorable interest rate. Prepayments may
adversely affect the value of mortgage loans, the levels of such assets that we retain in our
portfolio, net interest income, loan servicing income and capitalized servicing rights.
Increases in interest rates might cause depositors to shift funds from accounts that have a
comparatively lower cost, such as regular savings accounts, to accounts with a higher cost, such as
certificates of deposit. If the cost of interest-bearing deposits increases at a rate greater than
the yields on interest-earning assets increase, the net interest income will be negatively
affected. Changes in the asset and liability mix may also affect the net interest income.
Webster Is Subject To Extensive Government Regulation and Supervision
Webster, primarily through Webster Bank and certain non-bank subsidiaries, is subject to extensive
federal and state regulation and supervision. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect Webster’s lending practices, capital structure, investment
practices, dividend policy and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible changes. Changes to
statutes, regulations or regulatory policies, including changes in interpretation or implementation
of statutes, regulations or policies, could affect Webster in substantial and unpredictable ways.
Such changes could subject Webster to additional costs, limit the types of financial services and
products Webster may offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage,
which could have a material adverse effect on Webster’s business, financial condition and results
of operations. While Webster has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See the section captioned
“Supervision and Regulation” in Item 1. of this report for further information.
Webster’s Controls and Procedures May Fail or Be Circumvented
Management regularly reviews and updates Webster’s internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide only reasonable, not
absolute, assurances that the objectives of the system are met. Any failure or
circumvention of the controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on Webster’s business, results of
operations and financial condition.
14
New Lines of Business or New Products and Services May Subject Webster to Additional Risks
From time to time, Webster may implement new lines of business or offer new products and services
within existing lines of business. There are substantial risks and uncertainties associated with
these efforts, particularly in instances where the markets are not fully developed. In developing
and marketing new lines of business and/or new products and services, Webster may invest
significant time and resources. Initial timetables for the introduction and development of new
lines of business and/or new products or services may not be achieved and price and profitability
targets may not prove feasible. External factors, such as compliance with regulations, competitive
alternatives, and shifting market preferences, may also impact the successful implementation of a
new line of business or a new product or service. Furthermore, any new line of business and/or new
product or service could have a significant impact on the effectiveness of Webster’s system of
internal controls. Failure to successfully manage these risks in the development and implementation
of new lines of business or new products or services could have a material adverse effect on
Webster’s business, results of operations and financial condition.
Webster May Not Pay Dividends If It Is Not Able To Receive Dividends From Its Subsidiary, Webster
Bank
Cash dividends from Webster Bank and our liquid assets are Webster’s principal sources of funds for
paying cash dividends on our common stock. Unless we receive dividends from Webster Bank or choose
to use our liquid assets, we may not be able to pay dividends. Webster Bank’s ability to pay
dividends is subject to its ability to earn net income and to meet certain regulatory requirements.
Webster’s main sources of liquidity are dividends from Webster Bank, investment income and net
proceeds from capital offerings and borrowings. The main uses of liquidity are purchases of
investment securities, the payment of dividends to common stockholders, repurchases of Webster’s
common stock, and the payment of interest on borrowings and capital securities. There are certain
regulatory restrictions on the payment of dividends by Webster Bank to Webster. See Note 15 of
Notes to Consolidated Financial Statements contained elsewhere within this Report for further
information on such dividend restrictions.
Webster May Not Be Able To Attract and Retain Skilled People
Webster’s success depends, in large part, on its ability to attract and retain key people.
Competition for the best people in most activities engaged in by Webster can be intense and we may
not be able to hire people or to retain them. The unexpected loss of services of one or more of
Webster’s key personnel could have a material adverse impact on the business because of their
skills, knowledge of the market, years of industry experience and the difficulty of promptly
finding qualified replacement personnel. Webster does not currently have employment agreements with
any of its executive officers.
Webster’s Information Systems May Experience An Interruption Or Breach In Security
Webster relies heavily on communications and information systems to conduct its business. Any
failure, interruption or breach in security of these systems could result in failures or
disruptions in the customer relationship management, general ledger, deposit, loan and other
systems. While Webster has policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of its information systems, there can be no assurance that
any such failures, interruptions or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures, interruptions or security
breaches of information systems could damage Webster’s reputation, result in a loss of customer
business, subject Webster to additional regulatory scrutiny, or expose Webster to civil litigation
and possible financial liability, any of which could have a material adverse effect on Webster’s
financial condition and results of operations.
Webster Continually Encounters Technological Change
The financial services industry is continually undergoing rapid technological change with frequent
introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce
costs. Webster’s future success depends, in part, upon its ability to address the needs of its
customers by using technology to provide products and services that will satisfy customer demands,
as well as to create additional efficiencies in operations. Many of Webster’s competitors have
substantially greater resources to invest in technological improvements. Webster may not be able to
effectively implement new technology-driven products and services or be successful in marketing
these products and services to its customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse impact on Webster’s
business and, in turn, its financial condition and results of operations.
15
Webster Is Subject To Claims and Litigation Pertaining To Fiduciary Responsibility
From time to time, customers make claims and take legal action pertaining to Webster’s performance
of its fiduciary responsibilities. Whether customer claims and legal action related to Webster’s
performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal
actions are not resolved in a manner favorable to Webster they may result in significant financial
liability and/or adversely affect the market perception of Webster and its products and services as
well as impact customer demand for those products and services. Any financial liability or
reputation damage could have a material adverse effect on Webster’s business, which, in turn, could
have a material adverse effect on its financial condition and results of operations.
ITEM 1B. Unresolved Staff Comments
Webster has no unresolved comments from the SEC staff.
ITEM 2. Properties
At December 31, 2005, Webster Bank had 157 banking offices, which includes: 34 banking offices,
including its main office, in New Haven County; 48 banking offices in Hartford County; 21 banking
offices in Fairfield County; 9 banking offices in Litchfield County; 4 banking offices in Middlesex
County; 2 banking offices in Tolland County and 3 banking offices in New London County. It also
maintains 6 banking offices in New York State, 21 in Massachusetts and 9 in Rhode Island. Of the
157 offices, 68 offices are owned and 89 offices are leased. Lease expiration dates range from 1 to
82 years with renewal options of 2 to 35 years. Webster Financial Advisors, headquartered in
Stamford, Connecticut, has offices in Hartford, New Haven, Waterbury and Providence, Rhode Island.
The National Wholesale Lending Group is headquartered in Cheshire, Connecticut and maintains
regional offices in Chicago, Illinois; Phoenix, Arizona; and Seattle, Washington.
Subsidiaries maintain the following offices: Webster Insurance is headquartered in Wallingford,
Connecticut and has offices in East Haven, Vernon, Waterford and Westport, Connecticut and in
Harrison, New York. Webster Investment Services, Inc. is headquartered in Kensington, Connecticut
with sales offices located throughout Webster’s branch network. Center Capital has offices in Blue
Bell, Pennsylvania; Schaumburg, Illinois; Brookfield, Connecticut and is headquartered in
Farmington, Connecticut. WBCC is headquartered in New York, New York with offices in Atlanta,
Georgia; South Easton, Massachusetts; Chicago, Illinois, Baltimore, Maryland; Memphis, Tennessee;
and Hartford, Connecticut. BIC is headquartered in Rockville Centre, New York. Peoples Mortgage
Corporation has offices in South Easton, Andover and Wellesley, Massachusetts; Hamden, Connecticut;
Severna Park, Rockville and Towson, Maryland.
The total net book value of properties and equipment owned at December 31, 2005 was $182.9 million.
See Note 8 of Notes to Consolidated Financial Statements elsewhere in the Report for additional
information.
ITEM 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incident to
the registrant’s business, to which Webster 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 2005, no matters were submitted to a vote of Webster security holders.
16
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information
The common shares of Webster trade on the New York Stock Exchange under the symbol “WBS”.
The following table sets forth for each quarter of 2005 and 2004 the intra-day high and low sales
prices per share of common stock as reported by the NYSE and the cash dividend declared per share.
On February 24, 2006, the closing market price of Webster common stock was $47.45. Webster
increased its quarterly dividend to $0.25 per share in the second quarter of 2005.
Common Stock (per share)
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|
|
| |
|
Market Price |
|
Dividends |
| 2005 |
|
High |
|
Low |
|
Declared |
| |
First quarter |
|
$ |
50.65 |
|
|
$ |
43.52 |
|
|
$ |
0.23 |
|
Second quarter |
|
|
47.84 |
|
|
|
43.10 |
|
|
|
0.25 |
|
Third quarter |
|
|
49.24 |
|
|
|
43.84 |
|
|
|
0.25 |
|
Fourth quarter |
|
|
48.97 |
|
|
|
43.23 |
|
|
|
0.25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Market Price |
|
Dividends |
| 2004 |
|
High |
|
Low |
|
Declared |
| |
First quarter |
|
$ |
52.15 |
|
|
$ |
45.15 |
|
|
$ |
0.21 |
|
Second quarter |
|
|
51.29 |
|
|
|
41.35 |
|
|
|
0.23 |
|
Third quarter |
|
|
50.24 |
|
|
|
45.22 |
|
|
|
0.23 |
|
Fourth quarter |
|
|
51.56 |
|
|
|
46.45 |
|
|
|
0.23 |
|
Holders
Webster had 10,604 holders of record of common stock and 53,203,481 shares outstanding on February
24, 2006. The number of shareholders of record was determined by American Stock Transfer and Trust
Company.
Dividends
The payment of dividends 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. Payment of dividends
to Webster from Webster Bank is subject to certain regulatory and other restrictions. Under OCC
regulations, Webster 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 such 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. At December 31, 2005, Webster Bank was in compliance with
all applicable minimum capital requirements and had the ability to pay dividends of $186.8 million
to Webster without the prior approval of the OCC.
If the capital of Webster is 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 the
Report for additional information on dividends.
17
Recent sale of unregistered securities; use of proceeds from registered securities
No unregistered securities were sold by Webster within the last three years. Registered securities
were exchanged either as part of an employee and director stock compensation plan or as
consideration for acquired entities.
Purchases of equity securities by the issuer and affiliated purchases
The following table provides information with respect to any purchase made by or on behalf of
Webster or any “affiliated purchaser”, as defined by Section 240.10b-18(a)(3) of the Securities
Exchange Act of 1934, of shares of Webster common stock.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
| |
|
|
|
|
|
|
|
|
|
Purchased of Total |
|
Maximum Number of |
| |
|
|
|
|
|
|
|
|
|
That were Part of |
|
Shares That May Yet Be |
| |
|
Total Number of |
|
Average Price |
|
Publicly Announced |
|
Purchased Under the |
| Period |
|
Shares Purchased |
|
Paid Per Share |
|
Plans or Programs |
|
Plans or Programs |
| |
October 1-31, 2005 |
|
|
139,673 |
|
|
$ |
45.66 |
|
|
|
139,673 |
|
|
|
2,580,344 |
|
November 1-30, 2005 |
|
|
186,100 |
|
|
|
45.81 |
|
|
|
186,100 |
|
|
|
2,394,244 |
|
December 1-31, 2005 |
|
|
96,948 |
|
|
|
47.98 |
|
|
|
96,948 |
|
|
|
2,297,296 |
|
| |
Total |
|
|
422,721 |
|
|
$ |
46.26 |
|
|
|
422,721 |
|
|
|
2,297,296 |
|
Other Events
The annual meeting of shareholders will be held on Thursday, April 20, 2006 at the Courtyard by
Marriott, 63 Grand Street, Waterbury, Connecticut 06702.
18
ITEM 6. Selected Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At or for year ended December 31, |
| (In thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
STATEMENT OF CONDITION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
17,836,562 |
|
|
|
17,020,597 |
|
|
|
14,568,690 |
|
|
|
13,468,004 |
|
|
|
11,857,382 |
|
Loans, net |
|
|
12,138,800 |
|
|
|
11,562,663 |
|
|
|
9,091,135 |
|
|
|
7,795,835 |
|
|
|
6,725,993 |
|
Securities |
|
|
3,700,585 |
|
|
|
3,724,019 |
|
|
|
4,302,181 |
|
|
|
4,124,997 |
|
|
|
3,999,133 |
|
Goodwill and intangible assets |
|
|
698,570 |
|
|
|
694,165 |
|
|
|
330,929 |
|
|
|
297,359 |
|
|
|
320,051 |
|
Deposits |
|
|
11,631,145 |
|
|
|
10,571,288 |
|
|
|
8,372,135 |
|
|
|
7,606,122 |
|
|
|
7,066,471 |
|
FHLB advances and other borrowings |
|
|
4,377,297 |
|
|
|
4,698,833 |
|
|
|
4,936,393 |
|
|
|
4,455,669 |
|
|
|
3,533,364 |
|
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trusts (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121,255 |
|
|
|
150,000 |
|
Preferred stock of subsidiary corporation |
|
|
9,577 |
|
|
|
9,577 |
|
|
|
9,577 |
|
|
|
9,577 |
|
|
|
9,577 |
|
Shareholders’ equity |
|
|
1,647,226 |
|
|
|
1,543,974 |
|
|
|
1,152,895 |
|
|
|
1,035,458 |
|
|
|
1,006,467 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT OF INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
871,847 |
|
|
|
732,108 |
|
|
|
658,718 |
|
|
|
692,034 |
|
|
|
757,235 |
|
Interest expense |
|
|
354,506 |
|
|
|
263,947 |
|
|
|
245,199 |
|
|
|
286,306 |
|
|
|
389,756 |
|
| |
Net interest income |
|
|
517,341 |
|
|
|
468,161 |
|
|
|
413,519 |
|
|
|
405,728 |
|
|
|
367,479 |
|
Provision for credit losses |
|
|
9,500 |
|
|
|
18,000 |
|
|
|
25,000 |
|
|
|
29,000 |
|
|
|
14,400 |
|
Other noninterest income |
|
|
217,252 |
|
|
|
205,394 |
|
|
|
213,909 |
|
|
|
162,195 |
|
|
|
151,477 |
|
Gain on sale of securities, net |
|
|
3,633 |
|
|
|
14,313 |
|
|
|
18,574 |
|
|
|
23,377 |
|
|
|
10,621 |
|
Noninterest expenses |
|
|
455,570 |
|
|
|
447,137 |
|
|
|
377,982 |
|
|
|
328,323 |
|
|
|
310,737 |
|
| |
Income before income taxes, and cumulative effect
of change in accounting method |
|
|
273,156 |
|
|
|
222,731 |
|
|
|
243,020 |
|
|
|
233,977 |
|
|
|
204,440 |
|
Income taxes |
|
|
87,301 |
|
|
|
68,898 |
|
|
|
79,772 |
|
|
|
73,965 |
|
|
|
68,834 |
|
| |
Income before cumulative effect of change in
accounting method |
|
|
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
|
|
160,012 |
|
|
|
135,606 |
|
Cumulative effect of change in accounting method
(net of taxes) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,280 |
) |
|
|
(2,418 |
) |
| |
Net income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
|
|
152,732 |
|
|
|
133,188 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
3.47 |
|
|
|
3.05 |
|
|
|
3.58 |
|
|
|
3.21 |
|
|
|
2.71 |
|
Net income per share — diluted |
|
|
3.43 |
|
|
|
3.00 |
|
|
|
3.52 |
|
|
|
3.16 |
|
|
|
2.68 |
|
Dividends declared per common share |
|
|
0.98 |
|
|
|
0.90 |
|
|
|
0.82 |
|
|
|
0.74 |
|
|
|
0.67 |
|
Book value per common share |
|
|
30.70 |
|
|
|
28.79 |
|
|
|
24.91 |
|
|
|
22.69 |
|
|
|
20.48 |
|
Tangible book value per common share |
|
|
18.03 |
|
|
|
16.30 |
|
|
|
18.18 |
|
|
|
16.64 |
|
|
|
14.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
54,236 |
|
|
|
51,352 |
|
|
|
46,362 |
|
|
|
48,392 |
|
|
|
49,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Performance Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.06 |
% |
|
|
0.94 |
|
|
|
1.15 |
|
|
|
1.22 |
|
|
|
1.15 |
|
Return on average shareholders’ equity |
|
|
11.52 |
|
|
|
11.14 |
|
|
|
15.16 |
|
|
|
14.78 |
|
|
|
13.88 |
|
Net interest margin |
|
|
3.29 |
|
|
|
3.11 |
|
|
|
3.14 |
|
|
|
3.50 |
|
|
|
3.48 |
|
Interest-rate spread |
|
|
3.25 |
|
|
|
3.09 |
|
|
|
3.10 |
|
|
|
3.43 |
|
|
|
3.38 |
|
Noninterest income as a percentage of total revenue |
|
|
29.92 |
|
|
|
31.94 |
|
|
|
35.99 |
|
|
|
31.38 |
|
|
|
30.61 |
|
Average shareholders’ equity to average assets |
|
|
9.23 |
|
|
|
8.40 |
|
|
|
7.58 |
|
|
|
8.24 |
|
|
|
8.32 |
|
Dividend payout ratio |
|
|
28.57 |
|
|
|
30.00 |
|
|
|
23.30 |
|
|
|
23.42 |
|
|
|
25.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses/total loans |
|
|
1.27 |
% |
|
|
1.28 |
|
|
|
1.32 |
|
|
|
1.48 |
|
|
|
1.43 |
|
Allowance for loan losses/total loans |
|
|
1.19 |
|
|
|
1.28 |
|
|
|
1.32 |
|
|
|
1.48 |
|
|
|
1.43 |
|
Net charge-offs/average loans |
|
|
0.03 |
|
|
|
0.10 |
|
|
|
0.25 |
|
|
|
0.18 |
|
|
|
0.14 |
|
Nonperforming loans/total loans |
|
|
0.55 |
|
|
|
0.31 |
|
|
|
0.41 |
|
|
|
0.55 |
|
|
|
0.84 |
|
Nonperforming assets/total assets |
|
|
0.41 |
|
|
|
0.23 |
|
|
|
0.29 |
|
|
|
0.37 |
|
|
|
0.53 |
|
|
|
|
| (a) |
|
Webster adopted FIN 46R on December 31, 2003, and in accordance with its provisions,
deconsolidated the capital trusts and reported the associated liabilities as other long-term debt.
Commencing in 2004, the costs have been reclassified from noninterest expenses to interest expense. |
19
Selected Quarterly Consolidated Financial Information
Selected quarterly data for 2005 and 2004 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
| (In thousands, except per share data) |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
| |
2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
202,418 |
|
|
|
212,615 |
|
|
|
223,141 |
|
|
|
233,673 |
|
Interest expense |
|
|
74,186 |
|
|
|
82,780 |
|
|
|
93,529 |
|
|
|
104,011 |
|
| |
Net interest income |
|
|
128,232 |
|
|
|
129,835 |
|
|
|
129,612 |
|
|
|
129,662 |
|
Provision for credit losses |
|
|
3,500 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
Other noninterest income |
|
|
52,272 |
|
|
|
52,938 |
|
|
|
54,839 |
|
|
|
57,203 |
|
Gain on sale of securities, net |
|
|
756 |
|
|
|
710 |
|
|
|
1,141 |
|
|
|
1,026 |
|
Noninterest expenses |
|
|
107,774 |
|
|
|
113,505 |
|
|
|
114,932 |
|
|
|
119,359 |
|
| |
Income before income taxes |
|
|
69,986 |
|
|
|
67,978 |
|
|
|
68,660 |
|
|
|
66,532 |
|
Income taxes |
|
|
22,491 |
|
|
|
21,720 |
|
|
|
22,058 |
|
|
|
21,032 |
|
| |
Net income |
|
$ |
47,495 |
|
|
|
46,258 |
|
|
|
46,602 |
|
|
|
45,500 |
|
| |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.89 |
|
|
|
.86 |
|
|
|
.87 |
|
|
|
.85 |
|
| |
Diluted |
|
|
.88 |
|
|
|
.85 |
|
|
|
.86 |
|
|
|
.84 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
164,269 |
|
|
|
176,385 |
|
|
|
192,752 |
|
|
|
198,702 |
|
Interest expense |
|
|
58,463 |
|
|
|
62,918 |
|
|
|
71,464 |
|
|
|
71,102 |
|
| |
Net interest income |
|
|
105,806 |
|
|
|
113,467 |
|
|
|
121,288 |
|
|
|
127,600 |
|
Provision for credit losses |
|
|
5,000 |
|
|
|
5,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
Other noninterest income |
|
|
49,223 |
|
|
|
51,462 |
|
|
|
53,257 |
|
|
|
51,452 |
|
Gain (loss) on sale of securities, net |
|
|
5,500 |
|
|
|
5,616 |
|
|
|
5,843 |
|
|
|
(2,646 |
) |
Noninterest expenses |
|
|
92,141 |
|
|
|
97,179 |
|
|
|
103,769 |
|
|
|
154,048 |
|
| |
Income before income taxes |
|
|
63,388 |
|
|
|
68,366 |
|
|
|
72,619 |
|
|
|
18,358 |
|
Income taxes |
|
|
21,065 |
|
|
|
22,523 |
|
|
|
23,258 |
|
|
|
2,052 |
|
| |
Net income |
|
$ |
42,323 |
|
|
|
45,843 |
|
|
|
49,361 |
|
|
|
16,306 |
|
| |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.92 |
|
|
|
.92 |
|
|
|
.93 |
|
|
|
.31 |
|
| |
Diluted |
|
|
.90 |
|
|
|
.91 |
|
|
|
.92 |
|
|
|
.30 |
|
| |
The fourth quarter of 2004 was impacted by the $750 million balance sheet de-leveraging
transaction. Loss on sale of securities includes $4.0 million of losses related to the
de-leveraging and non-interest expenses include $45.8 million of debt prepayment expenses. As a
result, net income was reduced by $32.4 million, or $0.63 per diluted common share, after taxes.
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 included elsewhere in the Report
(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. Management believes that our most critical accounting policies, which
involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Credit Losses
Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment.
The allowance for credit losses, which comprises the allowance for loan losses and the reserve for
unfunded credit commitments, provides for probable losses based upon evaluations of known and
inherent risks in the loan portfolio and in unfunded credit commitments. To assess the adequacy of
the allowance, management considers historical information 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
credit losses and by recoveries of loans previously charged-off and reduced by loans charged-off.
For a full discussion of the methodology of assessing the adequacy of the allowance for credit
losses, see the “Asset Quality” section elsewhere within this Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Valuation of Goodwill/Intangible Assets and Analysis for Impairment
Webster, in part, has increased its market share through acquisitions, as well as from the purchase
of other financial institutions’ branches and selected assets (not the entire institution). These
acquisitions have been accounted for under the purchase method which requires that assets acquired
and liabilities assumed be recorded 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 revenue, price/equity and price/earnings
ratios.
Income Taxes
Certain aspects of income tax accounting require management judgment, including determining the
expected realization of deferred tax assets for inclusion in the Consolidated Statements of
Condition. Such judgments are subjective and involve estimates and assumptions about matters that
are inherently uncertain. Should actual factors and conditions differ materially from those used by
management, the actual realization of the net deferred tax assets could differ materially from the
amounts recorded in the financial statements.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in
future income tax returns, for which a financial statements tax benefit has already been
recognized. The realization of the net deferred tax asset generally depends upon future levels of
taxable income and the existence of prior years’ taxable income, to which “carry back” refund
claims could be made. Valuation allowances are established against those deferred tax assets
determined not likely to be realized (a full valuation allowance has been established for the
Connecticut, Massachusetts and Rhode Island portion of the net deferred tax assets).
Deferred tax liabilities represent items that will require a future tax payment. They generally
represent tax expense recognized in our financial statements for which payment has been deferred,
or a deduction taken on our tax return but not yet recognized as an expense in our financial
statements. Deferred tax liabilities are also recognized for certain “non-cash” items such as
certain acquired intangible assets subject to amortization which results in a future financial
statement expenses that are not deductible for tax purposes.
For more information about income taxes, see Note 9 of Notes to Consolidated Financial Statements
included elsewhere within this Report.
Pension and Other Postretirement Benefits
The determination of the obligation and expense for pension and other postretirement benefits is
dependent upon certain assumptions used 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
postretirement obligations and expense. See Note 18 of Notes to Consolidated Financial Statements
for further information.
21
Results of Operations
Summary
Net income was $185.9 million or $3.43 per diluted share in 2005, compared with $153.8 million or
$3.00 per diluted share in the prior year, which included a $32.4 million after tax, or $0.63 per
share, charge in conjunction with a balance sheet de-leveraging program.
Results for 2005 reflect our commitment to core operating principles which focuses on growing loans
and deposits, while reducing our exposure to rising interest rates by paying down borrowings and
increasing tangible capital. The 2005 net interest margin improvement of 18 basis points to 3.29%
from 3.11% in the prior year, was due to the benefit of a balance sheet de-leveraging program in
the fourth quarter of 2004, and the growth in earning assets in 2005. Average earning assets
increased $778.3 million or 5.1% with all the growth occurring in higher yielding loans and loans
held for sale.
Noninterest income increased by $1.2 million, or 1.0%, in 2005 due to increases in deposit service
fees of $8.2 million, or 10.6%, loan related fees of $4.7 million, or 16.3%, and wealth and
investment services of $0.9 million, or 4.3%. These increases were partially offset by a reduction
of $10.7 million in gains on sales of securities. The reduced level of security gains is consistent
with Webster’s emphasis on achieving high quality earnings.
Noninterest expenses increased $8.4 million to $455.6 million from a year ago. Adjusting for $45.8
million of debt prepayment expenses incurred in connection with the de-leveraging in 2004, expenses
increased $54.2 million or 13.5%. The increase reflects the impact of acquisitions, investments in
customer contact personnel, other employee-related costs and investments in technology to support
the new core systems. Expenses related to Webster’s core conversion equated to $0.10 per share for
the full year 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At or for the years ended December 31, |
| (Dollars in thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
| |
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
517,341 |
|
|
|
468,161 |
|
|
|
413,519 |
|
Total noninterest income |
|
|
220,885 |
|
|
|
219,707 |
|
|
|
232,483 |
|
Total noninterest expenses |
|
|
455,570 |
|
|
|
447,137 |
|
|
|
377,982 |
|
Net income |
|
|
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (diluted) |
|
$ |
3.43 |
|
|
|
3.00 |
|
|
|
3.52 |
|
Dividends declared |
|
|
0.98 |
|
|
|
0.90 |
|
|
|
0.82 |
|
Book value |
|
|
30.70 |
|
|
|
28.79 |
|
|
|
24.91 |
|
Tangible book value |
|
|
18.03 |
|
|
|
16.30 |
|
|
|
18.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares (average) |
|
|
54,236 |
|
|
|
51,352 |
|
|
|
46,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
1.06 |
% |
|
|
0.94 |
|
|
|
1.15 |
|
Return on average shareholders’ equity |
|
|
11.52 |
|
|
|
11.14 |
|
|
|
15.16 |
|
Net interest margin |
|
|
3.29 |
|
|
|
3.11 |
|
|
|
3.14 |
|
Efficiency ratio (a) |
|
|
61.71 |
|
|
|
65.00 |
|
|
|
58.51 |
|
Tangible capital ratio |
|
|
5.54 |
|
|
|
5.21 |
|
|
|
5.77 |
|
| |
|
|
|
| (a) |
|
Total noninterest expense as a percentage of net interest income plus total noninterest
income. |
22
Table 1: Three-year average balance sheet and net interest margin.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
Average |
| (Dollars in thousands) |
|
Balance |
|
Interest |
|
Yields |
|
Balance |
|
Interest |
|
Yields |
|
Balance |
|
Interest |
|
Yields |
| |
Loans (a) |
|
$ |
11,930,776 |
|
|
|
689,048 |
(b) |
|
|
5.78 |
% |
|
$ |
10,719,446 |
|
|
|
547,308 |
(b) |
|
|
5.11 |
% |
|
$ |
8,756,883 |
|
|
|
460,677 |
(b) |
|
|
5.26 |
% |
Loans held for sale |
|
|
232,695 |
|
|
|
12,945 |
|
|
|
5.56 |
|
|
|
129,945 |
|
|
|
6,682 |
|
|
|
5.14 |
|
|
|
292,514 |
|
|
|
15,409 |
|
|
|
5.27 |
|
Securities |
|
|
3,806,289 |
|
|
|
178,106 |
|
|
|
4.68 |
(c) |
|
|
4,331,385 |
|
|
|
183,028 |
|
|
|
4.23 |
(c) |
|
|
4,177,490 |
|
|
|
184,007 |
|
|
|
4.45 |
(c) |
Short-term investments |
|
|
19,982 |
|
|
|
537 |
|
|
|
2.69 |
|
|
|
30,651 |
|
|
|
390 |
|
|
|
1.27 |
|
|
|
25,588 |
|
|
|
250 |
|
|
|
0.98 |
|
| |
Total interest-earning assets |
|
|
15,989,742 |
|
|
|
880,636 |
|
|
|
5.50 |
(c) |
|
|
15,211,427 |
|
|
|
737,408 |
|
|
|
4.85 |
(c) |
|
|
13,252,475 |
|
|
|
660,343 |
|
|
|
5.00 |
(c) |
Other assets |
|
|
1,484,723 |
|
|
|
|
|
|
|
|
|
|
|
1,234,124 |
|
|
|
|
|
|
|
|
|
|
|
951,575 |
|
|
|
|
|
|
|
|
|
| |
Total assets |
|
$ |
17,474,465 |
|
|
|
|
|
|
|
|
|
|
$ |
16,445,551 |
|
|
|
|
|
|
|
|
|
|
$ |
14,204,050 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
1,449,596 |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,255,897 |
|
|
|
— |
|
|
|
— |
|
|
$ |
1,010,952 |
|
|
|
— |
|
|
|
— |
|
Savings, NOW, money market
deposit accounts |
|
|
5,633,897 |
|
|
|
66,226 |
|
|
|
1.18 |
% |
|
|
5,286,637 |
|
|
|
47,683 |
|
|
|
0.90 |
% |
|
|
4,282,536 |
|
|
|
41,519 |
|
|
|
0.97 |
% |
Certificates of deposits |
|
|
4,215,801 |
|
|
|
122,211 |
|
|
|
2.90 |
|
|
|
3,162,939 |
|
|
|
72,923 |
|
|
|
2.31 |
|
|
|
2,677,863 |
|
|
|
69,792 |
|
|
|
2.61 |
|
| |
Total deposits |
|
|
11,299,294 |
|
|
|
188,437 |
|
|
|
1.67 |
|
|
|
9,705,473 |
|
|
|
120,606 |
|
|
|
1.24 |
|
|
|
7,971,351 |
|
|
|
111,311 |
|
|
|
1.40 |
|
FHLB advances |
|
|
2,256,216 |
|
|
|
78,623 |
|
|
|
3.48 |
|
|
|
2,774,287 |
|
|
|
82,092 |
|
|
|
2.96 |
|
|
|
2,395,814 |
|
|
|
88,845 |
|
|
|
3.71 |
|
Fed funds and repurchase
agreements |
|
|
1,520,086 |
|
|
|
43,842 |
|
|
|
2.88 |
|
|
|
1,828,266 |
|
|
|
24,342 |
|
|
|
1.33 |
|
|
|
2,218,799 |
|
|
|
26,108 |
|
|
|
1.18 |
|
Other long-term debt |
|
|
673,562 |
|
|
|
43,604 |
|
|
|
6.47 |
|
|
|
652,975 |
|
|
|
36,907 |
|
|
|
5.65 |
|
|
|
316,736 |
|
|
|
18,935 |
|
|
|
5.98 |
|
| |
Total interest-bearing
liabilities |
|
|
15,749,158 |
|
|
|
354,506 |
|
|
|
2.25 |
|
|
|
14,961,001 |
|
|
|
263,947 |
|
|
|
1.76 |
|
|
|
12,902,700 |
|
|
|
245,199 |
|
|
|
1.90 |
|
Other liabilities |
|
|
102,732 |
|
|
|
|
|
|
|
|
|
|
|
94,145 |
|
|
|
|
|
|
|
|
|
|
|
79,491 |
|
|
|
|
|
|
|
|
|
Capital securities and preferred
stock of subsidiary corporation |
|
|
9,577 |
|
|
|
|
|
|
|
|
|
|
|
9,577 |
|
|
|
|
|
|
|
|
|
|
|
145,227 |
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
1,612,998 |
|
|
|
|
|
|
|
|
|
|
|
1,380,828 |
|
|
|
|
|
|
|
|
|
|
|
1,076,632 |
|
|
|
|
|
|
|
|
|
| |
Total liabilities and
shareholders’ equity |
|
$ |
17,474,465 |
|
|
|
526,130 |
|
|
|
|
|
|
$ |
16,445,551 |
|
|
|
473,461 |
|
|
|
|
|
|
$ |
14,204,050 |
|
|
|
415,144 |
|
|
|
|
|
| |
Less: fully taxable-equivalent
adjustment |
|
|
|
|
|
|
(8,789 |
) |
|
|
|
|
|
|
|
|
|
|
(5,300 |
) |
|
|
|
|
|
|
|
|
|
|
(1,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
517,341 |
|
|
|
|
|
|
|
|
|
|
|
468,161 |
|
|
|
|
|
|
|
|
|
|
|
413,519 |
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.25% |
(c) |
|
|
|
|
|
|
|
|
|
|
3.09% |
(c) |
|
|
|
|
|
|
|
|
|
|
3.10% |
(c) |
| |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
3.29% |
(c) |
|
|
|
|
|
|
|
|
|
|
3.11% |
(c) |
|
|
|
|
|
|
|
|
|
|
3.14% |
(c) |
| |
|
|
|
| (a) |
|
Interest on nonaccrual loans has been included only to the extent reflected in the
Consolidated Statements of Income. Nonaccrual loans are included in the average balance
outstanding. |
| |
| (b) |
|
Includes amortization of net deferred loan costs (net of fees) and premiums (net of
discounts) of: $14.0 million, $14.2 million and $3.4 million in 2005, 2004 and 2003,
respectively. |
| |
| (c) |
|
Unrealized gains (losses) on available-for-sale securities are excluded from the average
yield calculations. Unrealized net gains (losses) averaged $(24.1) million, $0.2 million and
$46.4 million for 2005, 2004 and 2003, respectively. |
23
Net Interest Income
Net interest income, which is the difference between interest earned on loans, investments and
other interest earning assets and interest paid on deposits and borrowings, totaled $517.3 million
in 2005, an increase of $49.2 million or 10.5% over the prior year. Net interest income is affected
by changes in interest rates, by loan and deposit pricing strategies and competitive conditions,
the volume and mix of interest-earning assets and interest bearing liabilities, and the level of
non-performing assets.
Net interest income also can be understood in terms of the impact of changing rates and changing
volumes. The table below describes the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have impacted interest income
and interest expense during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in rates (changes in rates multiplied by prior
volume), (ii) changes attributable to changes in volume (changes in volume multiplied by prior
rate) and (iii) the net change. The change attributable to the combined impact of volume and rate
has been allocated proportionately to the change due to volume and the change due to rate.
Table 2: Net interest income – rate/volume analysis.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
Years ended December 31, |
| |
|
2005 v. 2004 |
|
2004 v. 2003 |
| |
|
Increase (Decrease) due to |
|
Increase (Decrease) due to |
| (In thousands) |
|
Rate |
|
Volume |
|
Total |
|
Rate |
|
Volume |
|
Total |
| |
Interest on interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
76,125 |
|
|
|
65,608 |
|
|
|
141,733 |
|
|
$ |
(13,526 |
) |
|
|
100,157 |
|
|
|
86,631 |
|
Loans held for sale |
|
|
587 |
|
|
|
5,676 |
|
|
|
6,263 |
|
|
|
(371 |
) |
|
|
(8,356 |
) |
|
|
(8,727 |
) |
Securities and short-term investments |
|
|
16,915 |
|
|
|
(25,172 |
) |
|
|
(8,257 |
) |
|
|
(12,028 |
) |
|
|
7,514 |
|
|
|
(4,514 |
) |
| |
Total |
|
|
93,627 |
|
|
|
46,112 |
|
|
|
139,739 |
|
|
|
(25,925 |
) |
|
|
99,315 |
|
|
|
73,390 |
|
| |
Interest on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
46,032 |
|
|
|
21,799 |
|
|
|
67,831 |
|
|
|
(13,522 |
) |
|
|
22,817 |
|
|
|
9,295 |
|
FHLB advances and other borrowings |
|
|
47,034 |
|
|
|
(24,306 |
) |
|
|
22,728 |
|
|
|
501 |
|
|
|
8,952 |
|
|
|
9,453 |
|
| |
Total |
|
|
93,066 |
|
|
|
(2,507 |
) |
|
|
90,559 |
|
|
|
(13,021 |
) |
|
|
31,769 |
|
|
|
18,748 |
|
| |
Net change in net interest income |
|
$ |
561 |
|
|
|
48,619 |
|
|
|
49,180 |
|
|
$ |
(12,904 |
) |
|
|
67,546 |
|
|
|
54,642 |
|
| |
The Federal Reserve Board influences the general market rates of interest, including the
deposit and loan rates offered by many financial institutions. The loan portfolio is significantly
affected by changes in the prime interest rate. The prime interest rate, which is the rate offered
on loans to borrowers with strong credit ratings, began 2003 at 4.25%, decreased 25 basis points at
the end of the second quarter and ended the year at 4.00%. During 2004, the prime rate increased 25
basis points at the end of the second quarter, 50 basis points during the third quarter and 50
basis points during the fourth quarter and ended the year at 5.25%. During 2005, the prime interest
rate increased 50 basis points in each of the four quarters to end the year at 7.25%. The federal
funds rate, which is the cost of immediately available overnight funds, fluctuated in a similar
manner. It began 2003 at 1.25%, decreased 25 basis points at the end of the second quarter and
ended the year at 1.00%. During 2004, the federal funds rate increased 25 basis points at the end
of the second quarter, 50 basis points during the third quarter and 50 basis points during the
fourth quarter to end the year at 2.25%. During 2005, the federal funds rate increased 50 basis
points in each of the four quarters to end the year at 4.25%.
Net interest income totaled $517.3 million for the year ended December 31, 2005, an increase of
$49.2 million, or 10.5%, over the prior year. The increase reflects the growth in average earning
assets, primarily in the loan portfolio, up $1.2 billion or 11.3% over 2004, partially offset by a
reduction in securities and short-term investments of $535.8 million from 2004. Additionally, the
increasing interest rate environment during much of 2005 contributed to the increase in net
interest income. See Table 2 above for further information.
The net interest margin for 2005 was 3.29%, up 18 basis points from the prior year. The improvement
is due to the growth in higher-yielding loans funded by deposits and the de-leveraging in the 2004
forth quarter. Despite the year-over-year increase, the margin declined in the third and fourth
quarters of 2005 due to the flattening of the yield curve.
Interest Income
Total interest income increased $139.7 million, or 19.1%, to $871.8 million for the year 2005 as
compared to $732.1 million for the prior year. The rising interest rate environment during 2005 was
responsible for most of the increase in interest income. Also contributing was the increase in the
volume of earning assets, with most of that growth occurring in the loan portfolio.
24
The yield earned on earning assets increased during 2005 to 5.50% from 4.85% as a result of a
higher interest rate environment when compared to the prior year. The yield on loans for the year
was 5.78%, up 67 basis points, while the yield on securities was 4.68%, a 45 basis point
improvement over 2004.
Earning assets increased during 2005, averaging $16.0 billion, up from $15.2 billion in 2004.
Strong growth occurred in the loan portfolio, particularly commercial loans and commercial real
estate loans. In total, the average loan portfolio increased by 11.3% over the prior year.
Securities decreased during the year as a result of the de-leveraging in the fourth quarter of 2004
when securities of $750 million were sold to reduce borrowings.
Interest Expense
Interest expense increased $90.6 million, or 34.3%, to $354.5 million as compared to $263.9 million
for the previous year. The increase was entirely due to the higher interest rate environment, while
the volume increase in deposits was offset by a decline in borrowings.
The cost of interest bearing liabilities increased 49 basis points to 2.25% from 1.76% in 2004.
Deposit costs were 1.67% for the year, up 43 basis points from the prior year, as higher interest
rates were paid on deposit accounts. The cost of FHLB advances, Fed funds and repurchase agreements
and other borrowings, all rose due to higher wholesale funding rates.
Total interest bearing liabilities increased during the year by $788.2 million or 5.3% to $15.7
billion. Total deposits averaged $11.3 billion for the year, an increase of $1.6 billion, or 16.4%.
Since the growth in deposits exceeded the increase in earning assets, the excess was used to reduce
borrowings. As a result, total borrowings declined $805.7 million. Also contributing to the decline
in borrowings was the de-leveraging in the fourth quarter of 2004.
Provision for Credit Losses
The provision for credit losses declined to $9.5 million for the year ended December 31, 2005 from
$18.0 million a year earlier, a decrease of 47%. The decrease in the provision is primarily a
result of a reduced level of net-charge offs and continued strong asset quality. During 2005, net
charge-offs were $3.2 million compared to $10.3 million in 2004, a decrease of 69%. See Tables 10
through 15 for information on the allowance for credit losses, net charge-offs and nonperforming
assets.
Management performs a quarterly review of the loan portfolio and unfunded commitments to determine
the adequacy of the allowance for credit losses. At December 31, 2005, the allowance for credit
losses totaled $155.6 million or 1.27% of total loans compared to $150.1 million or 1.28% at the
prior year end. See the “Allowance for Credit Losses Methodology” section later in this
Management’s Discussion and Analysis for further details.
Noninterest Income
Table 3: Noninterest income comparison of 2005 to 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
Increase (decrease) |
| (In thousands) |
|
2005 |
|
2004 |
|
Amount |
|
% |
| |
Deposit service fees |
|
$ |
85,967 |
|
|
|
77,743 |
|
|
|
8,224 |
|
|
|
10.6 |
% |
Insurance revenue |
|
|
44,015 |
|
|
|
43,506 |
|
|
|
509 |
|
|
|
1.2 |
|
Loan related fees |
|
|
33,232 |
|
|
|
28,574 |
|
|
|
4,658 |
|
|
|
16.3 |
|
Wealth and investment services |
|
|
23,151 |
|
|
|
22,207 |
|
|
|
944 |
|
|
|
4.3 |
|
Gain on sale of loans and loan servicing, net |
|
|
11,573 |
|
|
|
13,305 |
|
|
|
(1,732 |
) |
|
|
(13.0 |
) |
Increase in cash surrender value of life insurance |
|
|
9,241 |
|
|
|
8,835 |
|
|
|
406 |
|
|
|
4.6 |
|
Financial advisory services |
|
|
— |
|
|
|
3,808 |
|
|
|
(3,808 |
) |
|
|
(100.0 |
) |
Other income |
|
|
10,073 |
|
|
|
7,416 |
|
|
|
2,657 |
|
|
|
35.8 |
|
| |
Noninterest revenues |
|
|
217,252 |
|
|
|
205,394 |
|
|
|
11,858 |
|
|
|
5.8 |
|
Gain on sale of securities, net |
|
|
3,633 |
|
|
|
14,313 |
|
|
|
(10,680 |
) |
|
|
(74.6 |
) |
| |
Total noninterest income |
|
$ |
220,885 |
|
|
|
219,707 |
|
|
|
1,178 |
|
|
|
0.5 |
% |
| |
The $1.2 million increase in noninterest income over the prior year is the result of increases
in deposit service fees of $8.2 million, loan fees of $4.7 million and other income of $2.7
million, offset by a decrease in gain on sale of securities of $10.7 million and a $3.8 million
loss of revenue from financial advisory services due to the sale of Duff and Phelps in the first
quarter of 2004. See below for further discussion on various components of non-interest income.
Deposit Service Fees. Deposit servicing fees increased $8.2 million or 10.6% compared to 2004. The
increase was primarily due to increases in insufficient funds fees of $6.0 million, check card fees
of $2.9 million and account service fees from HSA of $2.8 million. These increases were partially
offset by a decrease in account analysis fees of $2.1 million.
25
Insurance Revenue. Insurance revenue increased $0.5 million or 1.2%. The competitive environment
for pricing and business development impacted the growth of revenues during the year. Also
affecting revenues was the sale of the Pension and 401k Third Party Administration business in July
2005.
Loan Related Fees. Loan related fees increased by $4.7 million or 16.3% primarily due to higher
loan prepayment penalties of $1.8 million, commercial loan commitment fees of $1.2 million,
commercial late charges of $0.5 million and lower amortization of mortgage servicing rights of
$1.0 million due to lower prepayments.
Other Income. Other income increased in 2005 by $2.7 million or 35.8% primarily due to the
recognition of realized and unrealized gains of $2.5 million related to Webster’s direct
investments.
Noninterest Expenses
Table 4: Noninterest expenses comparison of 2005 to 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
Increase (decrease) |
| (In thousands) |
|
2005 |
|
2004 |
|
Amount |
|
% |
| |
Compensation and benefits |
|
$ |
241,469 |
|
|
|
219,320 |
|
|
|
22,149 |
|
|
|
10.1 |
% |
Occupancy |
|
|
43,292 |
|
|
|
35,820 |
|
|
|
7,472 |
|
|
|
20.9 |
|
Furniture and equipment |
|
|
50,228 |
|
|
|
37,626 |
|
|
|
12,602 |
|
|
|
33.5 |
|
Intangible assets amortization |
|
|
19,913 |
|
|
|
18,345 |
|
|
|
1,568 |
|
|
|
8.5 |
|
Marketing |
|
|
14,267 |
|
|
|
13,380 |
|
|
|
887 |
|
|
|
6.6 |
|
Professional services |
|
|
14,962 |
|
|
|
15,654 |
|
|
|
(692 |
) |
|
|
(4.4 |
) |
Conversion and infrastructure costs |
|
|
8,138 |
|
|
|
500 |
|
|
|
7,638 |
|
|
|
1,527.6 |
|
Debt prepayment expenses |
|
|
— |
|
|
|
45,761 |
|
|
|
(45,761 |
) |
|
|
(100.0 |
) |
Other expenses |
|
|
63,301 |
|
|
|
60,731 |
|
|
|
2,570 |
|
|
|
4.2 |
|
| |
Total noninterest expenses |
|
$ |
455,570 |
|
|
|
447,137 |
|
|
|
8,433 |
|
|
|
1.9 |
% |
| |
Total noninterest expense increased by $8.4 million or 1.9% compared to 2004 and $54.2 million or
13.5% excluding the de-leverage charge in 2004. The increase is the result of the acquisitions of
FIRSTFED AMERICA BANCORP, INC. (“FIRSTFED”) in May 2004 and HSA Bank in February 2005, adding $9.1
million and $7.6 million, respectively, of noninterest expense in 2005 that did not exist in the
prior year. Also contributing to the increase was $8.1 million costs related to the conversion and
installation of the new core banking systems and an increase of $4.5 million related to the de novo
branch expansion program. Offsetting these increases was the $45.8 million of debt prepayment
expense due to the de-leveraging program that was completed in 2004. Further changes in various
components of noninterest expense are discussed below.
Compensation and benefits. Total compensation and benefits increased by $22.1 million or 10.1% from
2004. The increase was primarily due to increases in compensation of $14.3 million, commissions of
$4.4 million and temporary help of $3.9 million. The increase in compensation can be attributed to
the full year impact of acquisitions, increased staff to support loan growth and de novo branch
expansion and merit increases. The increase in temporary help is primarily related the conversion
and installation of new core banking systems.
Occupancy. Total occupancy expense increased by $7.5 million or 20.9% compared to 2004. The
increase in occupancy is primarily due to expenses related to the de novo branch expansion program,
higher rent expense and increased utilities and snow removal costs.
Furniture and equipment. Total furniture and equipment expense increased by $12.6 million or 33.5%
compared to 2004. The increase is primarily due to higher depreciation on data processing
equipment, increases in equipment maintenance contracts and service costs related to the new core
banking systems.
Conversion and infrastructure costs. These represent costs such as training, overtime, consulting,
marketing, statement rendering of contracts and other miscellaneous costs related to the
installation of the new core banking systems.
Income Taxes
Income tax expense increased from the prior year primarily due to a higher level of pre-tax income
in 2005, partially offset by the effect of a higher level of tax-exempt income in 2005. Tax expense
in 2004 was impacted by the $2.0 million favorable resolution of tax audits. As a result, the
effective tax rate increased to 32.0% in 2005, as compared to 30.9% in the prior year.
26
Comparison of 2004 and 2003 Years
For the year 2004, net income was $153.8 million, or $3.00 per diluted common share, a decrease of
$9.4 million, or 5.8%, compared to net income of $163.2 million, or $3.52 per diluted common share
for the previous year. Net interest income rose to $468.2 million for 2004, an increase of $54.6
million, or 13.2%. Growth in net interest income resulted from growth of average earning assets,
partially offset by a decline in the rate on earning assets. The net interest margin declined to
3.11% during 2004 from 3.14% in the prior year. Noninterest income reached $219.7 million, a
decrease of $12.8 million, or 5.5%, primarily due to a decline in financial advisory revenue due to
the sale of Duff & Phelps in the first quarter of 2004. Noninterest expenses increased $69.2
million, or 18.3%, from the previous year as a result of $45.8 million in debt prepayment expenses
on FHLB advances related to the de-leveraging program. The provision for credit losses decreased
$7.0 million to $18.0 million for 2004.
Net Interest Income
Net interest income totaled $468.2 million for the year ended December 31, 2004, an increase of
$54.6 million, or 13.2%, over the prior year and resulted from the growth in average earning assets
of $2.0 billion during the year partially offset by a decline in the rate on earning assets. On a
fully taxable-equivalent basis the net interest margin declined to 3.11% in 2004 from 3.14%. See
Table 2 above for further information.
The low interest rate environment during much of 2003 and the first half of 2004 contributed to the
decline in margin. During this period mortgage related assets (loans and investments) and other
fixed rate loans prepaid with the proceeds reinvested at lower yields. As can be seen from the
rate/volume Table 2 on page 24, the increase in net interest income in 2004 is entirely due to the
volume growth in earning assets, which increased $2.0 billion or 14.8% with most of the growth
occurring in the loan portfolio. Interest-bearing liabilities grew $2.1 billion, with deposits and
borrowed funds increasing $1.7 billion and $324 million, respectively. Partially offsetting the
volume increase was the decline in rate due to the lower interest rate environment that existed in
much of 2004 as compared to 2003. As a result of the lower rates, asset yields dropped faster than
liability costs. See “Asset/Liability Management and Market Risk” section within Management’s
Discussion and Analysis for additional information.
The net interest margin improved throughout the second half of 2004. The fourth quarter
de-leveraging transaction was the principal cause of the quarter’s net interest margin increasing
to 3.25% from 3.06% in the third quarter.
Interest Income
Total interest income increased $73.4 million, or 11.1%, to $732.1 million for the year 2004 as
compared to $658.7 million the previous year. The increase in the volume of earning assets, with
most of that growth occurring in the loan portfolio, was the primary cause of increased interest
income. The increase in volume was partially offset by the low rates during much of the first half
of the year.
The yield earned on earning assets declined during 2004 to 4.85% from 5.00% as a result of the
lower interest rate environment as compared to the prior year. The yield on loans and investments
decreased 15 and 22 basis points, respectively, during 2004. These yields did improve noticeably,
however, during the second half of the year partly as a result of the balance sheet de-leveraging
program and a rising interest rate environment.
Earning assets increased during 2004, fully offsetting the reduced yield. Earning assets averaged
$15.2 billion during the year, up from $13.3 billion during 2003. Strong growth occurred in the
loan portfolio, specifically in commercial, commercial real estate and home equity loans. The
acquisitions of FIRSTFED and First City during 2004, contributed to the growth in assets and
interest income.
Interest Expense
Interest expense increased $18.7 million, or 7.6%, to $263.9 million for 2004 as compared to $245.2
million the previous year. The increase was primarily due to an increase in the volume of
interest-bearing liabilities, partially offset by a decline in the cost of funds due to the lower
interest rate environment during most of the year. Deposits accounted for the majority of the rate
decline as their costs decreased to 1.24% in 2004 from 1.40% the prior year. Savings, checking and
certificate of deposit offering rates were repriced downward earlier in the year and these rates
were maintained in the second half of the year as interest rates began to rise. The cost of
borrowings in 2004 was 2.73% consistent with 2003, however, increased volume added $9.0 million of
expense. The use of interest rate swaps to change fixed rate borrowings to floating rates
contributed to the reduced funding costs.
The average balance of interest-bearing liabilities increased $2.1 billion for 2004 compared to
2003. The increase was primarily due to deposits increasing $1.7 billion. The majority of this
increase occurred in the lower costing core deposits (i.e. savings, NOW and money market accounts),
as certificate of deposit balances declined during 2004.
27
Provision for Credit Losses
The provision for credit losses declined to $18.0 million for the year ended December 31, 2004 from
$25.0 million a year earlier, a decrease of 28.0%. The decrease in the provision was a result of an
additional provision of $5.0 million that was taken in the third quarter of 2003 reflecting the
charge-off of a single commercial nonperforming loan. Excluding this additional provision in 2003,
the provision decreased $2.0 million or 10.0%, reflecting the favorable asset quality trends,
partially offset by an increase in the loan portfolio and a shift in mix to more commercial loans.
During 2004, net charge-offs and nonperforming assets declined when compared to 2003. See Tables 10
through 15 for more information on the allowance for credit losses, net charge-offs and
nonperforming assets.
Management performs a quarterly review of the loan portfolio and unfunded commitments to determine
the adequacy of the allowance for credit losses. At December 31, 2004, the allowance for credit
losses totaled $150.1 million or 1.28% of total loans compared to $121.7 million or 1.32% in 2003.
See the “Allowance for Credit Losses Methodology” section later in this Management’s Discussion and
Analysis for further details.
Noninterest Income
Table 5: Noninterest income comparison of 2004 to 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
Increase (decrease) |
| (In thousands) |
|
2004 |
|
2003 |
|
Amount |
|
% |
| |
Deposit service fees |
|
$ |
77,743 |
|
|
|
70,018 |
|
|
|
7,725 |
|
|
|
11.0 |
% |
Insurance revenue |
|
|
43,506 |
|
|
|
39,975 |
|
|
|
3,531 |
|
|
|
8.8 |
|
Loan related fees |
|
|
28,574 |
|
|
|
26,384 |
|
|
|
2,190 |
|
|
|
8.3 |
|
Wealth and investment services |
|
|
22,207 |
|
|
|
18,341 |
|
|
|
3,866 |
|
|
|
21.1 |
|
Gain on sale of loans and loan servicing, net |
|
|
13,305 |
|
|
|
19,520 |
|
|
|
(6,215 |
) |
|
|
(31.8 |
) |
Increase in cash surrender value of life insurance |
|
|
8,835 |
|
|
|
8,490 |
|
|
|
345 |
|
|
|
4.1 |
|
Financial advisory services |
|
|
3,808 |
|
|
|
22,758 |
|
|
|
(18,950 |
) |
|
|
(83.3 |
) |
Other income |
|
|
7,416 |
|
|
|
8,423 |
|
|
|
(1,007 |
) |
|
|
(12.0 |
) |
| |
Noninterest revenues |
|
|
205,394 |
|
|
|
213,909 |
|
|
|
(8,515 |
) |
|
|
(4.0 |
) |
Gain on sale of securities, net |
|
|
14,313 |
|
|
|
18,574 |
|
|
|
(4,261 |
) |
|
|
(22.9 |
) |
| |
Total noninterest income |
|
$ |
219,707 |
|
|
|
232,483 |
|
|
|
(12,776 |
) |
|
|
(5.5 |
)% |
| |
The decrease in noninterest income is primarily attributable to a decline of $19.0 million in
financial advisory revenue due to the sale of Duff & Phelps in the first quarter of 2004.
Otherwise, noninterest income increased by $6.2 million, or 3%. Increases in core fee categories of
deposit service fees, insurance revenue, loan and loan servicing and wealth and investment services
were offset by a decline of $6.2 million in gains on sale of loans and loan servicing due to lower
mortgage origination volumes. Wealth and investment services income increased due to improved
market conditions and stronger business development activities and the restructuring of the WIS
retail investment sales teams during 2004.
Noninterest Expenses
Table 6: Noninterest expenses comparison of 2004 to 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
Increase (decrease) |
| (In thousands) |
|
2004 |
|
2003 |
|
Amount |
|
% |
| |
Compensation and benefits |
|
$ |
219,820 |
|
|
|
206,381 |
|
|
|
13,439 |
|
|
|
6.5 |
% |
Occupancy |
|
|
35,820 |
|
|
|
30,698 |
|
|
|
5,122 |
|
|
|
16.7 |
|
Furniture and equipment |
|
|
37,626 |
|
|
|
31,143 |
|
|
|
6,483 |
|
|
|
20.8 |
|
Intangible assets amortization |
|
|
18,345 |
|
|
|
15,998 |
|
|
|
2,347 |
|
|
|
14.7 |
|
Marketing |
|
|
13,380 |
|
|
|
11,508 |
|
|
|
1,872 |
|
|
|
16.3 |
|
Professional services |
|
|
15,654 |
|
|
|
11,708 |
|
|
|
3,946 |
|
|
|
33.7 |
|
Capital securities |
|
|
— |
|
|
|
11,924 |
|
|
|
(11,924 |
) |
|
|
(100.0 |
) |
Debt prepayment expenses |
|
|
45,761 |
|
|
|
— |
|
|
|
45,761 |
|
|
|
100.0 |
|
Other expenses |
|
|
60,731 |
|
|
|
58,622 |
|
|
|
2,109 |
|
|
|
3.6 |
|
| |
Total noninterest expenses |
|
$ |
447,137 |
|
|
|
377,982 |
|
|
|
69,155 |
|
|
|
18.3 |
% |
| |
28
The increase in noninterest expenses is primarily attributable to $45.8 million of debt prepayment
expenses on FHLB advances related to the de-leveraging program in the fourth quarter of 2004.
Excluding the de-leveraging, noninterest expenses increased by 6%.
The majority of the remaining increases are due to the combination of acquisitions during 2004 and
late 2003 and the strategic investment in technology and de novo branch network. Capital securities
expense decreased due to the adoption of FASB Interpretation No. 46R on December 31, 2003. Capital
securities expense was recorded in interest expense for the 2004 year whereas in 2003 it was
recorded in noninterest expense. Also partially offsetting the increases were declines due to the
Duff & Phelps sale during the first quarter of 2004.
Income Taxes
Income tax expense decreased from the prior year primarily due to a lower level of pre-tax income
resulting from the $49.9 million de-leveraging program. Income tax expense was further reduced by
$2.0 million from the favorable resolution of prior year tax audits in the fourth quarter of 2004.
As a result of these two items, the effective tax rate was 30.9% in 2004, compared to 32.8% in the
prior year.
Financial Condition
Webster had total assets of $17.8 billion at December 31, 2005, an increase of $816 million, or 5%,
from the previous year end. The growth was primarily due to total loans increasing $572.5 million
as a result of growth in the residential, commercial, commercial real estate and second mortgage
loan portfolio products. Total liabilities increased $713 million with total deposits increasing
$1.1 billion, partially offset by total borrowings and other liabilities decreasing $431.5 million
and $23.6 million, respectively. The $1.1 billion or 10% increase in total deposits for the year
includes the de novo branching program which added eight new retail banking branches and $273
million in deposits in 2005 and $155 million of deposits from the acquisition of HSA Bank in
February 2005. The decrease in total borrowings was primarily due to deposits growing faster than
loans over the past year, which allowed excess funds to be used to reduce higher costs borrowings
by over $300 million.
Total equity was $1.6 billion at year end, up $103.3 million or 6.7% over the prior year end. This
increase was primarily due to net income of $185.9 million for the year, $6.7 million related to
stock-based compensation expense and $11.8 million from stock option exercises, partially offset by
$52.7 million of common stock dividend payments, $28.1 million of common stock repurchases and a
$24.1 million increase in the after-tax net unrealized losses on the available for sale securities
portfolio.
Investment Activities
Webster, either directly or through Webster Bank, maintains an investment securities 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 is
classified into three major categories: available for sale, held to maturity and trading. At
December 31, 2005, the combined investment portfolios of Webster and Webster Bank totaled $3.7
billion. At December 31, 2005, Webster Bank’s portfolio consisted primarily of mortgage-backed
securities and Webster’s portfolio consisted primarily of equity and corporate trust preferred
securities. See Note 4 of Notes to Consolidated Financial Statements contained elsewhere within the
Report for additional information.
Webster Bank may acquire, hold and transact various types of investment securities in accordance
with applicable federal regulations and within the guidelines of its internal investment policy.
The type of investments that it 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 charted institutions.
Webster 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 assets/liability strategy. See Note 16 of Notes to Consolidated Financial Statements contained
elsewhere within the Report for additional information concerning derivative financial instruments.
The securities portfolios are managed 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. While there may be no statutory limit on certain categories of
investments, the OCC may establish an individual limit on such investments, if the concentration in
such investments presents a safety and soundness concern.
29
Investment Securities
Total securities, excluding the trading portfolio, decreased by $26 million from December 31, 2004.
The available for sale securities portfolio increased by $61 million while the held to maturity
portfolio decreased by $87 million.
Table 7: Carrying value of investment securities.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
| (Dollars in thousands) |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
|
Amount |
|
of Total |
| |
Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
$ |
2,257 |
|
|
|
0.1 |
% |
|
$ |
— |
|
|
|
— |
% |
|
$ |
555 |
|
|
|
0.0 |
% |
| |
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies notes |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
69,022 |
|
|
|
1.6 |
|
Municipal bonds and notes |
|
|
— |
|
|
|
|
|
|
|
390 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Corporate bonds and notes |
|
|
201,323 |
|
|
|
5.4 |
|
|
|
196,373 |
|
|
|
5.3 |
|
|
|
219,863 |
|
|
|
5.1 |
|
Equity securities |
|
|
228,026 |
|
|
|
6.2 |
|
|
|
272,651 |
|
|
|
7.3 |
|
|
|
179,928 |
|
|
|
4.2 |
|
Mortgage-backed securities |
|
|
2,126,070 |
|
|
|
57.5 |
|
|
|
2,024,992 |
|
|
|
54.4 |
|
|
|
3,659,442 |
|
|
|
85.1 |
|
| |
Total available for sale |
|
|
2,555,419 |
|
|
|
69.1 |
|
|
|
2,494,406 |
|
|
|
67.0 |
|
|
|
4,128,255 |
|
|
|
96.0 |
|
| |
Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
|
401,112 |
|
|
|
10.8 |
|
|
|
342,264 |
|
|
|
9.2 |
|
|
|
173,371 |
|
|
|
4.0 |
|
Mortgage-backed securities |
|
|
741,797 |
|
|
|
20.0 |
|
|
|
887,349 |
|
|
|
23.8 |
|
|
|
— |
|
|
|
— |
|
| |
Total held to maturity |
|
|
1,142,909 |
|
|
|
30.8 |
|
|
|
1,229,613 |
|
|
|
33.0 |
|
|
|
173,371 |
|
|
|
4.0 |
|
| |
Total securities |
|
$ |
3,700,585 |
|
|
|
100.0 |
% |
|
$ |
3,724,019 |
|
|
|
100.0 |
% |
|
$ |
4,302,181 |
|
|
|
100.0 |
% |
| |
For additional information on the securities portfolio see Note 4 of Notes to Consolidated
Financial Statements included elsewhere in this Report.
Loans
Table 8: Loan portfolio composition at December 31.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| (Dollars in thousands) |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
| |
Residential mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family units |
|
$ |
4,640,284 |
|
|
|
37.8 |
% |
|
$ |
4,614,669 |
|
|
|
39.4 |
% |
|
$ |
3,607,613 |
|
|
|
39.1 |
% |
|
$ |
3,243,820 |
|
|
|
41.0 |
% |
|
$ |
3,162,700 |
|
|
|
46.3 |
% |
Construction |
|
|
188,280 |
|
|
|
1.5 |
|
|
|
160,675 |
|
|
|
1.4 |
|
|
|
136,400 |
|
|
|
1.5 |
|
|
|
142,387 |
|
|
|
1.8 |
|
|
|
223,583 |
|
|
|
3.3 |
|
| |
Total |
|
|
4,828,564 |
|
|
|
39.3 |
|
|
|
4,775,344 |
|
|
|
40.8 |
|
|
|
3,744,013 |
|
|
|
40.6 |
|
|
|
3,386,207 |
|
|
|
42.8 |
|
|
|
3,386,283 |
|
|
|
49.6 |
|
| |
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial non-mortgage |
|
|
1,435,512 |
|
|
|
11.7 |
|
|
|
1,409,155 |
|
|
|
12.0 |
|
|
|
1,007,696 |
|
|
|
11.0 |
|
|
|
913,529 |
|
|
|
11.5 |
|
|
|
911,473 |
|
|
|
13.4 |
|
Asset-based lending |
|
|
661,234 |
|
|
|
5.4 |
|
|
|
547,898 |
|
|
|
4.7 |
|
|
|
526,933 |
|
|
|
5.7 |
|
|
|
465,407 |
|
|
|
5.9 |
|
|
|
135,401 |
|
|
|
2.0 |
|
Equipment financing |
|
|
779,782 |
|
|
|
6.3 |
|
|
|
627,685 |
|
|
|
5.4 |
|
|
|
506,292 |
|
|
|
5.5 |
|
|
|
419,962 |
|
|
|
5.3 |
|
|
|
320,704 |
|
|
|
4.7 |
|
| |
Total |
|
|
2,876,528 |
|
|
|
23.4 |
|
|
|
2,584,738 |
|
|
|
22.1 |
|
|
|
2,040,921 |
|
|
|
22.2 |
|
|
|
1,798,898 |
|
|
|
22.7 |
|
|
|
1,367,578 |
|
|
|
20.1 |
|
| |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
1,342,741 |
|
|
|
10.9 |
|
|
|
1,321,407 |
|
|
|
11.3 |
|
|
|
1,060,806 |
|
|
|
11.5 |
|
|
|
913,030 |
|
|
|
11.5 |
|
|
|
892,145 |
|
|
|
13.1 |
|
Commercial construction |
|
|
465,753 |
|
|
|
3.8 |
|
|
|
393,640 |
|
|
|
3.3 |
|
|
|
220,710 |
|
|
|
2.4 |
|
|
|
116,302 |
|
|
|
1.5 |
|
|
|
82,831 |
|
|
|
1.2 |
|
| |
Total |
|
|
1,808,494 |
|
|
|
14.7 |
|
|
|
1,715,047 |
|
|
|
14.6 |
|
|
|
1,281,516 |
|
|
|
13.9 |
|
|
|
1,029,332 |
|
|
|
13.0 |
|
|
|
974,976 |
|
|
|
14.3 |
|
| |
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity credit loans |
|
|
2,736,274 |
|
|
|
22.3 |
|
|
|
2,606,161 |
|
|
|
22.2 |
|
|
|
2,117,222 |
|
|
|
23.0 |
|
|
|
1,661,864 |
|
|
|
21.0 |
|
|
|
1,038,350 |
|
|
|
15.2 |
|
Other consumer |
|
|
35,426 |
|
|
|
0.3 |
|
|
|
31,485 |
|
|
|
0.3 |
|
|
|
29,137 |
|
|
|
0.3 |
|
|
|
36,338 |
|
|
|
0.5 |
|
|
|
56,113 |
|
|
|
0.8 |
|
| |
Total |
|
|
2,771,700 |
|
|
|
22.6 |
|
|
|
2,637,646 |
|
|
|
22.5 |
|
|
|
2,146,359 |
|
|
|
23.3 |
|
|
|
1,698,202 |
|
|
|
21.5 |
|
|
|
1,094,463 |
|
|
|
16.0 |
|
| |
Total loans (a) |
|
|
12,285,286 |
|
|
|
100.0 |
% |
|
|
11,712,775 |
|
|
|
100.0 |
% |
|
|
9,212,809 |
|
|
|
100.0 |
% |
|
|
7,912,639 |
|
|
|
100.0 |
% |
|
|
6,823,300 |
|
|
|
100.0 |
% |
Less: allowance for loan losses |
|
|
(146,486 |
) |
|
|
|
|
|
|
(150,112 |
) |
|
|
|
|
|
|
(121,674 |
) |
|
|
|
|
|
|
(116,804 |
) |
|
|
|
|
|
|
(97,307 |
) |
|
|
|
|
| |
Loans, net |
|
$ |
12,138,800 |
|
|
|
|
|
|
$ |
11,562,663 |
|
|
|
|
|
|
$ |
9,091,135 |
|
|
|
|
|
|
$ |
7,795,835 |
|
|
|
|
|
|
$ |
6,725,993 |
|
|
|
|
|
| |
|
|
|
| (a) |
|
Net of premiums, discounts and deferred costs. |
Total loans increased 4.9% during 2005, with commercial loans and commercial real estate loans
increasing 11.3% and 5.4%, respectively, from the previous year end. Consumer loans also showed
growth of 5.1%, while the residential mortgage portfolio grew by 1.1%. The FIRSTFED and First City
acquisitions completed by Webster during 2004 contributed to the overall increase from year end
2003.
30
Table 9: Contractual maturities and interest-rate sensitivity of selected loan categories at
December 31, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
$ |
186,864 |
|
|
|
— |
|
|
|
— |
|
|
|
186,864 |
|
Commercial mortgage |
|
|
136,353 |
|
|
|
264,429 |
|
|
|
53,684 |
|
|
|
454,466 |
|
Commercial loans |
|
|
390,908 |
|
|
|
1,926,011 |
|
|
|
545,455 |
|
|
|
2,862,374 |
|
| |
Total |
|
$ |
714,125 |
|
|
|
2,190,440 |
|
|
|
599,139 |
|
|
|
3,503,704 |
|
| |
Interest-Rate Sensitivity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
215,360 |
|
|
|
747,748 |
|
|
|
135,207 |
|
|
|
1,098,315 |
|
Variable rate |
|
|
498,765 |
|
|
|
1,442,692 |
|
|
|
463,932 |
|
|
|
2,405,389 |
|
| |
Total |
|
$ |
714,125 |
|
|
|
2,190,440 |
|
|
|
599,139 |
|
|
|
3,503,704 |
|
| |
The contractual maturities are expected gross receipts from borrowers and do not reflect
premiums, discounts and deferred costs.
Asset Quality
Asset quality declined slightly in 2005 as nonperforming assets increased to $73.0 million compared
to $39.2 million a year earlier. The increase in nonperforming assets was primarily the result of
increase in nonperforming commercial loans and commercial real estate loans. The allowance for loan
losses decreased in 2005 to $146.5 million from $150.1 million in 2004 primarily due to a
reclassification of $9.1 million of the allowance to a reserve for unfunded credit commitments.
Reflecting this reclassification, the allowance for loan losses decreased to 1.19% of total loans
at year end 2005 compared with 1.28% at December 31, 2004.
Nonperforming assets, loan delinquency and credit losses are considered to be key measures of asset
quality. Asset quality is one of the key factors in the determination of the level of the allowance
for credit losses. See “Allowance for Credit Losses” contained elsewhere within this section for
further information on the allowance.
Nonperforming Assets
Management devotes significant attention to maintaining asset quality through conservative
underwriting standards, active servicing of loans and aggressively managing nonperforming assets.
Nonperforming assets include nonaccrual loans, loans past due 90 days or more and accruing and
foreclosed properties. The aggregate amount of nonperforming assets increased as a percentage of
total assets to 0.41% at December 31, 2005 from 0.23% at December 31, 2004.
Nonperforming loans were $67.2 million at December 31, 2005, compared to $36.1 million at December
31, 2004. Nonperforming loans are defined as nonaccruing loans and loans past due 90 or more days
and accruing. The ratio of nonperforming loans to total loans was 0.55% and 0.31% at December 31,
2005 and 2004, respectively. The allowance for loan losses at December 31, 2005 was $146.5 million
and represented 218% of nonperforming loans and 1.19% of total loans. At December 31, 2004, the
allowance was $150.1 million and represented 416% of nonperforming loans and 1.28% of total loans.
Interest on nonaccrual loans that would have been recorded as additional interest income for the
years ended December 31, 2005, 2004 and 2003 had the loans been current in accordance with their
original terms approximated $3.2 million, $2.1 million, and $2.6 million, respectively. See Note 1
of Notes to Consolidated Financial Statements contained elsewhere within the Report for information
concerning the nonaccrual loan policy.
Total nonperforming loans increased $31.1 million, or 86% in 2005. This increase was primarily the
result of a $12.2 million increase in commercial loans and a $14.2 million increase in commercial
real estate loans. The increase in commercial loans was principally due to four new loans totaling
$15.0 million offset by one loan of $3.4 million that paid off in 2005. The increase in commercial
real estate was primarily due to five loans totaling $16.7 million that were added during 2005,
partially offset by two loans that paid off in 2005 for a total of $3.0 million. The new
nonperforming loans do not represent a concentration in any particular industry or collateral type
and, in management’s judgment, should not result in a significant increase in net charge-offs in
future periods.
31
Table 10: Nonperforming assets.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
Loans accounted for on a nonaccrual basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial banking |
|
$ |
26,002 |
|
|
|
13,502 |
|
|
|
20,199 |
|
|
|
18,885 |
|
|
|
29,521 |
|
Equipment financing |
|
|
3,065 |
|
|
|
3,383 |
|
|
|
5,583 |
|
|
|
6,586 |
|
|
|
7,333 |
|
| |
Total commercial |
|
|
29,067 |
|
|
|
16,885 |
|
|
|
25,782 |
|
|
|
25,471 |
|
|
|
36,854 |
|
Commercial real estate |
|
|
22,678 |
|
|
|
8,431 |
|
|
|
3,325 |
|
|
|
9,109 |
|
|
|
11,062 |
|
Residential |
|
|
6,979 |
|
|
|
7,796 |
|
|
|
6,128 |
|
|
|
7,263 |
|
|
|
7,677 |
|
Consumer |
|
|
1,829 |
|
|
|
1,894 |
|
|
|
959 |
|
|
|
894 |
|
|
|
1,823 |
|
| |
Nonaccruing loans |
|
|
60,553 |
|
|
|
35,006 |
|
|
|
36,194 |
|
|
|
42,737 |
|
|
|
57,416 |
|
| |
Loans past due 90 days or more and accruing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
6,676 |
|
|
|
1,122 |
|
|
|
494 |
|
|
|
515 |
|
|
|
— |
|
Commercial real estate |
|
|
— |
|
|
|
— |
|
|
|
956 |
|
|
|
— |
|
|
|
— |
|
| |
Total loans past due 90 days or more and accruing |
|
|
6,676 |
|
|
|
1,122 |
|
|
|
1,450 |
|
|
|
515 |
|
|
|
— |
|
| |
Total nonperforming loans |
|
|
67,229 |
|
|
|
36,128 |
|
|
|
37,644 |
|
|
|
43,252 |
|
|
|
57,416 |
|
| |
Nonaccruing loans held for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,706 |
|
|
|
— |
|
| |
Foreclosed Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential and consumer |
|
|
659 |
|
|
|
214 |
|
|
|
942 |
|
|
|
509 |
|
|
|
2,504 |
|
Commercial |
|
|
5,126 |
|
|
|
2,824 |
|
|
|
4,296 |
|
|
|
2,568 |
|
|
|
2,534 |
|
| |
Total foreclosed property |
|
|
5,785 |
|
|
|
3,038 |
|
|
|
5,238 |
|
|
|
3,077 |
|
|
|
5,038 |
|
| |
Total nonperforming assets |
|
$ |
73,014 |
|
|
|
39,166 |
|
|
|
42,882 |
|
|
|
50,035 |
|
|
|
62,454 |
|
| |
It is Webster’s policy that all loans 90 or more days past due are placed in nonaccruing
status. Occasionally, there are circumstances that cause loans to be placed in the 90 days and
accruing category, for example, loans that are considered to be well secured and in the process of
collection.
Table 11: Troubled debt restructures.
The following accruing loans are considered troubled debt restructurings. A modification of terms
constitutes a troubled debt restructuring if, for reasons related to the debtor’s financial
difficulties, a concession is granted to the debtor that would not otherwise be considered.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
Residential |
|
$ |
— |
|
|
|
— |
|
|
|
710 |
|
|
|
826 |
|
|
|
1,262 |
|
Commercial real estate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
3,767 |
|
Consumer |
|
|
12 |
|
|
|
20 |
|
|
|
21 |
|
|
|
78 |
|
|
|
204 |
|
| |
Total |
|
$ |
12 |
|
|
|
20 |
|
|
|
731 |
|
|
|
922 |
|
|
|
5,233 |
|
| |
Table 12: Loans past due 30 to 89 days.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
| |
|
Principal |
|
of loans |
|
Principal |
|
of loans |
|
Principal |
|
of loans |
|
Principal |
|
of loans |
|
Principal |
|
of loans |
| (Dollars in thousands) |
|
Balances |
|
outstanding |
|
Balances |
|
outstanding |
|
Balances |
|
outstanding |
|
Balances |
|
outstanding |
|
Balances |
|
outstanding |
| |
Residential |
|
$ |
17,717 |
|
|
|
0.14 |
% |
|
$ |
11,296 |
|
|
|
0.10 |
% |
|
$ |
9,443 |
|
|
|
0.10 |
% |
|
$ |
13,318 |
|
|
|
0.17 |
% |
|
$ |
18,359 |
|
|
|
0.27 |
% |
Commercial |
|
|
46,343 |
|
|
|
0.38 |
|
|
|
21,338 |
|
|
|
0.18 |
|
|
|
6,285 |
|
|
|
0.07 |
|
|
|
21,894 |
|
|
|
0.28 |
|
|
|
16,286 |
|
|
|
0.23 |
|
Commercial real estate |
|
|
31,680 |
|
|
|
0.26 |
|
|
|
6,611 |
|
|
|
0.06 |
|
|
|
14,419 |
|
|
|
0.16 |
|
|
|
21,324 |
|
|
|
0.27 |
|
|
|
22,973 |
|
|
|
0.34 |
|
Consumer |
|
|
10,878 |
|
|
|
0.09 |
|
|
|
3,777 |
|
|
|
0.03 |
|
|
|
2,403 |
|
|
|
0.02 |
|
|
|
6,757 |
|
|
|
0.08 |
|
|
|
5,260 |
|
|
|
0.08 |
|
| |
Total |
|
$ |
106,618 |
|
|
|
0.87 |
% |
|
$ |
43,022 |
|
|
|
0.37 |
% |
|
$ |
32,550 |
|
|
|
0.35 |
% |
|
$ |
63,293 |
|
|
|
0.80 |
% |
|
$ |
62,878 |
|
|
|
0.92 |
% |
| |
32
Allowance for Credit Losses
Methodology
The allowance for credit losses, which comprises the allowance for loan losses and the reserve for
unfunded credit commitments, is maintained at a level estimated by management to provide adequately
for probable losses inherent in the loan portfolio and unfunded commitments. Probable losses are
estimated based upon a quarterly review of the loan portfolio, past loss experience, specific
problem loans, economic conditions and other pertinent factors which, in management’s judgment,
deserve current recognition in estimating loan losses. In assessing the specific risks inherent in
the portfolio, management takes into consideration the risk of loss on nonaccrual loans, classified
loans and watch list loans including an analysis of the collateral for such loans. Management
believes that the allowance for credit losses at December 31, 2005 is adequate to cover probable
losses inherent in the loan portfolio and unfunded commitments at the balance sheet date.
Management considers the adequacy of the allowance for credit losses a critical accounting policy.
As such, the adequacy of the allowance for credit losses is subject to judgment in its
determination. Actual loan losses could differ materially from management’s estimate if actual loss
factors and conditions differ significantly from the assumptions utilized. These factors and
conditions include the general economic conditions within Webster’s market and nationally, trends
within industries where the loan portfolio is concentrated, real estate values, interest rates and
the financial condition of individual borrowers. While management believes the allowance for credit
losses is adequate as of December 31, 2005, actual results may prove different and these
differences could be significant.
Webster’s Loan Loss Allowance Committee meets on a quarterly basis to review and conclude on the
adequacy of the allowance. In addition, the loan review function reports to the Audit Committee on
a quarterly basis its findings during the past three months.
Webster’s methodology for assessing the appropriateness of the allowance consists of several key
elements. The loan portfolio is segmented into pools of loans that are similar in type and risk
characteristic. These homogeneous pools are tracked over time and historic delinquency, nonaccrual
and loss information is collected and analyzed. In addition, problem loans are identified and
analyzed individually on a periodic basis to detect specific probable losses. Webster collects
industry delinquency, nonaccrual and loss data for the same portfolio segments for comparison
purposes.
The data is analyzed and estimates of probable losses in the portfolio are estimated by calculating
formula allowances for homogeneous pools of loans and classified loans and specific allowances for
impaired loans. The formula allowance is calculated by applying loss factors to the loan pools
based on historic default and loss rates, internal risk ratings, and other risk-based
characteristics. Changes in risk ratings, and other risk factors, from period to period for both
performing and nonperforming loans affect the calculation of the formula allowance. Loss factors
are based on Webster’s loss experience, and may be adjusted for significant conditions that, in
management’s judgment, affect the collectability of the portfolio as of the evaluation date. The
following is considered when determining probable losses:
| |
• |
|
Webster utilizes migration models, which track the dynamic business
characteristics inherent in the specific portfolios. The assumptions are updated periodically
to match changes in the business cycle. |
| |
| |
• |
|
Pooled loan loss factors (not individually graded loans) are based on expected net
charge-offs. Pooled loans are loans that are homogeneous in nature, such as residential and
consumer loans. |
| |
| |
• |
|
The loan portfolios are characterized by historical statistics such as default
rates, cure rates, loss in event of default rates and internal risk ratings. |
| |
| |
• |
|
Webster statistically evaluates the impact of larger concentrations in the
commercial loan portfolio. |
| |
| |
• |
|
Comparable industry charge-off statistics by line of business, broadly defined as
residential, consumer, home equity and second mortgages, commercial real estate and commercial
and industrial lending, are utilized as factors in calculating loss estimates in the loan
portfolios. |
| |
| |
• |
|
Actual losses by portfolio segment are reviewed to validate estimated probable
losses. |
At December 31, 2005, the allowance for loan losses was $146.5 million, or 1.19% of the total loan
portfolio, and 218% of total nonperforming loans. This compares with an allowance of $150.1 million
or 1.28% of the total loan portfolio, and 416% of total nonperforming loans at December 31, 2004.
The allowance for credit losses analysis includes consideration for the risks associated with
unfunded loan commitments and letters of credit. These commitments are converted to estimates of
potential loss using loan equivalency factors, and include internal and external historic loss
experience. At December 31, 2005, the reserve for unfunded credit commitments was $9.1 million,
which represents 5.9% of the total allowance for credit losses. This reserve was established as a
separate component of the allowance for credit losses in the fourth quarter of 2005.
33
The allowance for credit losses incorporates the range of probable outcomes as part of the loss
estimate calculation, as well as an estimate of loss representing inherent risk not captured in
quantitative modeling and methodologies. These factors include, but are not limited to, imprecision
in loss estimate methodologies and models, internal asset quality trends, changes in portfolio
characteristics and loan mix, significant volatility in historic loss experience, and the
uncertainty associated with industry trends, economic uncertainties and other external factors.
Table 13: Allowance for credit losses activity.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the years ended December 31, |
| (Dollars in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
Balance at beginning of year |
|
$ |
150,112 |
|
|
|
121,674 |
|
|
|
116,804 |
|
|
|
97,307 |
|
|
|
90,809 |
|
Allowances for acquired loans |
|
|
— |
|
|
|
20,698 |
|
|
|
2,116 |
|
|
|
16,338 |
|
|
|
1,851 |
|
Writedown of loans transferred to held for sale |
|
|
(775 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12,432 |
) |
|
|
— |
|
Provisions charged to operations |
|
|
9,500 |
|
|
|
18,000 |
|
|
|
25,000 |
|
|
|
29,000 |
|
|
|
14,400 |
|
| |
Subtotal |
|
|
158,837 |
|
|
|
160,372 |
|
|
|
143,920 |
|
|
|
130,213 |
|
|
|
107,060 |
|
| |
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
(833 |
) |
|
|
(1,629 |
) |
|
|
(607 |
) |
|
|
(882 |
) |
|
|
(1,096 |
) |
Commercial |
|
|
(8,288 |
) |
|
|
(12,709 |
) |
|
|
(24,898 |
) |
|
|
(13,775 |
) |
|
|
(8,978 |
) |
Commercial real estate (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Consumer |
|
|
(633 |
) |
|
|
(613 |
) |
|
|
(644 |
) |
|
|
(1,093 |
) |
|
|
(1,501 |
) |
| |
Total charge-offs |
|
|
(9,754 |
) |
|
|
(14,951 |
) |
|
|
(26,149 |
) |
|
|
(15,750 |
) |
|
|
(11,575 |
) |
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
548 |
|
|
|
689 |
|
|
|
252 |
|
|
|
191 |
|
|
|
333 |
|
Commercial |
|
|
5,814 |
|
|
|
3,743 |
|
|
|
3,382 |
|
|
|
1,813 |
|
|
|
1,267 |
|
Commercial real estate (a) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Consumer |
|
|
187 |
|
|
|
259 |
|
|
|
269 |
|
|
|
337 |
|
|
|
222 |
|
| |
Total recoveries |
|
|
6,549 |
|
|
|
4,691 |
|
|
|
3,903 |
|
|
|
2,341 |
|
|
|
1,822 |
|
| |
Net charge-offs |
|
|
(3,205 |
) |
|
|
(10,260 |
) |
|
|
(22,246 |
) |
|
|
(13,409 |
) |
|
|
(9,753 |
) |
| |
Balance at end of year |
|
$ |
155,632 |
|
|
|
150,112 |
|
|
|
121,674 |
|
|
|
116,804 |
|
|
|
97,307 |
|
| |
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
146,486 |
|
|
|
150,112 |
|
|
|
121,674 |
|
|
|
116,804 |
|
|
|
97,307 |
|
Reserve for unfunded credit commitments (b) |
|
|
9,146 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Allowance for credit losses |
|
$ |
155,632 |
|
|
|
150,112 |
|
|
|
121,674 |
|
|
|
116,804 |
|
|
|
97,307 |
|
| |
| (a) |
|
All Business & Professional Banking loans, both commercial and commercial real estate, are
considered commercial for purposes of reporting charge-offs and recoveries. |
| (b) |
|
Effective December 31, 2005, Webster transferred the portion of the allowance for loan losses
related to commercial and consumer lending commitments and letters of credit to the reserve
for unfunded credit commitments. |
Table 14: Net charge-offs to average outstanding loans by category.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the years ended December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
| |
Residential |
|
|
0.01 |
% |
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.02 |
|
Commercial |
|
|
0.09 |
|
|
|
0.38 |
|
|
|
0.69 |
|
|
|
0.75 |
|
|
|
0.58 |
|
Commercial real estate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Consumer |
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.05 |
|
|
|
0.16 |
|
| |
Total |
|
|
0.03 |
% |
|
|
0.10 |
|
|
|
0.25 |
|
|
|
0.18 |
|
|
|
0.14 |
|
| |
34
Table 15: Allocation of allowance for credit losses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
|
|
|
|
2005 |
|
|
|
|
|
2004 |
|
|
|
|
|
2003 |
|
|
|
|
|
2002 |
|
|
|
|
|
2001 |
| |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
|
|
|
|
|
Percent |
| |
|
|
|
|
|
of loans |
|
|
|
|
|
of loans |
|
|
|
|
|
of loans |
|
|
|
|
|
of loans |
|
|
|
|
|
of loans |
| |
|
|
|
|
|
in each |
|
|
|
|
|
in each |
|
|
|
|
|
in each |
|
|
|
|
|
in each |
|
|
|
|
|
in each |
| |
|
|
|
|
|
category |
|
|
|
|
|
category |
|
|
|
|
|
category |
|
|
|
|
|
category |
|
|
|
|
|
category |
| |
|
|
|
|
|
to total |
|
|
|
|
|
to total |
|
|
|
|
|
to total |
|
|
|
|
|
to total |
|
|
|
|
|
to total |
| (Dollars in thousands) |
|
Amount |
|
loans |
|
Amount |
|
loans |
|
Amount |
|
loans |
|
Amount |
|
loans |
|
Amount |
|
loans |
| |
Allowance for credit losses
at end of period applicable
to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
$ |
17,198 |
|
|
|
39.3 |
% |
|
$ |
16,848 |
|
|
|
40.8 |
% |
|
$ |
13,594 |
|
|
|
40.6 |
% |
|
$ |
18,540 |
|
|
|
42.8 |
% |
|
$ |
17,614 |
|
|
|
49.6 |
% |
Commercial |
|
|
92,318 |
|
|
|
23.4 |
|
|
|
87,661 |
|
|
|
22.1 |
|
|
|
72,418 |
|
|
|
22.2 |
|
|
|
67,293 |
|
|
|
22.7 |
|
|
|
47,390 |
|
|
|
20.1 |
|
Commercial real estate |
|
|
28,207 |
|
|
|
14.7 |
|
|
|
27,706 |
|
|
|
14.6 |
|
|
|
21,691 |
|
|
|
13.9 |
|
|
|
19,646 |
|
|
|
13.0 |
|
|
|
22,894 |
|
|
|
14.3 |
|
Consumer |
|
|
17,909 |
|
|
|
22.6 |
|
|
|
17,897 |
|
|
|
22.5 |
|
|
|
13,971 |
|
|
|
23.3 |
|
|
|
11,325 |
|
|
|
21.5 |
|
|
|
9,409 |
|
|
|
16.0 |
|
| |
Total |
|
$ |
155,632 |
|
|
|
100.0 |
% |
|
$ |
150,112 |
|
|
|
100.0 |
% |
|
$ |
121,674 |
|
|
|
100.0 |
% |
|
$ |
116,804 |
|
|
|
100.0 |
% |
|
$ |
97,307 |
|
|
|
100.0 |
% |
| |
As management performed its review of the loan portfolio and the credit loss allowance, it
considered various factors when determining the adequacy of the allowance. The amounts allocated to
the residential and consumer portfolio reflect portfolio growth including the effect of
acquisitions. The commercial loan allocation reflects growth in the portfolio partially offset by
the decline in the amount of syndicated loans included in the specialized portfolio. The increased
allocation for commercial real estate reflects the growth in the portfolio. Management believes
that the allowance for credit losses is adequate to cover credit losses inherent in the loan
portfolio, including unfunded credit commitments, at December 31, 2005.
Sources of Funds
Cash flows from deposits, loan and mortgage-backed securities repayments, securities sales proceeds
and maturities, borrowings and earnings are the primary sources of Webster Bank’s funds available
for use in its lending and investment activities and in meeting its operational needs. While
scheduled loan and securities 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 and are inherently uncertain. The borrowings primarily include Federal Home
Loan Bank (“FHLB”) advances and repurchase agreement borrowings. See Notes 12, 13 and 14 of Notes
to Consolidated Financial Statements contained elsewhere within this Report for further borrowing
information.
Webster 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. It 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.
Deposit Activities
Webster 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. The key customer acquisition strategy is the High Performance Checking account
program that offers consumers and small businesses 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 certificate of deposit accounts are offered to
consumers that include both short and long term maturity options up to five years. Webster Bank
continues to offer special IRA products, which include savings accounts, certificate of deposits
and rollovers 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.
Webster Bank receives retail and commercial deposits through its main office and 156 other banking
offices throughout Connecticut (120), Massachusetts (21), Rhode Island (9) and New York (6).
Deposit customers can access their accounts in a variety of ways including branch banking, ATMs,
internet banking or telephone banking. Effective advertising, direct mail, good service and
competitive pricing policies are strategies that attract and retain deposits. In addition,
commercial deposits are also received in the same manner and a variety of commercial accounts, such
as “free checking” is offered to meet small business customers’ financial needs.
35
Although not an integral part of its deposit strategies, from time to time, brokered deposits are
used as a means of funds generation. As with any other funding source, Webster Bank considers its
needs, relative cost and availability in determining the suitability of brokered deposits. At
December 31, 2005 and 2004, outstanding brokered deposits totaled $490.6 million and $281.6
million, respectively.
Customer services also include 304 ATM facilities with membership in NYCE and PLUS networks and
provide 24-hour access to linked accounts. Webster Bank’s internet 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 access to customer service representatives at certain established hours.
Customers can transfer account balances, process stop payments and change addresses, place check
orders, open deposit accounts, inquire about account transactions and request general information
about products and services. Additional services include automatic loan payment from accounts as
well as direct deposit of Social Security benefits, payroll, and other retirement benefits. See
Note 11 of Notes to Consolidated Financial Statements contained elsewhere within the Report for
additional deposit information.
Borrowings
Webster Bank is a member of the Federal Home Loan Bank of Boston which is part of the Federal Home
Loan Bank System. Members are required to own capital stock in the FHLBs and borrowings are
collateralized by certain home mortgages or securities of the U.S. Government and its agencies. The
maximum amount of credit which the FHLBs will extend varies from time to time depending on their
policies. Webster maintains borrowing capacity at the FHLB Boston that is a percentage of its total
regulatory assets, subject to capital stock and collateralization requirements. Long-term and
short-term borrowings are utilized as a source of funding to meet liquidity and planning needs when
the cost of these funds are favorable compared to alternative funding sources. At December 31, 2005
and 2004, FHLB borrowings totaled $2.2 billion and $2.6 billion and represented 50.6% and 55.1%,
respectively, of total outstanding borrowed funds.
In addition to FHLB borrowings, Webster Bank’s wholesale funding sources include repurchase
agreements and term and overnight Federal funds. Webster Bank often participates and is awarded
U.S. Treasury operating funds in auctions conducted by the Federal Reserve System.
In April 2004, Webster completed a $150 million senior note offering which was issued under a
universal shelf registration filed with the Securities and Exchange Commission. These 10-year notes
have an interest rate of 5.125%, and net proceeds were used to partially fund the cash portion of
the FIRSTFED acquisition. In January 2003, Webster Bank issued $200 million of 5.875% subordinated
notes due 2013. Webster has outstanding $50.4 million of $126 million 8.72% senior notes issued in
2000 and due 2007. These notes require annual principal payments of $25.2 million. Webster also has
several issues of capital trust securities, including $75 million in statutory trust securities
issued 2003 and due 2013.
Liquidity and Capital Resources
Liquidity management allows Webster to meet cash needs at a reasonable cost under various operating
environments. Liquidity is actively managed and reviewed in order to maintain stable, cost
effective funding to support growth in the balance sheet. Liquidity comes from a variety of sources
such as the cash flow from operating activities including principal and interest payments on loans
and investments, unpledged securities which can be sold or utilized to secure funding and by the
ability to attract new deposits. Webster’s goal is to maintain a strong, increasing base of core
deposits to support the growth in the loan portfolios.
The main sources of liquidity are customer deposits, wholesale borrowings, payments of principal
and interest from our loan and securities portfolio and the ability to use our loan and securities
portfolios as collateral for secured borrowings. Webster Bank is a member of the FHLB system. At
December 31, 2005, outstanding FHLB advances totaled $2.2 billion and there was additional
borrowing capacity from the FHLB of $1.0 billion. At December 31, 2005, investment securities were
not fully utilized as collateral, and had all securities been used for collateral, Webster Bank
would have additional borrowing capacity of approximately $1.8 billion. There is also the ability
to borrow funds through repurchase agreements, using the securities portfolio as collateral. At
December 31, 2005, outstanding repurchase agreements and other short-term borrowings totaled $1.5
billion. FHLB advances, repurchase agreements and other borrowings decreased $321.5 million from
the prior year end, primarily due to the de-leveraging and a higher level of deposits.
36
Other factors affecting liquidity include loan origination volumes, loan prepayment rates, maturity
structure of existing loans, core deposit growth levels, time deposit maturity structure and
retention, credit ratings, investment portfolio cash flows, the composition, characteristics and
diversification of wholesale funding sources, and the market value of investment securities that
can be used to collateralize FHLB advances and repurchase agreements. The liquidity position is
influenced by general interest rate levels, economic conditions and competition. For example, as
interest rates decline, payments of principal from the loan and mortgage-backed securities
portfolio accelerate, as borrowers are more willing to prepay. Additionally, the market value of
the securities portfolio generally increases as rates decline, thereby increasing the amount of
collateral available for funding purposes.
Management monitors current and projected cash needs and adjusts liquidity as necessary. Liquidity
policy ratios are designed to measure the liquidity from several different perspectives: maturity
concentration, diversification, and liquidity reserve. Actual ratios are measured against policy
limits. In addition to funding under normal market conditions, there is a contingency funding plan
which is designed for dealing with liquidity under a crisis so that measures can be implemented in
an orderly and timely manner.
Webster’s main sources of liquidity at the parent company level are dividends from Webster Bank,
investment income and net proceeds from borrowings and capital offerings. The main uses of
liquidity are purchases of available for sale securities, the payment of dividends to common
stockholders, repurchases of Webster’s common stock, and the payment of principal and interest to
holders of senior notes and capital securities. There are certain restrictions on the payment of
dividends. See Note 15 of Notes to Consolidated Financial Statements contained elsewhere within
this Report for further information on such dividend restrictions. Webster also maintains $75
million in three-year revolving lines of credit with correspondent banks as a source of additional
liquidity.
During 2005 and 2004, a total of 609,519 and 95,677 shares, respectively, of common stock were
repurchased utilizing funds of approximately $28.1 million and $4.6 million, respectively. A
majority of the repurchased shares were the result of a Board approved program during the third
quarter of 2002 to acquire 2.4 million shares of common stock. Another stock repurchase program
was approved by the Board during the third quarter of 2003 to buy back an additional 2.3 million
shares. See Note 15 of Notes to Consolidated Financial Statements contained elsewhere within the
Report for further information concerning stock repurchases.
Webster Bank is required by regulations adopted by the OCC to maintain liquidity sufficient to
ensure safe and sound operations. Adequate liquidity, as assessed by the OCC, may vary from
institution to institution depending on such factors as the overall asset/liability structure,
market conditions, competition and the nature of the institution’s deposit and loan customers.
Management believes Webster Bank exceeds all regulatory and operational liquidity requirements at
December 31, 2005.
Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum
leverage and risk-based capital requirements. As an OCC regulated commercial institution, it is
also subject to a minimum tangible capital requirement. At December 31, 2005, Webster Bank was in
full compliance with all applicable capital requirements and met the FDIC requirements for a “well
capitalized” institution. See Note 15 of Notes to Consolidated Financial Statements contained
elsewhere within this Report for further information concerning capital.
Table 16: Contractual obligations and commercial commitments at December 31, 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
| (In thousands) |
|
Total |
|
one year |
|
1-3 years |
|
3-5 years |
|
After 5 years |
| |
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
2,196,026 |
|
|
|
1,213,468 |
|
|
|
755,502 |
|
|
|
176,732 |
|
|
|
50,324 |
|
Senior notes |
|
|
200,400 |
|
|
|
25,200 |
|
|
|
25,200 |
|
|
|
— |
|
|
|
150,000 |
|
Subordinated notes |
|
|
200,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
200,000 |
|
Junior subordinated debt |
|
|
246,409 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
246,409 |
|
Other borrowed funds |
|
|
1,516,356 |
|
|
|
1,330,330 |
|
|
|
113,026 |
|
|
|
73,000 |
|
|
|
— |
|
Operating leases |
|
|
122,829 |
|
|
|
16,018 |
|
|
|
24,933 |
|
|
|
18,984 |
|
|
|
62,894 |
|
| |
Total contractual cash obligations |
|
$ |
4,482,020 |
|
|
|
2,585,016 |
|
|
|
918,661 |
|
|
|
268,716 |
|
|
|
709,627 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Commitment Expirations Per Period |
| |
|
Total amounts |
|
Less than |
|
|
|
|
|
|
| (In thousands) |
|
committed |
|
one year |
|
1-3 years |
|
3-5 years |
|
After 5 years |
| |
Commercial Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit |
|
$ |
2,489,711 |
|
|
|
860,680 |
|
|
|
867,112 |
|
|
|
648,643 |
|
|
|
113,276 |
|
Standby letters of credit |
|
|
211,597 |
|
|
|
91,768 |
|
|
|
76,418 |
|
|
|
40,765 |
|
|
|
2,646 |
|
Other commercial commitments |
|
|
761,822 |
|
|
|
289,121 |
|
|
|
196,281 |
|
|
|
205,332 |
|
|
|
71,088 |
|
| |
Total commercial commitments |
|
$ |
3,463,130 |
|
|
|
1,241,569 |
|
|
|
1,139,811 |
|
|
|
894,740 |
|
|
|
187,010 |
|
| |
37
Off-Balance Sheet Arrangements
In the normal course of operations, Webster engages in a variety of financial transactions that, in
accordance with U.S. generally accepted accounting principles, are not recorded in the financial
statements, or are recorded in amounts that differ from the notional amounts. These transactions
involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used for general corporate purposes or for customer needs. Corporate purpose
transactions are used to help manage credit, interest rate and liquidity risk or to optimize
capital. Customer transactions are used to manage customers’ requests for funding.
For the year ended December 31, 2005, Webster Bank engaged in no off-balance sheet transactions
reasonably likely to have a material effect on the consolidated financial condition.
Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short
and long-term interest rate risks in determining management strategy and action. To facilitate and
manage this process, Webster has an Asset/Liability Committee (“ALCO”). The primary goal of ALCO is
to manage interest rate risk to maximize net income and net economic value over time in changing
interest rate environments subject to Board of Director approved risk limits. The Board sets limits
for earnings at risk for parallel ramps in interest rates over 12 months of plus and minus 100, 200
and 300 basis points. Economic value or “equity at risk” limits are set for parallel shocks in
interest rates of plus and minus 100 and 200 basis points. ALCO also regularly reviews earnings at
risk scenarios for non-parallel changes in rates, as well as longer term earnings at risk for up to
four years in the future.
Management measures interest rate risk using simulation analyses to calculate earnings and equity
at risk. These risk measures are quantified using simulation software from one of the leading firms
in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates
and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate
risk is quantified and appropriate strategies are formulated and implemented.
Earnings at risk is defined as the change in earnings due to changes in interest rates. Interest
rates are assumed to change up or down in a parallel fashion and net income results are compared to
a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve
constant over the twelve month forecast horizon. Earnings simulation analysis incorporates
assumptions about balance sheet changes such as asset and liability growth, loan and deposit
pricing and changes to the mix of assets and liabilities. It is a measure of short-term interest
rate risk. Equity at risk is defined as the change in the net economic value of assets and
liabilities due to changes in interest rates compared to a base net economic value. Equity at risk
analyzes sensitivity in the present value of cash flows over the expected life of existing assets,
liabilities and off-balance sheet contracts. It is a measure of the long-term interest rate risk to
future earnings streams embedded in the current balance sheet.
Key assumptions underlying the present value of cash flows include the behavior of interest rates
and spreads, asset prepayment speeds and attrition rates on deposits. Cash flow projections from
the model are continually compared to market expectations for similar collateral types and adjusted
based on experience with Webster Bank’s own portfolio. The model’s valuation results are compared
to observable market prices for similar instruments whenever possible. The behavior of deposit and
loan customers is studied using historical time series analysis to model future customer behavior
under varying interest rate environments.
The equity at risk simulation process uses multiple interest rate paths generated by an
arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which
all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive
forward rates for future months. Using interest rate swap option volatilities as inputs, the model
creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios,
the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then
constructed in a similar manner to the Base Case.
Cash flows for all instruments are created for each scenario and each rate path using product
specific prepayment models and account specific system data for properties such as maturity date,
amortization type, coupon rate, repricing frequency and repricing date. The asset/liability
simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage
Obligation database. Instruments with explicit options (i.e., caps, floors, puts and calls) and
implicit options (i.e., prepayment and early withdrawal ability) require such a rate and cash flow
modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted
the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time
without penalty and may have embedded caps and floors. On the liability side, there is a large
concentration of customers with indeterminate maturity deposits who have options to add or withdraw
funds from their accounts at any time. Webster Bank also has the option to change the interest rate
paid on these deposits at any time.
38
Webster’s earnings and equity at risk models incorporate certain non-interest income and expense
items that vary with interest rates. These items include mortgage banking income, mortgage
servicing rights and derivative mark-to-market adjustments.
Four main tools are used for managing interest rate risk: (1) the size and duration of the
investment portfolio, (2) the size and duration of the wholesale funding portfolio, (3) off balance
sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets
at least monthly to make decisions on the investment and funding portfolios based on the economic
outlook, the Committee’s interest rate expectations, the risk position and other factors. ALCO
delegates pricing and product design responsibilities to individuals and sub-committees, but
monitors and influences their actions on a regular basis.
Various interest rate contracts, including futures and options, interest rate swaps and interest
rate caps and floors can be used to manage interest rate risk. As of December 31, 2005, Webster was
paying the floating rate side of $802.5 million in interest rate swaps of varying maturities. These
swaps were entered into during 2002, 2003, 2004 and 2005 in order to convert fixed rate FHLB
advances, repurchase agreements and subordinated debt into floating rate liabilities. All of the
swaps qualify for fair value hedge accounting treatment under SFAS No. 133. These interest rate
contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the
possibility that a loss may occur if a counter party to a transaction fails to perform according to
the terms of the contract. The notional amount of interest rate contracts is the amount upon which
interest and other payments are based. The notional amount is not exchanged and therefore, the
notional amounts should not be taken as a measure of credit risk. See Notes 1 and 16 of Notes to
Consolidated Financial Statements contained elsewhere within this Report for additional
information.
Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized
by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking
activities. Prior to closing and funds disbursement, an interest rate lock commitment is generally
extended to the borrower. During such time, Webster Bank is subject to risk that market rates of
interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward
delivery sales commitments are established, thereby setting sales price.
The following table summarizes the estimated impact that gradual 100 and 200 basis point changes in
interest rates over a twelve month period starting December 31, 2005 and December 31, 2004 might
have on Webster’s net income for the subsequent twelve month period compared to no change in
interest rates.
Table 17: Earnings sensitivity (Earnings at risk).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
-200 bp |
|
-100 bp |
|
+100 bp |
|
+200 bp |
| |
December 31, 2004 |
|
|
-9.7 |
% |
|
|
-3.3 |
% |
|
|
+0.4 |
% |
|
|
-0.1 |
% |
December 31, 2005 |
|
|
+0.3 |
% |
|
|
+0.8 |
% |
|
|
-1.3 |
% |
|
|
-2.6 |
% |
The reduction in risk to falling rates since the end of 2004 is due primarily to higher market
interest rates which have reduced mortgage related prepayment risk in the loan and securities
portfolios. Mortgage rates have risen about 50 basis points during this time reducing the economic
incentive to prepay. Additionally, Webster has raised deposit rates farther away from assumed
floors during 2005 giving it more flexibility should market rates fall again. The increase in risk
to rising rates is due primarily to a changing mix of deposits from savings and money market
accounts into more rate sensitive CDs and from an increase in the assumed pricing elasticity of
core deposits. Webster is well within policy limits for all scenarios.
Webster can also hold futures and options positions to minimize the price volatility of certain
assets held as trading securities. Changes in the market value of these positions are recognized in
the Consolidated Statements of Income in the period for which the change occurred.
39
Table 18: Market value sensitivity (Equity at risk).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated |
|
|
Estimated Economic Value |
|
| |
|
Book |
|
|
Economic |
|
|
Change |
|
| (Dollars in thousands) |
|
Value |
|
|
Value |
|
|
-100 BP |
|
|
+100 BP |
|
| |
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
17,836,562 |
|
|
|
17,121,602 |
|
|
|
319,715 |
|
|
|
(379,819 |
) |
Liabilities |
|
|
16,189,336 |
|
|
|
15,371,476 |
|
|
|
246,837 |
|
|
|
(220,926 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,647,226 |
|
|
|
1,750,126 |
|
|
|
72,878 |
|
|
|
(158,893 |
) |
Net change as % base net economic value |
|
|
|
|
|
|
|
|
|
|
4.2 |
% |
|
|
(9.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
17,020,597 |
|
|
|
16,430,957 |
|
|
|
246,773 |
|
|
|
(341,144 |
) |
Liabilities |
|
|
15,476,623 |
|
|
|
14,840,817 |
|
|
|
252,619 |
|
|
|
(225,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,543,974 |
|
|
|
1,590,140 |
|
|
|
(5,846 |
) |
|
|
(115,520 |
) |
Net change as % base net economic value |
|
|
|
|
|
|
|
|
|
|
(0.4 |
)% |
|
|
(7.3 |
)% |
The book value of assets exceeded the estimated market value at December 31, 2005 and 2004 because
the equity at risk model assigns no value to goodwill and other intangible assets, which totaled
$698.6 million and $694.2 million, respectively. The above table includes interest-earning assets
that are not directly impacted by changes in interest rates. Assets include equity securities of
$228.0 million at December 31, 2005 and $272.7 million at December 31, 2004. Equity securities
include $169.7 million of FHLB and FRB stock and $38.4 million in common stock at December 31,
2005. See Note 4 of Notes to Consolidated Financial Statements contained elsewhere within this
Report for further information concerning investment securities. Values for mortgage servicing
rights have been included in the tables above as movements in interest rates affect their
valuation.
Changes in economic value can be best described using duration. Duration is a measure of the price
sensitivity of financial instruments for small changes in interest rates. For fixed rate
instruments it can also be thought of as the weighted average expected time to receive future cash
flows. For floating rate instruments it can be thought of as the weighted average expected time
until the next rate reset. The longer the duration, the greater the price sensitivity for given
changes in interest rates. Floating rate instruments may have a duration as short as one month and
therefore have very little price sensitivity due to changes in interest rates. Increases in
interest rates typically reduce the value of fixed rate assets as future discounted cash flows are
worth less at higher discount rates. A liability’s value decreases for the same reason in a rising
rate environment. A reduction in value of a liability is a benefit, however, as this is an
obligation of Webster.
At the end of 2005, Webster’s net economic value was more sensitive to changing rates than in 2004.
The change in sensitivity was primarily due to a 50 basis point increase in long term interest
rates and changes in the mix of deposits.
Duration gap is the difference between the duration of assets and the duration of liabilities. A
duration gap near zero implies that the balance sheet is matched and would exhibit no change in
estimated economic value for a small change in interest rates. Webster’s duration gap was positive
0.6 at the end of 2005. At the end of 2004, the duration gap was positive 0.2. A positive duration
gap implies that assets are longer than liabilities and therefore, they have more economic price
sensitivity than liabilities and will reset their interest rates slower than liabilities.
Consequently, Webster’s net estimated economic value would decrease when interest rates rise as the
increased value of liabilities would not offset the decreased value of assets. The opposite would
occur when interest rates fall. Net income would also generally be expected to decrease when
interest rates rise and increase when rates fall. The change in Webster’s duration gap is due to
asset duration rising 0.3 to 2.1 and liability duration falling 0.1 to 1.5 in 2005 for the reasons
discussed above.
These estimates assume that management does not take any action to mitigate any positive or
negative effects from changing interest rates. The net income and economic values estimates are
subject to factors that could cause actual results to differ. Management believes that Webster’s
interest rate risk position at December 31, 2005 represents a reasonable level of risk given the
current interest rate outlook. Management, as always, is prepared to act in the event that interest
rates do change rapidly.
40
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein have been prepared in
accordance with U.S. generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a banking
institution are monetary in nature. As a result, interest rates have a more significant impact on
Webster’s performance than the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under
the caption “Asset/Liability Management and Market Risk”.
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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41
MANAGEMENT’S REPORT ON INTERNAL CONTROL
We, as management of Webster Financial Corporation and its Subsidiaries (“Webster” or the
“Company”), are responsible for establishing and maintaining effective internal control over
financial reporting. Pursuant to the rules and regulations of the Securities and Exchange
Commission, internal control over financial reporting is a process designed by, or under the
supervision of, the Company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company’s board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles, and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Management has evaluated the effectiveness of Webster’s internal control over financial reporting
as of December 31, 2005 based on the control criteria established in a report entitled Internal
Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on such evaluation, we have concluded the Webster’s internal
control over financial reporting is effective as of December 31, 2005.
The independent registered public accounting firm of KPMG LLP, as auditors of Webster’s
consolidated financial statements, has issued an attestation report on management’s assessment of
Webster’s internal control over financial reporting.
| |
|
|
|
|
/s/ James C. Smith
James C. Smith
|
|
|
/s/ William J. Healy
William J. Healy
|
|
Chairman and Chief Executive Officer
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
March 10, 2006
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Webster Financial Corporation:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control, that Webster Financial Corporation and subsidiaries (the “Company”) maintained
effective internal control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on criteria
established in Internal Control —
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of condition of Webster Financial Corporation
and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of
income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2005, and our report dated March 10, 2006 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Hartford, Connecticut
March 10, 2006
43
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Webster Financial Corporation:
We have audited the accompanying consolidated statements of condition of Webster Financial
Corporation and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related
consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Webster Financial Corporation and subsidiaries as of
December 31, 2005 and 2004, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 10, 2006 expressed an unqualified opinion on management’s assessment of, and the
effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Hartford, Connecticut
March 10, 2006
44
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands, except share and per share data) |
|
2005 |
|
2004 |
| |
Assets: |
|
|
|
|
|
|
|
|
Cash and due from depository institutions |
|
$ |
293,706 |
|
|
|
248,825 |
|
Short-term investments |
|
|
36,302 |
|
|
|
17,629 |
|
Securities: (Notes 4 and 13) |
|
|
|
|
|
|
|
|
Trading, at fair value |
|
|
2,257 |
|
|
|
— |
|
Available for sale, at fair value |
|
|
2,555,419 |
|
|
|
2,494,406 |
|
Held to maturity securities (fair value of $1,132,223 and $1,234,629) |
|
|
1,142,909 |
|
|
|
1,229,613 |
|
Loans held for sale (Note 16) |
|
|
267,919 |
|
|
|
147,211 |
|
Loans, net (Notes 5 and 6) |
|
|
12,138,800 |
|
|
|
11,562,663 |
|
Accrued interest receivable |
|
|
85,779 |
|
|
|
63,406 |
|
Goodwill (Note 7) |
|
|
642,889 |
|
|
|
623,298 |
|
Cash surrender value of life insurance |
|
|
237,822 |
|
|
|
228,120 |
|
Premises and equipment, net (Note 8) |
|
|
182,856 |
|
|
|
149,069 |
|
Intangible assets (Note 7) |
|
|
55,681 |
|
|
|
70,867 |
|
Deferred tax asset, net (Note 9) |
|
|
55,313 |
|
|
|
70,988 |
|
Prepaid expenses and other assets (Note 10) |
|
|
138,910 |
|
|
|
114,502 |
|
| |
Total assets |
|
$ |
17,836,562 |
|
|
|
17,020,597 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Deposits (Note 11) |
|
$ |
11,631,145 |
|
|
|
10,571,288 |
|
Federal Home Loan Bank advances (Note 12) |
|
|
2,214,010 |
|
|
|
2,590,335 |
|
Securities sold under agreements to repurchase and other
short-term borrowings (Note 13) |
|
|
1,522,381 |
|
|
|
1,428,483 |
|
Other long-term debt (Note 14) |
|
|
640,906 |
|
|
|
680,015 |
|
Reserve for unfunded credit commitments (Note 6) |
|
|
9,146 |
|
|
|
— |
|
Accrued expenses and other liabilities |
|
|
162,171 |
|
|
|
196,925 |
|
| |
Total liabilities |
|
|
16,179,759 |
|
|
|
15,467,046 |
|
| |
|
|
|
|
|
|
|
|
|
Preferred stock of subsidiary corporation (Note 22) |
|
|
9,577 |
|
|
|
9,577 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 5, 8 and 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity: (Note 15) |
|
|
|
|
|
|
|
|
Common stock, $.01 par value: |
|
|
|
|
|
|
|
|
Authorized
— 200,000,000 shares at December 31, 2005 and 2004;
|
|
|
|
|
|
|
|
|
Issued — 54,117,218 shares at December 31, 2005
and 53,639,467 shares at December 31, 2004 |
|
|
541 |
|
|
|
536 |
|
Paid-in capital |
|
|
619,644 |
|
|
|
605,696 |
|
Retained earnings |
|
|
1,075,984 |
|
|
|
942,830 |
|
Less: Treasury stock at cost, 455,426 shares at December 31,
2005 and 11,000 shares at December 31, 2004 |
|
|
(21,065 |
) |
|
|
(547 |
) |
Accumulated other comprehensive loss |
|
|
(27,878 |
) |
|
|
(4,541 |
) |
| |
Total shareholders’ equity |
|
|
1,647,226 |
|
|
|
1,543,974 |
|
| |
Total liabilities and shareholders’ equity |
|
$ |
17,836,562 |
|
|
|
17,020,597 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
45
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
| |
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
689,041 |
|
|
|
547,308 |
|
|
|
460,677 |
|
Securities and short-term investments |
|
|
169,861 |
|
|
|
178,118 |
|
|
|
182,632 |
|
Loans held for sale |
|
|
12,945 |
|
|
|
6,682 |
|
|
|
15,409 |
|
| |
Total interest income |
|
|
871,847 |
|
|
|
732,108 |
|
|
|
658,718 |
|
| |
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (Note 11) |
|
|
188,437 |
|
|
|
120,606 |
|
|
|
111,311 |
|
FHLB advances and other borrowings |
|
|
86,283 |
|
|
|
106,434 |
|
|
|
114,953 |
|
Other long-term debt |
|
|
79,786 |
|
|
|
36,907 |
|
|
|
18,935 |
|
| |
Total interest expense |
|
|
354,506 |
|
|
|
263,947 |
|
|
|
245,199 |
|
| |
Net interest income |
|
|
517,341 |
|
|
|
468,161 |
|
|
|
413,519 |
|
Provision for credit losses (Note 6) |
|
|
9,500 |
|
|
|
18,000 |
|
|
|
25,000 |
|
| |
Net interest income after provision for credit losses |
|
|
507,841 |
|
|
|
450,161 |
|
|
|
388,519 |
|
| |
Noninterest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposit service fees |
|
|
85,967 |
|
|
|
77,743 |
|
|
|
70,018 |
|
Insurance revenue |
|
|
44,015 |
|
|
|
43,506 |
|
|
|
39,975 |
|
Loan related fees |
|
|
33,232 |
|
|
|
28,574 |
|
|
|
26,384 |
|
Wealth and investment services |
|
|
23,151 |
|
|
|
22,207 |
|
|
|
18,341 |
|
Gain on sale of loans and loan servicing, net |
|
|
11,573 |
|
|
|
13,305 |
|
|
|
19,520 |
|
Increase in cash surrender value of life insurance |
|
|
9,241 |
|
|
|
8,835 |
|
|
|
8,490 |
|
Gain on sale of securities, net (Note 4) |
|
|
3,633 |
|
|
|
14,313 |
|
|
|
18,574 |
|
Financial advisory services |
|
|
— |
|
|
|
3,808 |
|
|
|
22,758 |
|
Other income |
|
|
10,073 |
|
|
|
7,416 |
|
|
|
8,423 |
|
| |
Total noninterest income |
|
|
220,885 |
|
|
|
219,707 |
|
|
|
232,483 |
|
| |
Noninterest Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits (Notes 18 and 19) |
|
|
241,469 |
|
|
|
219,320 |
|
|
|
206,381 |
|
Occupancy |
|
|
43,292 |
|
|
|
35,820 |
|
|
|
30,698 |
|
Furniture and equipment |
|
|
50,228 |
|
|
|
37,626 |
|
|
|
31,143 |
|
Intangible amortization (Note 7) |
|
|
19,913 |
|
|
|
18,345 |
|
|
|
15,998 |
|
Marketing |
|
|
14,267 |
|
|
|
13,380 |
|
|
|
11,508 |
|
Professional services |
|
|
14,962 |
|
|
|
15,654 |
|
|
|
11,708 |
|
Dividends on preferred stock of subsidiary corporation (Note 22) |
|
|
863 |
|
|
|
863 |
|
|
|
863 |
|
Conversion and infrastructure costs |
|
|
8,138 |
|
|
|
500 |
|
|
|
— |
|
Debt prepayment expenses (Note 12) |
|
|
— |
|
|
|
45,761 |
|
|
|
— |
|
Capital securities (Note 14 and 21) |
|
|
— |
|
|
|
— |
|
|
|
11,924 |
|
Other expenses |
|
|
62,438 |
|
|
|
59,868 |
|
|
|
57,759 |
|
| |
Total noninterest expenses |
|
|
455,570 |
|
|
|
447,137 |
|
|
|
377,982 |
|
| |
Income before income taxes |
|
|
273,156 |
|
|
|
222,731 |
|
|
|
243,020 |
|
Income taxes (Note 9) |
|
|
87,301 |
|
|
|
68,898 |
|
|
|
79,772 |
|
| |
Net Income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
46
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
| |
Net income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.47 |
|
|
|
3.05 |
|
|
|
3.58 |
|
Diluted |
|
$ |
3.43 |
|
|
|
3.00 |
|
|
|
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
53,577 |
|
|
|
50,506 |
|
|
|
45,542 |
|
Dilutive effect of stock-based compensation |
|
|
659 |
|
|
|
846 |
|
|
|
820 |
|
| |
Diluted |
|
|
54,236 |
|
|
|
51,352 |
|
|
|
46,362 |
|
| |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Net Income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding loss on securities available for sale
arising during year (net of income tax effect of $(11,873),
$(9,806) and $(14,908) for 2005, 2004 and 2003, respectively) |
|
|
(22,052 |
) |
|
|
(14,515 |
) |
|
|
(21,343 |
) |
Reclassification adjustment for net gains on securities included in
net income (net of income tax effect of $(1,097),
$(5,179) and $(7,311) for 2005, 2004 and 2003, respectively) |
|
|
(2,037 |
) |
|
|
(9,617 |
) |
|
|
(11,024 |
) |
Deferred gain on cash flow hedge (Note 14) |
|
|
— |
|
|
|
— |
|
|
|
1,690 |
|
Reclassification adjustment for cash flow hedge gain amortization
included in net income |
|
|
(168 |
) |
|
|
(169 |
) |
|
|
(162 |
) |
Reclassification adjustment for amortization of unrealized loss
(gain) upon transfer to held to maturity (net of income tax effect
of $496, $13, and $(11) for 2005, 2004 and 2003, respectively ) |
|
|
920 |
|
|
|
24 |
|
|
|
(21 |
) |
| |
Other comprehensive loss |
|
|
(23,337 |
) |
|
|
(24,277 |
) |
|
|
(30,860 |
) |
| |
Comprehensive income |
|
$ |
162,518 |
|
|
|
129,556 |
|
|
|
132,388 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
47
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre- |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hensive |
|
|
| |
|
Common |
|
Paid-in |
|
Retained |
|
Treasury |
|
Income |
|
|
| (In thousands, except per share data) |
|
Stock |
|
Capital |
|
Earnings |
|
Stock |
|
(Loss) |
|
Total |
| |
Balance, December 31, 2002 |
|
$ |
495 |
|
|
|
411,154 |
|
|
|
707,531 |
|
|
|
(134,318 |
) |
|
|
50,596 |
|
|
|
1,035,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2003 |
|
|
— |
|
|
|
— |
|
|
|
163,248 |
|
|
|
— |
|
|
|
— |
|
|
|
163,248 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.82 per common share |
|
|
— |
|
|
|
— |
|
|
|
(37,422 |
) |
|
|
— |
|
|
|
— |
|
|
|
(37,422 |
) |
Exercise of stock options |
|
|
— |
|
|
|
(3,647 |
) |
|
|
— |
|
|
|
11,916 |
|
|
|
— |
|
|
|
8,269 |
|
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12,400 |
) |
|
|
— |
|
|
|
(12,400 |
) |
Common stock issued in acquisition |
|
|
— |
|
|
|
1,812 |
|
|
|
— |
|
|
|
20,163 |
|
|
|
— |
|
|
|
21,975 |
|
Net unrealized loss on securities
available for sale, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(32,367 |
) |
|
|
(32,367 |
) |
Stock-based compensation |
|
|
— |
|
|
|
3,692 |
|
|
|
— |
|
|
|
1,926 |
|
|
|
— |
|
|
|
5,618 |
|
Repurchase of capital trust securities |
|
|
— |
|
|
|
(991 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(991 |
) |
Deferred gain from hedge, net of
amortization |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,528 |
|
|
|
1,528 |
|
Amortization of unrealized gain on
securities transferred to held to
maturity, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
|
|
(21 |
) |
| |
Balance, December 31, 2003 |
|
|
495 |
|
|
|
412,020 |
|
|
|
833,357 |
|
|
|
(112,713 |
) |
|
|
19,736 |
|
|
|
1,152,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2004 |
|
|
— |
|
|
|
— |
|
|
|
153,833 |
|
|
|
— |
|
|
|
— |
|
|
|
153,833 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.90 per common share |
|
|
— |
|
|
|
— |
|
|
|
(44,361 |
) |
|
|
— |
|
|
|
— |
|
|
|
(44,361 |
) |
Exercise of stock options |
|
|
2 |
|
|
|
5,659 |
|
|
|
— |
|
|
|
6,453 |
|
|
|
— |
|
|
|
12,114 |
|
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,620 |
) |
|
|
— |
|
|
|
(4,620 |
) |
Common stock issued in acquisitions |
|
|
40 |
|
|
|
182,289 |
|
|
|
1 |
|
|
|
108,650 |
|
|
|
— |
|
|
|
290,980 |
|
Net unrealized loss on securities
available for sale, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24,132 |
) |
|
|
(24,132 |
) |
Stock-based compensation |
|
|
— |
|
|
|
5,704 |
|
|
|
— |
|
|
|
1,683 |
|
|
|
— |
|
|
|
7,387 |
|
Amortization of deferred hedging gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(169 |
) |
|
|
(169 |
) |
Amortization of unrealized loss on
securities transferred to held to
maturity, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
24 |
|
Other |
|
|
(1 |
) |
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
| |
Balance, December 31, 2004 |
|
|
536 |
|
|
|
605,696 |
|
|
|
942,830 |
|
|
|
(547 |
) |
|
|
(4,541 |
) |
|
|
1,543,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2005 |
|
|
— |
|
|
|
— |
|
|
|
185,855 |
|
|
|
— |
|
|
|
— |
|
|
|
185,855 |
|
Dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$.98 per common share |
|
|
— |
|
|
|
— |
|
|
|
(52,701 |
) |
|
|
— |
|
|
|
— |
|
|
|
(52,701 |
) |
Exercise of stock options |
|
|
5 |
|
|
|
11,639 |
|
|
|
— |
|
|
|
161 |
|
|
|
— |
|
|
|
11,805 |
|
Common stock repurchased |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(28,135 |
) |
|
|
— |
|
|
|
(28,135 |
) |
Net unrealized loss on securities
available for sale, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(24,089 |
) |
|
|
(24,089 |
) |
Stock-based compensation |
|
|
— |
|
|
|
1,871 |
|
|
|
— |
|
|
|
6,740 |
|
|
|
— |
|
|
|
8,611 |
|
Amortization of deferred hedging gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(168 |
) |
|
|
(168 |
) |
Amortization of unrealized loss on
securities transferred to held to
maturity, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
920 |
|
|
|
920 |
|
Employee Stock Purchase Plan |
|
|
— |
|
|
|
438 |
|
|
|
— |
|
|
|
716 |
|
|
|
— |
|
|
|
1,154 |
|
| |
Balance, December 31, 2005 |
|
$ |
541 |
|
|
|
619,644 |
|
|
|
1,075,984 |
|
|
|
(21,065 |
) |
|
|
(27,878 |
) |
|
|
1,647,226 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
48
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
9,500 |
|
|
|
18,000 |
|
|
|
25,000 |
|
Provision for deferred taxes |
|
|
25,452 |
|
|
|
18,965 |
|
|
|
(744 |
) |
Depreciation and amortization |
|
|
33,781 |
|
|
|
34,424 |
|
|
|
37,524 |
|
Amortization of intangible assets |
|
|
19,913 |
|
|
|
18,345 |
|
|
|
15,998 |
|
Stock-based compensation |
|
|
8,611 |
|
|
|
7,387 |
|
|
|
5,618 |
|
Net gain on sale of foreclosed properties |
|
|
(41 |
) |
|
|
(313 |
) |
|
|
(216 |
) |
Net gain on sale of securities |
|
|
(3,160 |
) |
|
|
(14,796 |
) |
|
|
(18,335 |
) |
Net gain on sale of loans and loan servicing |
|
|
(11,573 |
) |
|
|
(13,305 |
) |
|
|
(19,520 |
) |
Net (gain) loss on trading securities |
|
|
(456 |
) |
|
|
483 |
|
|
|
(239 |
) |
(Increase) decrease in trading securities |
|
|
(1,801 |
) |
|
|
72 |
|
|
|
5,436 |
|
Increase in cash surrender value of life insurance |
|
|
(9,241 |
) |
|
|
(8,835 |
) |
|
|
(8,490 |
) |
Loans originated for sale |
|
|
(1,844,829 |
) |
|
|
(1,889,437 |
) |
|
|
(2,693,403 |
) |
Proceeds from sale of loans originated for sale |
|
|
1,735,694 |
|
|
|
1,924,756 |
|
|
|
3,028,250 |
|
(Increase) decrease in interest receivable |
|
|
(21,436 |
) |
|
|
(10,250 |
) |
|
|
1,845 |
|
(Increase) decrease in prepaid expenses and other assets |
|
|
(17,114 |
) |
|
|
66,251 |
|
|
|
116,538 |
|
(Decrease) increase in accrued expenses and other liabilities, net |
|
|
(52,271 |
) |
|
|
52,560 |
|
|
|
(160,587 |
) |
Proceeds from surrender of life insurance contracts |
|
|
797 |
|
|
|
666 |
|
|
|
— |
|
| |
Net cash provided by operating activities |
|
|
57,681 |
|
|
|
358,806 |
|
|
|
497,923 |
|
| |
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities, available for sale |
|
|
(833,071 |
) |
|
|
(2,154,660 |
) |
|
|
(4,018,142 |
) |
Proceeds from maturities and principal repayments of securities available for sale |
|
|
480,619 |
|
|
|
900,715 |
|
|
|
1,950,084 |
|
Proceeds from sales of securities, available for sale |
|
|
258,370 |
|
|
|
2,800,802 |
|
|
|
1,937,431 |
|
Purchases of held-to-maturity securities |
|
|
(72,901 |
) |
|
|
(176,687 |
) |
|
|
(17,448 |
) |
Proceeds from maturities and principal repayments of held-to-maturity securities |
|
|
158,543 |
|
|
|
42,375 |
|
|
|
— |
|
Proceeds from sale of held-to-maturity securities |
|
|
769 |
|
|
|
— |
|
|
|
— |
|
Decrease in short-term investments, net |
|
|
89,803 |
|
|
|
27,426 |
|
|
|
4,089 |
|
Increase in loans, net |
|
|
(598,196 |
) |
|
|
(867,350 |
) |
|
|
(1,200,185 |
) |
Proceeds from sale of foreclosed properties |
|
|
2,687 |
|
|
|
7,343 |
|
|
|
4,401 |
|
Purchases of premises and equipment, net |
|
|
(58,539 |
) |
|
|
(49,074 |
) |
|
|
(22,560 |
) |
Net cash received (paid) for purchase and sale transactions |
|
|
17,038 |
|
|
|
(108,911 |
) |
|
|
(57,587 |
) |
Deferred realized hedging gains |
|
|
— |
|
|
|
— |
|
|
|
1,690 |
|
Other, net |
|
|
— |
|
|
|
— |
|
|
|
(611 |
) |
| |
Net cash (used) provided by investing activities |
|
|
(554,878 |
) |
|
|
421,979 |
|
|
|
(1,418,838 |
) |
| |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
918,853 |
|
|
|
532,701 |
|
|
|
616,021 |
|
Proceeds from FHLB advances |
|
|
42,204,505 |
|
|
|
76,385,372 |
|
|
|
50,769,098 |
|
Repayment of FHLB advances |
|
|
(42,570,120 |
) |
|
|
(77,051,445 |
) |
|
|
(50,442,836 |
) |
Increase (decrease) in securities sold under agreements to
repurchase and other short-term borrowings |
|
|
91,917 |
|
|
|
(695,755 |
) |
|
|
(274,502 |
) |
Other long-term debt issued |
|
|
— |
|
|
|
150,000 |
|
|
|
200,000 |
|
Other long-term debt repaid |
|
|
(35,200 |
) |
|
|
(25,200 |
) |
|
|
(25,200 |
) |
Issuance of capital trust securities |
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
Redemption of capital trust securities |
|
|
— |
|
|
|
— |
|
|
|
(12,342 |
) |
Cash dividends to common shareholders |
|
|
(52,701 |
) |
|
|
(44,361 |
) |
|
|
(37,422 |
) |
Exercise of stock options |
|
|
11,805 |
|
|
|
12,114 |
|
|
|
8,269 |
|
Stock sold to Employee Stock Purchase Plan |
|
|
1,154 |
|
|
|
— |
|
|
|
— |
|
Common stock repurchased |
|
|
(28,135 |
) |
|
|
(4,620 |
) |
|
|
(12,400 |
) |
| |
Net cash provided (used) by financing activities |
|
|
542,078 |
|
|
|
(741,194 |
) |
|
|
863,686 |
|
| |
Increase (decrease) in cash and cash equivalents |
|
|
44,881 |
|
|
|
39,591 |
|
|
|
(57,229 |
) |
Cash and cash equivalents at beginning of year |
|
|
248,825 |
|
|
|
209,234 |
|
|
|
266,463 |
|
| |
Cash and cash equivalents at end of year |
|
$ |
293,706 |
|
|
|
248,825 |
|
|
|
209,234 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
49
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
| |
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
84,349 |
|
|
|
39,177 |
|
|
|
78,146 |
|
Interest paid |
|
|
344,418 |
|
|
|
258,353 |
|
|
|
243,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans to foreclosed properties |
|
|
5,394 |
|
|
|
4,767 |
|
|
|
6,347 |
|
Reclassification of reserve for unfunded credit commitments |
|
|
9,146 |
|
|
|
— |
|
|
|
— |
|
Reclassification of available for sale securities to held to maturity |
|
|
— |
|
|
|
922,778 |
|
|
|
155,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Assets acquired and liabilities assumed and assets sold and liabilities extinguished were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
| |
Purchase Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of noncash assets acquired |
|
$ |
235,963 |
|
|
|
2,740,278 |
|
|
|
222,189 |
|
Fair value of liabilities assumed |
|
|
210,786 |
|
|
|
2,724,335 |
|
|
|
219,495 |
|
Fair value of common stock issued |
|
|
— |
|
|
|
290,980 |
|
|
|
21,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of noncash assets sold |
|
|
105,656 |
|
|
|
16,263 |
|
|
|
— |
|
Fair value of liabilities extinguished |
|
|
56,237 |
|
|
|
7,104 |
|
|
|
— |
|
| |
See accompanying Notes to Consolidated Financial Statements.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
a) Basis of Financial Statement Presentation
1) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Webster Financial Corporation and its
subsidiaries (collectively, “Webster”), including Webster Bank, National Association, a national
bank regulated by the Office of the Comptroller of the Currency (“OCC”). The Consolidated Financial
Statements have been prepared in conformity with U.S. generally accepted accounting principles
(“GAAP”) and all significant intercompany balances and transactions have been eliminated in
consolidation.
2) Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the Consolidated Financial Statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the date of the
Consolidated Financial Statements and the reported amounts of revenues and expenses for the periods
presented. The actual results could differ from those estimates. Material estimates that are
susceptible to near-term changes include the determination of the allowance for credit losses and
the valuation allowance for the deferred tax asset.
b) Cash and Cash Equivalents
For the purposes of the Statements of Cash Flows, cash on hand and in banks is reflected as cash
and cash equivalents. Webster is required by the Federal Reserve System to maintain noninterest
bearing cash reserves equal to a percentage of certain deposits.
c) Securities
Securities are classified as available for sale, held to maturity or trading. Management determines
the appropriate classification of securities at the time of purchase. Securities are classified as
held to maturity when the intent and ability is to hold the securities to maturity. Held to
maturity securities are stated at amortized cost. Securities bought and held for the purpose of
selling in the near term are classified as trading and are carried at fair value, with net
unrealized gains and losses recognized currently in noninterest income. Securities not classified
as held to maturity or trading are classified as available for sale and are stated at fair value.
Unrealized gains and losses, net of tax, on available for sale securities are included in
accumulated other comprehensive income (loss), net of income taxes, as a separate component of
shareholders’ equity. Transfers from available for sale to held to maturity are recorded at fair
market value at the time of transfer. Any unrealized gain or loss on transferred securities is
reclassified as a separate component of accumulated other comprehensive income (loss) and amortized
as an adjustment to interest income using a method that approximates the level yield method. The
reported value of held to maturity or available for sale securities is adjusted for amortization of
premiums or accretion of discounts using a method that approximates the level yield method. Such
amortization and accretion is included in interest income from securities. Non-marketable
securities, such as Federal Home Loan Bank (“FHLB”) and Federal Reserve Banks (“FRB”) stock, are
carried at cost. Unrealized losses on securities are charged to noninterest income when the decline
in fair value of a security is judged to be other than temporary. The specific identification
method is used to determine realized gains and losses on sales of securities.
d) Loans
Loans are stated at the principal amounts outstanding, net of unamortized premiums and discounts
and net of deferred loan fees and/or costs which are recognized as a yield adjustment using the
interest method. These yield adjustments are generally amortized over the contractual life of the
related loans adjusted for estimated prepayments when applicable. Interest on loans is credited to
interest income as earned based on the interest rate applied to principal amounts outstanding.
Loans are placed on nonaccrual status when timely collection of principal and interest in
accordance with contractual terms is doubtful. Loans are transferred to a nonaccrual basis
generally when principal or interest payments become 90 days delinquent, unless the loan is well
secured and in process of collection, or sooner when management concludes circumstances indicate
that borrowers may be unable to meet contractual principal or interest payments.
Loans held for sale are valued at the lower of aggregate cost or fair value. Gains or losses on
sales of loans held for sale are determined using the specific identification basis and are
recognized upon delivery in noninterest income.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrual of interest is discontinued if the loan is placed on nonaccrual status. When a loan is
transferred to nonaccrual status, unpaid accrued interest is reversed and charged against interest
income. If ultimate repayment of a nonaccrual loan is expected, any payments received are applied
in accordance with contractual terms. If ultimate repayment is not expected or management judges it
to be prudent, any payment received on a nonaccrual loan is applied to principal until the unpaid
balance has been fully recovered. Any excess is then credited to interest income received. Loans
are removed from nonaccrual status when they become current as to principal and interest or
demonstrate a period of performance under contractual terms and, in the opinion of management, are
fully collectible as to principal and interest.
Commercial-type loans (commercial and commercial real estate loans) are considered impaired when it
is probable that the borrower will not repay the loan according to the original contractual terms
of the loan agreement. Impaired loans included in nonperforming loans generally are nonaccrual
commercial-type loans, commercial-type loans past due 90 days or more and still accruing interest,
and all loans restructured in a troubled debt restructuring.
While employing industry accepted portfolio management procedures and through aggressive problem
loan practices, we periodically will identify credit losses within the loan portfolio. Loans, or
portions of loans, are charged-off against the allowance for loan losses when deemed by management
to be uncollectible. Charge-offs are processed in accordance with established Federal regulatory
guidelines. Recoveries on previously charged off loans are credited to the allowance.
Loan origination fees, net of certain direct origination costs, and premiums and discounts on loans
purchased are recognized in interest income over the lives of the loans using a method
approximating the interest method.
e) Allowance for Credit Losses
The allowance for credit losses, which comprises the allowance for loan losses and the reserve for
unfunded credit commitments, is maintained at a level adequate to absorb probable losses inherent
in the loan portfolio and in unfunded credit commitments. This allowance is increased by provisions
charged to operating expense and by recoveries on loans previously charged-off, and reduced by
charge-offs on loans.
Management believes that the allowance for credit losses is adequate. While management uses
available information to recognize losses, future additions to the allowance may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for credit losses and such agencies
may require additions to the allowance for credit losses based on judgments different from those of
management.
The allowance for loan losses related to impaired loans is based on discounted cash flows using the
loan’s initial effective interest rate or the fair value of the collateral for certain loans where
repayment of the loan is expected to be provided solely by the underlying collateral (collateral
dependent loans). Estimated costs to sell are considered when determining the fair value of
collateral in the measurement of impairment if these costs are expected to reduce the cash flows
available to repay or otherwise satisfy the loans.
f) Derivative Instruments and Hedging Activities
Derivatives are accounted for in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. All
derivatives are recognized as either assets or liabilities in the Consolidated Statements of
Condition and measured at fair value. Changes in the fair value of the derivatives are reported in
either earnings or other comprehensive income (loss), depending on the use of the derivative and
whether or not it qualifies for hedge accounting. Hedge accounting treatment is permitted only if
specific criteria are met, including a requirement that the hedging relationship be highly
effective both at inception of the hedge relationship and on an ongoing basis. Accounting for
hedges varies based on the type of hedge — fair value or cash flow. Results of effective hedges are
recognized in current earnings for fair value hedges and in other comprehensive income (loss) for
cash flow hedges. Ineffective portions of hedges are recognized immediately in earnings and are not
deferred.
When derivative contracts that were designated as hedging instruments in fair value hedges are
terminated, the fair value adjustment related to the hedged item is amortized as a yield adjustment
over the remaining life of the hedged item.
Interest rate lock commitments are extended to borrowers in connection with the origination of
mortgage loans held for sale (“rate locks”). To mitigate the interest rate risk inherent in these
rate locks, as well as in closed mortgage loans held for sale (“loans held for sale”), mandatory
forward commitments (“forward commitments”) are established to sell mortgage-backed securities and
best efforts forward commitments are established to sell individual mortgage loans. Rate locks and
forward commitments are considered to be derivatives under SFAS No. 133, as amended.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
g) Short-term Investments
Short-term investments consist primarily of interest-bearing deposits in the FHLB or other
short-term money market investments. These deposits are carried at cost, which approximates market
value.
h) Premises and Equipment and Depreciation
Premises and equipment are carried at cost, less accumulated depreciation. Depreciation of premises
and equipment is accumulated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 15 to 40 years for buildings and improvements and 3 to 20 years
for equipment and software. Amortization of leasehold improvements is calculated on a straight-line
basis over the shorter of the useful life of the improvement or the term of the related leases.
Maintenance and repairs are charged to noninterest expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated and any resulting gains and losses are credited or charged to
income.
i) Impairment of Long-lived Assets
Long-lived assets are evaluated periodically for impairment. An assessment of recoverability is
performed prior to any writedown of an asset. Noninterest expense would be charged in the current
period for any such impairment.
j) Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets
acquired. Goodwill is not subject to amortization but rather is tested at least annually for
impairment.
Intangible assets represent purchased assets that lack physical substance but can be distinguished
from goodwill because of contractual or other legal rights or because the asset is capable of being
sold or exchanged either separately or in combination with a related contract, asset or liability.
Intangible assets with finite useful lives are amortized to noninterest expense over their
estimated useful lives and are subject to impairment testing. Any impairment writedown would be
charged to noninterest expense.
k) Cash Surrender Value of Life Insurance
The investment in life insurance represents the cash surrender value of life insurance policies on
officers of Webster. Increases in the cash surrender value are recorded as other noninterest
income. Decreases are the result of collection on the policies due to the death of an insured.
Death benefit proceeds in excess of cash surrender value are recorded in noninterest income when
received.
l) Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, using the “asset and liability” method.
Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or tax returns; (ii)
are attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates
expected to apply in the years when those temporary differences are expected to be recovered or
settled. Where applicable, deferred tax assets are reduced by a valuation allowance for any
portions determined not likely to be realized. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income tax expenses in the period of enactment. The
valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts
and circumstances warrant.
m) Employee Retirement Benefit Plans
Webster Bank has a noncontributory pension plan covering substantially all employees. Costs related
to this plan, based upon actuarial computations of current and future benefits for employees, are
charged to noninterest expense and are funded in accordance with the requirements of the Employee
Retirement Income Security Act (“ERISA”). A supplemental retirement plan is also maintained for
executive level employees.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
n) Stock-based Compensation
At December 31, 2005, a stock-based employee and a non-employee director compensation plan were
maintained as described more fully in Note 19. Prior to January 1, 2002, stock-based compensation
related to option plans was accounted for under the recognition and measurement provisions of
Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and
related interpretations. Therefore, no stock-based employee compensation expense related to option
grants was reflected in noninterest expense for 2001 and prior years, as all options granted under
the plans had an exercise price equal to the market value of the underlying common stock on the
date of grant. Effective January 1, 2002, the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation”, were adopted prospectively, for all employee and
non-employee options granted, modified, or settled January 1, 2002 and thereafter. Awards under the
plans, in general, vest over periods ranging from 3 to 4 years. Therefore, the cost related to
stock-based compensation included in the determination of net income for 2004 and 2003 was 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. As of January 1, 2005, all stock
options granted prior to the implementation of SFAS No. 123 are fully vested. Restricted stock is
also granted to employees and directors. The fair value of restricted stock granted is expensed
over the vesting period and reflected in noninterest expense. The expense recognized for restricted
stock totaled $2.3 million, $1.8 million and $2.2 million for the years 2005, 2004 and 2003,
respectively.
The following table illustrates the effect on net income and earnings per share if the fair value
based method had been applied to all stock option awards in each of the periods presented.
| |
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
|
| |
|
Net income, as reported |
|
$185,855 |
|
153,833 |
|
163,248 |
|
Add: Stock-based compensation expense included
in reported net income, net of related tax effects |
|
5,845 |
|
3,304 |
|
2,329 |
|
Deduct: Total stock-based compensation expense
determined under fair value based method for all awards,
net of related tax effects |
|
(5,845 |
) |
(3,713 |
) |
(4,061 |
) |
| |
|
Pro forma net income |
|
$185,855 |
|
153,424 |
|
161,516 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
Basic — as reported |
|
$3.47 |
|
3.05 |
|
3.58 |
|
— pro forma |
|
3.47 |
|
3.04 |
|
3.55 |
|
| |
|
Diluted — as reported |
|
$3.43 |
|
3.00 |
|
3.52 |
|
— pro
forma |
|
3.43 |
|
2.99 |
|
3.48 |
|
| |
|
o) Loan and Loan Servicing Sales
Gains or losses on sales of loans are included in noninterest income and are recognized at the time
of sale. SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, requires that a mortgage banking entity recognize as a separate
asset the value of the right to service mortgage loans for others, regardless of how those
servicing rights are acquired. Fair values are estimated considering loan prepayment predictions,
historical prepayment rates, interest rates, and other economic factors. For purposes of impairment
evaluation and measurement, mortgage servicing rights are stratified based on predominate risk
characteristics of the underlying loans including loan type, interest rate (fixed or adjustable)
and amortization type. To the extent that the carrying value of mortgage servicing rights exceeds
fair value by individual stratum, a valuation allowance is established by a charge to noninterest
income. The allowance is adjusted for subsequent changes in fair value. The cost basis of mortgage
servicing rights is amortized into noninterest income over the estimated period of servicing
revenue.
p) Fee Revenue
Generally, fee revenue from deposit service charges and loans is recognized when earned, except
where ultimate collection is uncertain, in which case revenue is recognized when received.
Insurance revenue is recognized on property and casualty insurance, at the later of the billing or
effective date, net of cancellations. Customer policy cancellations may result in a partial refund
of previously collected revenue and, therefore, an adjustment to income is made at that time.
Revenue for other lines of insurance, such as life and health, is recognized when earned.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trust revenue is recognized as received from individual accounts based upon a percentage of asset
value. Fee income on managed institutional accounts is accrued as earned and collected quarterly
based on the value of assets managed at quarter end.
Generally, financial advisory services revenue is recognized to the extent that work has been
completed on specific projects. Additionally, some revenues are contingent on successful completion
of the project. Revenues on these contracts are not recognized until determinable.
q) Comprehensive Income
Comprehensive income is defined as net income and any changes in equity from sources that are not
reflected in the statements of income except those resulting from investments by or distributions
to owners. Other comprehensive income includes items such as net changes in unrealized gains or
losses on securities available for sale, unrealized gains or losses upon transfer of available for
sale securities to held to maturity, deferred gains on cash flow hedges and minimum pension
liability adjustments, net of income taxes. Accumulated other comprehensive income or loss
represents the accumulation of these other comprehensive income items until they are recognized in
the Consolidated Statements of Income.
r) Earnings Per Share
Basic net income per common share (“EPS”) is calculated by dividing net income available to common
shareholders by the weighted-average number of shares of common stock outstanding. Diluted EPS
reflects the potential dilution that could occur if contracts to issue common stock (such as stock
options) were exercised or converted into common stock that would then share in the earnings of
Webster. Diluted EPS is calculated by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding, adjusted for the additional common shares
that would have been outstanding if all potentially dilutive common shares were issued during the
reporting period. For each of the years in the three-year period ended December 31, 2005, the
difference between basic and diluted weighted average shares outstanding was entirely due to the
effects of stock-based compensation as potential common shares.
At December 31, 2005, 2004 and 2003, options to purchase 296,315, 475,140 and 446,406 shares of
common stock at exercise prices from $46.96 to $50.64; $48.21 to $51.31; and $39.20 to $46.15;
respectively, were not considered in the computation of diluted potential common stock since the
exercise prices of the options were greater than the average market price of Webster’s common stock
for the respective periods.
s) Standby Letters of Credit
Substantially all the outstanding standby letters of credit are performance standby letters of
credit within the scope of FASB Interpretation No. 45. These are irrevocable undertakings by
Webster, as guarantor, to make payments in the event a specified third party fails to perform under
a nonfinancial contractual obligation. Most of the performance standby letters of credit arise in
connection with lending relationships and have terms of one year or less. At December 31, 2005,
standby letters of credit totaled $187.6 million. The fair value of standby letters of credit is
considered immaterial to Webster’s Consolidated Financial Statements.
t) Reclassifications
Certain financial statement balances as previously reported have been reclassified to conform to
the 2005 Consolidated Financial Statements presentation.
NOTE 2: Purchase and Sale Transactions
The following purchase and sale transactions were completed during 2005. The results of operations
of the acquired companies are included in the Consolidated Financial Statements only for periods
subsequent to the date of acquisition.
Eastern Wisconsin Bancshares, Inc.
On September 7, 2004, Webster announced its entry into the health savings account business through
a definitive agreement to acquire Eastern Wisconsin Bancshares, Inc. (“EWBI”), the holding company
for State Bank of Howards Grove (“State Bank”), headquartered in Howards Grove, Wisconsin. This
transaction closed on February 28, 2005. The acquisition made Webster one of the largest custodians
and administrators of health savings accounts in the United States. The purchase price was
approximately $27 million in cash. State Bank had $163 million in assets and $144 million in
deposits, including $95 million in health savings account deposits at the time of the agreement.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A definitive agreement was announced on February 8, 2005 whereby Webster would divest State Bank’s
two retail branches and related loans and deposits and retain the health savings account operation.
The health savings account division operates under the name of HSA Bank, a division of Webster
Bank. The State Bank branch sale closed on April 15, 2005.
J. Bush & Co.
On June 29, 2005, Webster announced the completion of its acquisition of the assets of J. Bush &
Co., a New Haven-based investment management firm. J. Bush & Co., which retained its name and
operates as a division of Webster’s Wealth and Investment Advisors group, brought to Webster over
$200 million in assets under management. These assets are not included in the Consolidated
Financial Statements.
NOTE 3: Recent Accounting Standards
Statements of Financial Accounting Standards
SFAS No. 154, “Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and
FASB Statement No. 3,” establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit transition
requirements specific to a newly adopted accounting principle. Previously, most changes in
accounting principle were recognized by including the cumulative effect of changing to the new
accounting principle in net income of the period of the change. Under SFAS No. 154, retrospective
application requires (i) the cumulative effect of the change to the new accounting principle on
periods prior to those presented to be reflected in the carrying amounts of assets and liabilities
as of the beginning of the first period presented, (ii) an offsetting adjustment, if any, to be
made to the opening balance of retained earnings (or other appropriate components of equity) for
that period, and (iii) financial statements for each individual prior period presented to be
adjusted to reflect the direct period-specific effects of applying the new accounting principle.
Special retroactive application rules apply in situations where it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. Indirect effects of a
change in accounting principle are required to be reported in the period in which the accounting
change is made. SFAS No. 154 carries forward the guidance in APB Opinion No. 20, “Accounting
Changes,” requiring justification of a change in accounting principle on the basis of
preferability. SFAS No. 154 also carries forward without change the guidance contained in APB
Opinion No. 20, for reporting the correction of an error in previously issued financial statements
and for a change in an accounting estimate. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
In December 2004, the FASB issued SFAS No. 123 (R), “Share Based Payment”, which requires
compensation cost relating to share-based payment transactions to be recognized in the financial
statements, based upon the fair value of the instruments issued. SFAS No. 123 (R) covers a wide
range of share-based compensation arrangements including share options, restricted stock plans,
performance-based awards, share appreciation rights and employee purchase plans. This Statement is
effective for public entities as of the beginning of the first annual period that begins after June
15, 2005. SFAS No. 123 (R) replaces SFAS No. 123, which established as preferable a fair value
based method of accounting for share-based compensation with employees, but permitted the option of
continuing to apply the guidance of APB Opinion No. 25, as long as the notes to the financial
statements disclosed the effects of the preferable fair value method. Webster adopted the
provisions of SFAS No. 123, effective January 1, 2002. Therefore, the adoption of SFAS No. 123 (R)
is not expected to have a material impact on Webster’s Consolidated Financial Statements.
Financial Accounting Standards Board Staff Positions
In November 2005, the FASB issued Staff Position Nos. 115-1
and 124-1, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments” (“FSP No. 115-1”),
which addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary;
and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an
other-than-temporary impairment loss on a debt security and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No.
03-1 with references to existing authoritative literature concerning
other-than-temporary determinations (principally SFAS No. 115, “Accounting
for Certain Investments in Debt and Equity Securities,” and
Securities and Exchange Commission Staff Accounting Bulletin No. 59,
“Accounting for
Noncurrent Marketable Equity Securities”). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the
security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1
also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor
does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods
beginning after December 15, 2005. Webster does not expect that the application of FSP No. 115-1 will have a material impact on its Consolidated Financial
Statements.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Securities
A summary of securities follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
Amortized |
|
Unrealized |
|
Estimated |
|
Amortized |
|
Unrealized |
|
Estimated |
|
Amortized |
|
Unrealized |
|
Estimated |
| (In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| |
Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and
notes |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
2,257 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
555 |
|
| |
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
notes |
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
73,821 |
|
|
|
96 |
|
|
|
(4,895 |
) |
|
|
69,022 |
|
Municipal bonds and
notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
390 |
|
|
|
— |
|
|
|
— |
|
|
|
390 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Corporate bonds and
notes |
|
|
197,101 |
|
|
|
5,384 |
|
|
|
(1,162 |
) |
|
|
201,323 |
|
|
|
192,076 |
|
|
|
6,192 |
|
|
|
(1,895 |
) |
|
|
196,373 |
|
|
|
214,030 |
|
|
|
7,957 |
|
|
|
(2,124 |
) |
|
|
219,863 |
|
Equity securities (a) |
|
|
223,043 |
|
|
|
5,542 |
|
|
|
(559 |
) |
|
|
228,026 |
|
|
|
262,776 |
|
|
|
9,893 |
|
|
|
(18 |
) |
|
|
272,651 |
|
|
|
163,783 |
|
|
|
17,202 |
|
|
|
(1,057 |
) |
|
|
179,928 |
|
Mortgage-backed
securities |
|
|
2,176,121 |
|
|
|
27 |
|
|
|
(50,078 |
) |
|
|
2,126,070 |
|
|
|
2,043,666 |
|
|
|
212 |
|
|
|
(18,886 |
) |
|
|
2,024,992 |
|
|
|
3,649,955 |
|
|
|
29,033 |
|
|
|
(19,546 |
) |
|
|
3,659,442 |
|
| |
Total available for sale |
|
$ |
2,596,265 |
|
|
|
10,953 |
|
|
|
(51,799 |
) |
|
|
2,555,419 |
|
|
$ |
2,498,908 |
|
|
|
16,297 |
|
|
|
(20,799 |
) |
|
|
2,494,406 |
|
|
$ |
4,101,589 |
|
|
|
54,288 |
|
|
|
(27,622 |
) |
|
|
4,128,255 |
|
| |
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and
notes |
|
$ |
401,112 |
|
|
|
8,237 |
|
|
|
(1,011 |
) |
|
|
408,338 |
|
|
$ |
342,264 |
|
|
|
7,494 |
|
|
|
(550 |
) |
|
|
349,208 |
|
|
$ |
173,371 |
|
|
|
1,348 |
|
|
|
(88 |
) |
|
|
174,631 |
|
Mortgage-backed
securities |
|
|
741,797 |
|
|
|
— |
|
|
|
(17,912 |
) |
|
|
723,885 |
|
|
|
887,349 |
|
|
|
196 |
|
|
|
(2,124 |
) |
|
|
885,421 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Total held to maturity
securities |
|
$ |
1,142,909 |
|
|
|
8,237 |
|
|
|
(18,923 |
) |
|
|
1,132,223 |
|
|
$ |
1,229,613 |
|
|
|
7,690 |
|
|
|
(2,674 |
) |
|
|
1,234,629 |
|
|
$ |
173,371 |
|
|
|
1,348 |
|
|
|
(88 |
) |
|
|
174,631 |
|
| |
| (a) |
|
As of December 31, 2005, the fair value of equity securities consisted of FHLB stock of
$133.4 million FRB stock of $36.3 million, common stock of $38.4 million and preferred stock
of $19.9 million. The fair value of equity securities at December 31, 2004 consisted of FHLB
stock of $190.0 million, FRB stock of $37.9 million and common stock of $44.8 million. As of
December 31, 2003, the fair value of equity securities consisted of FHLB stock of $134.0
million and common stock of $45.9 million. |
The following table identifies temporarily impaired investment securities as of December 31,
2005 segregated by length of time the securities had been in a continuous unrealized loss position.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than Twelve Months |
|
Twelve Months or Longer |
|
Total |
| (In thousands) |
|
Fair Value |
|
Unrealized Losses |
|
Fair Value |
|
Unrealized Losses |
|
Fair Value |
|
Unrealized Losses |
| |
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
8,678 |
|
|
|
(431 |
) |
|
|
15,353 |
|
|
|
(731 |
) |
|
|
24,031 |
|
|
|
(1,162 |
) |
Equity securities |
|
|
22,601 |
|
|
|
(133 |
) |
|
|
3,979 |
|
|
|
(426 |
) |
|
|
26,580 |
|
|
|
(559 |
) |
Mortgage-backed securities |
|
|
688,628 |
|
|
|
(10,475 |
) |
|
|
1,426,055 |
|
|
|
(39,603 |
) |
|
|
2,114,683 |
|
|
|
(50,078 |
) |
| |
Total available for sale |
|
|
719,907 |
|
|
|
(11,039 |
) |
|
|
1,445,387 |
|
|
|
(40,760 |
) |
|
|
2,165,294 |
|
|
|
(51,799 |
) |
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
|
62,907 |
|
|
|
(589 |
) |
|
|
15,851 |
|
|
|
(422 |
) |
|
|
78,758 |
|
|
|
(1,011 |
) |
Mortgage-backed securities |
|
|
522,006 |
|
|
|
(12,576 |
) |
|
|
201,879 |
|
|
|
(5,336 |
) |
|
|
723,885 |
|
|
|
(17,912 |
) |
| |
Total held to maturity securities |
|
|
584,913 |
|
|
|
(13,165 |
) |
|
|
217,730 |
|
|
|
(5,758 |
) |
|
|
802,643 |
|
|
|
(18,923 |
) |
| |
Total securities |
|
$ |
1,304,820 |
|
|
|
(24,204 |
) |
|
|
1,663,117 |
|
|
|
(46,518 |
) |
|
|
2,967,937 |
|
|
|
(70,722 |
) |
| |
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table identifies temporarily impaired investment securities as of December 31,
2004 segregated by length of time the securities had been in a continuous unrealized loss position.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than Twelve Months |
|
Twelve Months or Longer |
|
|
|
|
|
Total |
| (In thousands) |
|
Fair Value |
|
|
Unrealized Losses |
|
Fair Value |
Unrealized Losses |
Fair Value |
|
Unrealized Losses |
| |
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
32,319 |
|
|
|
(320 |
) |
|
|
15,321 |
|
|
|
(1,575 |
) |
|
|
|
47,640 |
|
(1,895 |
) |
Equity securities |
|
|
409 |
|
|
|
(18 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
409 |
|
(18 |
) |
Mortgage-backed securities |
|
|
1,862,393 |
|
|
|
(18,886 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
1,862,393 |
|
(18,886 |
) |
| |
Total available for sale |
|
|
1,895,121 |
|
|
|
(19,224 |
) |
|
|
15,321 |
|
|
|
(1,575 |
) |
|
|
|
1,910,442 |
|
(20,799 |
) |
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
|
39,279 |
|
|
|
(550 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
39,279 |
|
(550 |
) |
Mortgage-backed securities |
|
|
648,664 |
|
|
|
(2,124 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
648,664 |
|
(2,124 |
) |
| |
Total held to maturity securities |
|
|
687,943 |
|
|
|
(2,674 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
687,943 |
|
(2,674 |
) |
| |
Total securities |
|
$ |
2,583,064 |
|
|
|
(21,898 |
) |
|
|
15,321 |
|
|
|
(1,575 |
) |
|
|
|
2,598,385 |
|
(23,473 |
) |
| |
Unrealized losses on fixed income securities result from the cost basis of securities being
greater than current market value. This will generally occur as a result of an increase in interest
rates since the time of purchase, a structural change in an investment or from deterioration in
credit quality of the issuer. Management has and will continue to evaluate impairments, whether
caused by adverse interest rate or credit movements, to determine if they are other-than-temporary.
In accordance with applicable accounting literature, Webster must demonstrate an ability and intent
to hold impaired securities until full recovery of their cost basis. Management uses both internal
and external information sources to arrive at the most informed decision. This quantitative and
qualitative assessment begins with a review of general market conditions and changes to market
conditions, credit, investment performance and structure since the prior review period. The ability
to hold the impaired securities will involve a number of factors, including: forecasted recovery
period based on average life; whether its return provides satisfactory carry relative to funding
sources; Webster’s capital, earnings and cash flow positions; and compliance with various debt
covenants, among other things. Webster currently intends to hold all temporarily impaired
securities to full recovery, which may be until maturity.
Estimating the recovery period for equity securities will include analyst forecasts, earnings
assumptions and other company specific financial performance metrics. In addition, this assessment
will incorporate general market data, industry and sector cycles and related trends to determine a
reasonable recovery period.
Webster’s determination of impairment at December 31, 2005 began with a recognition that market
yields increased during the course of 2005, reflecting the impact of thirteen interest rate
increases of 25 basis points, or 325 basis points in total, by the Federal Reserve from June 2004
through December 2005.
At December 31, 2005, Webster had $1.7 billion of impaired securities with an unrealized loss of
$46.5 million for twelve consecutive months or longer due to interest rates currently being higher
than at the time of purchase. Approximately 85 percent of that unrealized loss, or $39.6 million,
was concentrated in mortgage-backed securities available for sale totaling $1.43 billion in fair
value. These securities carry AAA ratings or Agency-implied AAA credit ratings and are currently
performing as expected. Management does not consider these investments to be other-than-temporarily
impaired and Webster has the ability and intent to hold these investments to full recovery of the
cost basis. Management expects that recovery of temporarily impaired available for sale
mortgage-backed securities will occur over the weighted-average estimated remaining life of these
securities. Management uses market-accepted pricing and prepayment models to project the estimated
average life, which for this group of securities is presently estimated to be approximately 2.8
years. Further, the majority of these securities are hybrid adjustable rate mortgage-backed
securities, which tend to prepay faster than similar coupon fixed-rate mortgage-backed securities
and as the collateral loans approach their interest rate reset dates, management expects the
securities to trade at par or at a premium when fully indexed.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Held to maturity mortgage-backed securities totaling $201.9 million at December 31, 2005, with an
unrealized loss of $5.3 million, were impaired for twelve consecutive months or longer due to
interest rate increases. These securities carry AAA ratings or Agency-implied AAA credit ratings
and are currently performing as expected. Management does not consider these investments to be
other-than-temporarily impaired. Webster has the ability and intent to hold these investments to
full recovery of the cost basis. Management expects that recovery of temporarily impaired held to
maturity mortgage-backed securities will occur over the weighted-average estimated remaining life
of these securities. Management uses market-accepted pricing and prepayment models to project the
estimated average life, which for this group of securities is presently estimated to be
approximately 4.4 years. Further, this group of securities continues to record acceptable levels of
prepayments monthly at par, which reduces the amount of fair value and unrealized loss accordingly.
Held to maturity municipal securities totaling $15.9 million at December 31, 2005, with an
unrealized loss of $0.4 million, were impaired for twelve consecutive months or longer due to
interest rate increases. Most of these bonds are insured AAA rated general obligation bonds with
stable ratings. There were no credit downgrades since the last review period. These securities are
currently performing as anticipated. Management does not consider these investments to be
other-than-temporarily impaired. Webster has the ability and intent to hold these investments to
full recovery of the cost basis. Management expects recovery of temporarily impaired held to
maturity municipal securities over their weighted-average estimated remaining life, which is
presently estimated to be approximately 8.7 years.
Three available for sale corporate securities totaling $15.4 million at December 31, 2005, with an
unrealized loss of $0.7 million, were impaired for twelve consecutive months or longer. The
unrealized loss was primarily caused by higher interest rates. Two of the corporate securities are
unrated, but have undergone an internal credit review. One corporate security is A rated, but has
never been downgraded. As a result of our credit review of the issuers, management has determined
that there has been no deterioration in credit quality subsequent to purchase or last review
period. These securities are currently performing as projected. Management does not consider these
investments to be other-than-temporarily impaired based on experience with these types of
investments. Webster has the ability and intent to hold these investments to full recovery of the
cost basis. Management expects recovery of temporarily impaired available for sale corporate
securities over their weighted-average estimated remaining life, which is presently estimated to be
approximately 2.2 years.
One available for sale equity security of $4.0 million at December 31, 2005, with an unrealized
loss of $0.4 million, was impaired for twelve consecutive months or longer. The stock is in the
financial services industry, which is experiencing performance pressures from a flatter yield curve
and slowing mortgage originations. The severity of the impairment is consistent with those market
developments. Management believes the decline in price has stabilized and the security is not
other-than-temporarily impaired. Based on our internal evaluation and analyst forecasts, management
believes that Webster has the ability and intent to hold this security to full recovery of the cost
basis.
There were no impairment writedowns of securities during the years ended December 31, 2005 and
2004. Writedowns of $0.2 million were recorded in 2003.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value (“FV”) and weighted-average yield (based on amortized
cost) of debt securities at December 31, 2005 by contractual maturity. Mortgage-backed securities
are included by final contractual maturity. Actual maturities will differ from contractual
maturities because certain issuers have the right to call or prepay obligations with or without
call or prepayment penalties.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
After one year |
|
After five years |
|
|
|
|
| |
|
One year or less |
|
through five years |
|
through ten years |
|
After 10 years |
|
Total |
| (Dollars in thousands) |
|
FV |
|
Yield |
|
FV |
|
Yield |
|
FV |
|
Yield |
|
FV |
|
Yield |
|
FV |
|
Yield |
|
Trading: |
Trading |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
$ |
30 |
|
|
|
3.23 |
% |
|
$ |
471 |
|
|
|
3.43 |
% |
|
$ |
338 |
|
|
|
3.76 |
% |
|
$ |
1,418 |
|
|
|
4.25 |
% |
|
$ |
2,257 |
|
|
|
3.99 |
% |
| |
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and
notes |
|
|
406 |
|
|
|
4.31 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
200,917 |
|
|
|
8.19 |
|
|
|
201,323 |
|
|
|
8.18 |
|
Mortgage-backed securities |
|
|
— |
|
|
|
— |
|
|
|
58,528 |
|
|
|
3.77 |
|
|
|
— |
|
|
|
— |
|
|
|
2,067,542 |
|
|
|
4.24 |
|
|
|
2,126,070 |
|
|
|
4.23 |
|
| |
Total available for sale |
|
|
406 |
|
|
|
4.31 |
|
|
|
58,528 |
|
|
|
3.77 |
|
|
|
— |
|
|
|
— |
|
|
|
2,268,459 |
|
|
|
4.59 |
|
|
|
2,327,393 |
|
|
|
4.57 |
|
| |
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds and notes |
|
|
14,866 |
|
|
|
4.52 |
|
|
|
7,774 |
|
|
|
4.34 |
|
|
|
9,012 |
|
|
|
4.54 |
|
|
|
376,686 |
|
|
|
4.69 |
|
|
|
408,338 |
|
|
|
4.67 |
|
Mortgage-backed securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
723,885 |
|
|
|
4.29 |
|
|
|
723,885 |
|
|
|
4.29 |
|
| |
Total held to maturity |
|
|
14,866 |
|
|
|
4.52 |
|
|
|
7,774 |
|
|
|
4.34 |
|
|
|
9,012 |
|
|
|
4.54 |
|
|
|
1,100,571 |
|
|
|
4.43 |
|
|
|
1,132,223 |
|
|
|
4.43 |
|
| |
Total |
|
$ |
15,302 |
|
|
|
4.51 |
% |
|
$ |
66,773 |
|
|
|
3.83 |
% |
|
$ |
9,350 |
|
|
|
4.51 |
% |
|
$ |
3,370,448 |
|
|
|
4.53 |
% |
|
$ |
3,461,873 |
|
|
|
4.52 |
% |
| |
A summary of realized gains and losses follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| |
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
2003 |
|
|
| |
| (In thousands) |
|
Gains |
|
Losses |
|
Net |
|
Gains |
|
Losses |
|
Net |
|
Gains |
|
Losses |
|
Net |
| |
Trading Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes |
|
$ |
147 |
|
|
|
— |
|
|
|
147 |
|
|
$ |
182 |
|
|
|
(202 |
) |
|
|
(20 |
) |
|
$ |
489 |
|
|
|
(141 |
) |
|
|
348 |
|
U.S. Government agency notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
(100 |
) |
|
|
(91 |
) |
|
|
44 |
|
|
|
(138 |
) |
|
|
(94 |
) |
Municipal bonds and notes |
|
|
429 |
|
|
|
(176 |
) |
|
|
253 |
|
|
|
448 |
|
|
|
(369 |
) |
|
|
79 |
|
|
|
369 |
|
|
|
(290 |
) |
|
|
79 |
|
Corporate bonds and notes |
|
|
6 |
|
|
|
(200 |
) |
|
|
(194 |
) |
|
|
65 |
|
|
|
(214 |
) |
|
|
(149 |
) |
|
|
477 |
|
|
|
(545 |
) |
|
|
(68 |
) |
Mortgage-backed securities |
|
|
28 |
|
|
|
— |
|
|
|
28 |
|
|
|
19 |
|
|
|
— |
|
|
|
19 |
|
|
|
43 |
|
|
|
(67 |
) |
|
|
(24 |
) |
Futures and options contracts |
|
|
428 |
|
|
|
(206 |
) |
|
|
222 |
|
|
|
391 |
|
|
|
(712 |
) |
|
|
(321 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
Total trading |
|
|
1,038 |
|
|
|
(582 |
) |
|
|
456 |
|
|
|
1,114 |
|
|
|
(1,597 |
) |
|
|
(483 |
) |
|
|
1,422 |
|
|
|
(1,183 |
) |
|
|
239 |
|
| |
Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
U.S. Government agency notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95 |
|
|
|
(4,964 |
) |
|
|
(4,869 |
) |
|
|
1,249 |
|
|
|
(3,431 |
) |
|
|
(2,182 |
) |
Municipal bonds and notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
259 |
|
|
|
(23 |
) |
|
|
236 |
|
Corporate bonds and notes |
|
|
168 |
|
|
|
(17 |
) |
|
|
151 |
|
|
|
2,189 |
|
|
|
(978 |
) |
|
|
1,211 |
|
|
|
3,855 |
|
|
|
(4,232 |
) |
|
|
(377 |
) |
Equity securities |
|
|
2,728 |
|
|
|
(2 |
) |
|
|
2,726 |
|
|
|
9,141 |
|
|
|
(742 |
) |
|
|
8,399 |
|
|
|
9,093 |
|
|
|
(335 |
) |
|
|
8,758 |
|
Mortgage-backed securities |
|
|
698 |
|
|
|
(424 |
) |
|
|
274 |
|
|
|
20,374 |
|
|
|
(10,318 |
) |
|
|
10,056 |
|
|
|
12,286 |
|
|
|
(386 |
) |
|
|
11,900 |
|
| |
Total available for sale |
|
|
3,594 |
|
|
|
(443 |
) |
|
|
3,151 |
|
|
|
31,799 |
|
|
|
(17,003 |
) |
|
|
14,796 |
|
|
|
26,742 |
|
|
|
(8,407 |
) |
|
|
18,335 |
|
| |
Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
26 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Total |
|
$ |
4,658 |
|
|
|
(1,025 |
) |
|
|
3,633 |
|
|
$ |
32,913 |
|
|
|
(18,600 |
) |
|
|
14,313 |
|
|
$ |
28,164 |
|
|
|
(9,590 |
) |
|
|
18,574 |
|
| |
The mortgage-backed securities sold in 2005 from the held to maturity portfolio represented
securities for which Webster collected over 85% of the principal outstanding at acquisition. The
net carrying amount of the mortgage-backed securities sold in 2005 totaled $0.7 million.
Short and long futures and options positions may be entered into to minimize the price volatility
of certain assets held as trading securities and to profit from trading opportunities. Changes in
the market value of futures and options positions are recognized as a gain or loss in the period in
which the change occurred. All gains and losses resulting from futures and options positions are
reflected in noninterest income. At December 31, 2005 and 2004, there were no such positions open.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 1, 2004, certain available for sale mortgage-backed securities with an amortized cost of
$929.7 million and fair value of $921.3 million were transferred to held to maturity. In accordance
to the provisions of SFAS No. 115, the securities were transferred at their fair value and an
unrealized loss of $8.4 million was segregated within accumulated other comprehensive income and is
being amortized as an adjustment to held to maturity securities interest income over the remaining
life of the securities.
At December 31, 2005, securities of single issuers with an aggregate value exceeding ten percent of
total stockholders’ equity, or $164.7 million, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Aggregate |
|
|
Aggregate |
|
| (In thousands) |
|
Amortized Cost |
|
|
Market Value |
| |
Issuers: |
|
|
|
|
|
|
|
|
Fannie Mae |
|
$ |
1,162,424 |
|
|
$ |
1,132,332 |
|
Bank of America |
|
|
617,377 |
|
|
|
605,075 |
|
Freddie Mac |
|
|
396,893 |
|
|
|
385,258 |
|
Wells Fargo |
|
|
307,770 |
|
|
|
301,521 |
|
Washington Mutual, Inc. |
|
|
209,453 |
|
|
|
205,722 |
|
Of the Fannie Mae and Freddie Mac securities identified above, none are preferred stock
investments.
NOTE 5: Loans, Net
A summary of loans, net follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
2005 |
|
2004 |
| (Dollars in thousands) |
|
Amount |
|
% |
|
Amount |
|
% |
| |
Residential mortgage loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family units |
|
$ |
4,640,284 |
|
|
|
37.8 |
|
|
$ |
4,614,669 |
|
|
|
39.4 |
|
Construction |
|
|
188,280 |
|
|
|
1.5 |
|
|
|
160,675 |
|
|
|
1.4 |
|
| |
Total residential mortgage loans |
|
|
4,828,564 |
|
|
|
39.3 |
|
|
|
4,775,344 |
|
|
|
40.8 |
|
| |
Commercial loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial non-mortgage |
|
|
1,435,512 |
|
|
|
11.7 |
|
|
|
1,409,155 |
|
|
|
12.0 |
|
Asset-based lending |
|
|
661,234 |
|
|
|
5.4 |
|
|
|
547,898 |
|
|
|
4.7 |
|
Equipment financing |
|
|
779,782 |
|
|
|
6.3 |
|
|
|
627,685 |
|
|
|
5.4 |
|
| |
Total commercial loans |
|
|
2,876,528 |
|
|
|
23.4 |
|
|
|
2,584,738 |
|
|
|
22.1 |
|
| |
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
1,342,741 |
|
|
|
10.9 |
|
|
|
1,321,407 |
|
|
|
11.3 |
|
Commercial construction |
|
|
465,753 |
|
|
|
3.8 |
|
|
|
393,640 |
|
|
|
3.3 |
|
| |
Total commercial real estate |
|
|
1,808,494 |
|
|
|
14.7 |
|
|
|
1,715,047 |
|
|
|
14.6 |
|
| |
Consumer loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity credit loans |
|
|
2,736,274 |
|
|
|
22.3 |
|
|
|
2,606,161 |
|
|
|
22.2 |
|
Other consumer |
|
|
35,426 |
|
|
|
0.3 |
|
|
|
31,485 |
|
|
|
0.3 |
|
| |
Total consumer loans |
|
|
2,771,700 |
|
|
|
22.6 |
|
|
|
2,637,646 |
|
|
|
22.5 |
|
| |
Total loans |
|
|
12,285,286 |
|
|
|
100.0 |
|
|
|
11,712,775 |
|
|
|
100.0 |
|
Less: allowance for loan losses |
|
|
(146,486 |
) |
|
|
|
|
|
|
(150,112 |
) |
|
|
|
|
| |
Loans, net |
|
$ |
12,138,800 |
|
|
|
|
|
|
$ |
11,562,663 |
|
|
|
|
|
| |
At December 31, 2005, net loans included $24.5 million of net premiums and $36.9 million of net
deferred costs. At December 31, 2004, net loans included $20.5 million of net premiums and $32.1
million of net deferred costs. The unadvanced portions of closed loans totaled $547.5 million and
$523.3 million at December 31, 2005 and 2004, respectively.
A majority of mortgage loans are secured by real estate in the State of Connecticut. Accordingly,
the ultimate collectability of a substantial portion of the loan portfolio is dependent on economic
and market conditions in Connecticut.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Webster individually reviews classified loans greater than $250,000 for impairment based on the
fair value of collateral or expected cash flows and it reviews loans under $250,000 as a
homogeneous pool. At December 31, 2005, there were $61.7 million of impaired loans as defined by
SFAS No. 114, including loans of $27.5 million with an impairment allowance of $9.9 million. At
December 31, 2004, there were $14.1 million of impaired loans with an impairment allowance of $1.1
million. In 2005, 2004 and 2003, the average balance of impaired loans was $42.7 million, $22.2
million and $23.6 million, respectively.
The policy with regard to the recognition of interest income on commercial impaired loans includes
an individual assessment of each loan. Interest on loans that are more than 90 days past due is no
longer accrued and all previously accrued and unpaid interest is charged to interest income. When
payments on commercial impaired loans are received, interest income is recorded on a cash basis or
is applied to principal based on an individual assessment of each loan. Cash basis interest income
recognized on commercial impaired loans for the years 2005, 2004 and 2003 amounted to $591,000,
$170,000 and $725,000, respectively.
At December 31, 2005 and 2004, total troubled debt restructurings approximated $12,000 and $20,000,
respectively. Interest income recognized in 2005 and 2004 on restructured loans was insignificant.
At December 31, 2005, there were no commitments to lend any additional funds to debtors in troubled
debt restructurings.
Nonaccrual loans totaled $60.6 million and $35.0 million at December 31, 2005 and 2004,
respectively. Interest on nonaccrual loans that would have been recorded as additional interest
income for the years ended December 31, 2005, 2004 and 2003 had the loans been current in
accordance with their original terms totaled $3.2 million, $2.1 million and $2.6 million,
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 amounts recognized in the Consolidated Statements of Condition.
The estimated fair value of commitments to extend credit is considered insignificant at December
31, 2005 and 2004. 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.
As of December 31, 2005 and 2004, residential mortgage commitments totaled $137.2 million and
$284.4 million, respectively. Residential commitments outstanding at December 31, 2005 consisted of
adjustable rate and fixed rate mortgages of $14.8 million and $122.4 million, respectively, at
rates ranging from 1.0% to 12.25%. Residential commitments outstanding at December 31, 2004
consisted of adjustable rate and fixed rate mortgages of $55.1 million and $229.3 million,
respectively, at rates ranging from 1.0% to 8.5%. Commitments to originate loans generally expire
within 60 days. In addition, at December 31, 2005 and 2004, there were unused portions of home
equity credit lines extended of $1.7 billion and $1.2 billion, respectively. Unused commercial
lines of credit, letters of credit, standby letters of credit, equipment financing commitments and
outstanding commercial new loan commitments totaled $3.4 billion and $2.9 billion at December 31,
2005 and 2004, respectively. As of December 31, 2005 and 2004, consumer loan commitments totaled
$83.2 million and $53.3 million, respectively.
Forward commitments are used to sell residential mortgage loans, and are entered into for the
purpose of reducing the market risk associated with originating loans held for sale and committed
loans with rate locks. Risks may arise from the possible inability of Webster or the other party to
fulfill the contracts. At December 31, 2005 and 2004, there were forward commitments to sell loans
totaling $343.0 million and $305.3 million, respectively. At December 31, 2005 and 2004, there were
$262.6 million and $146.7 million, respectively, of residential mortgage loans held for sale.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: Allowance for Credit Losses
The allowance for credit losses is maintained at a level adequate to absorb probable losses
inherent in the loan portfolio and in unfunded credit commitments. This allowance is increased by
provisions charged to operating expense and by recoveries on loans previously charged-off, and
reduced by charge-offs on loans.
A summary of the changes in the allowance for credit losses follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Balance at beginning of year |
|
$ |
150,112 |
|
|
|
121,674 |
|
|
|
116,804 |
|
Allowances from purchase transactions |
|
|
— |
|
|
|
20,698 |
|
|
|
2,116 |
|
Write-down of loans transferred to held for sale |
|
|
(775 |
) |
|
|
— |
|
|
|
— |
|
Provisions charged to operating expense |
|
|
9,500 |
|
|
|
18,000 |
|
|
|
25,000 |
|
| |
Subtotal |
|
|
158,837 |
|
|
|
160,372 |
|
|
|
143,920 |
|
| |
Charge-offs |
|
|
(9,754 |
) |
|
|
(14,951 |
) |
|
|
(26,149 |
) |
Recoveries |
|
|
6,549 |
|
|
|
4,691 |
|
|
|
3,903 |
|
| |
Net charge-offs |
|
|
(3,205 |
) |
|
|
(10,260 |
) |
|
|
(22,246 |
) |
| |
Balance at end of year |
|
$ |
155,632 |
|
|
|
150,112 |
|
|
|
121,674 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Components: |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
146,486 |
|
|
|
150,112 |
|
|
|
121,674 |
|
Reserve for unfunded credit commitments (1) |
|
|
9,146 |
|
|
|
— |
|
|
|
— |
|
| |
Allowance for credit losses |
|
$ |
155,632 |
|
|
|
150,112 |
|
|
|
121,674 |
|
| |
| |
Net loan charge-offs as a percentage of average total loans |
|
|
0.03 |
% |
|
|
0.10 |
|
|
|
0.25 |
|
Allowance for loan losses as a percentage of total loans |
|
|
1.19 |
|
|
|
1.28 |
|
|
|
1.32 |
|
Allowance for credit losses as a percentage of total loans |
|
|
1.27 |
|
|
|
1.28 |
|
|
|
1.32 |
|
|
|
|
| (1) |
|
Effective December 31, 2005, Webster transferred the portion of the allowance for loan
losses related to commercial and consumer lending commitments and letters of credit to the reserve
for unfunded credit commitments. |
NOTE 7: Goodwill and Other Intangible Assets
The following tables set forth the carrying values of goodwill and intangible assets, net of
accumulated amortization.
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Goodwill
— not subject to amortization: |
|
$ |
642,889 |
|
|
|
623,298 |
|
| |
Intangible assets: |
|
|
|
|
|
|
|
|
Balances subject to amortization: |
|
|
|
|
|
|
|
|
Core deposit intangibles |
|
$ |
47,227 |
|
|
|
61,734 |
|
Other identified intangibles |
|
|
6,610 |
|
|
|
7,289 |
|
Balances not subject to amortization: |
|
|
|
|
|
|
|
|
Pension assets |
|
|
1,844 |
|
|
|
1,844 |
|
| |
| |
Total |
|
$ |
55,681 |
|
|
|
70,867 |
|
| |
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the carrying amount of goodwill for the year ended December 31, 2005 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retail |
|
Commercial |
|
|
| (In thousands) |
|
Banking |
|
Banking |
|
Total |
|
| |
Balance at December 31, 2004 |
|
$ |
596,715 |
|
|
|
26,583 |
|
|
|
623,298 |
|
| |
Purchase transactions |
|
|
13,983 |
|
|
|
— |
|
|
|
13,983 |
|
Purchase price adjustments |
|
|
680 |
|
|
|
4,928 |
|
|
|
5,608 |
|
| |
Balance at December 31, 2005 |
|
$ |
611,378 |
|
|
|
31,511 |
|
|
|
642,889 |
|
| |
Webster performed annual evaluations of goodwill and found no impairment in 2005, 2004 and 2003.
During 2005, $4.7 million of net core deposit intangibles with an amortization period of 7 years
were added as the result of the purchase of HSA Bank.
Amortization of intangible assets for 2005, 2004 and 2003 totaled $19.9 million, $18.3 million and
$16.0 million, respectively. Other identified intangible assets include customer relationships,
employment agreements and business relationship network. Estimated annual amortization expense of
current intangible assets with finite useful lives, absent any future impairment or change in
estimated useful lives, is summarized below for each of the next five years and thereafter.
| |
|
|
|
|
| (In thousands) |
|
|
|
|
| |
For years ending December 31,
|
|
|
|
|
2006 |
|
$ |
15,861 |
|
2007 |
|
|
7,777 |
|
2008 |
|
|
4,914 |
|
2009 |
|
|
4,742 |
|
2010 |
|
|
4,671 |
|
Thereafter |
|
|
15,872 |
|
| |
NOTE 8: Premises and Equipment, Net
A summary of premises and equipment, net follows:
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
|
2004 |
|
| |
Land |
|
$ |
16,713 |
|
|
|
17,100 |
|
Buildings and improvements |
|
|
106,152 |
|
|
|
104,596 |
|
Leasehold improvements |
|
|
37,421 |
|
|
|
27,234 |
|
Equipment and software |
|
|
188,880 |
|
|
|
142,729 |
|
| |
Total premises and equipment |
|
|
349,166 |
|
|
|
291,659 |
|
Accumulated depreciation and amortization |
|
|
(166,310 |
) |
|
|
(142,590 |
) |
| |
Premises and equipment, net |
|
$ |
182,856 |
|
|
|
149,069 |
|
| |
At December 31, 2005, Webster was obligated under various non-cancelable operating leases for
properties used as banking offices and other office facilities. The leases contain renewal options
and escalation clauses which provide for increased rental expense based primarily upon increases in
real estate taxes over a base year. Rental expense under leases was $17.2 million, $14.8 million
and $14.7 million in 2005, 2004 and 2003, respectively. Webster is also entitled to rental income
under various non-cancelable operating leases for properties owned. Rental income was $1.1 million,
$1.0 million and $1.1 million in 2005, 2004 and 2003, respectively.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of future minimum rental payments and receipts required under these
leases as of December 31, 2005:
| |
|
|
|
|
|
|
|
|
| |
|
Rental |
|
Rental |
| (In thousands) |
|
Payments |
|
Receipts |
| |
For years ending December 31, |
|
|
|
|
|
|
|
|
2006 |
|
$ |
16,018 |
|
|
|
864 |
|
2007 |
|
|
13,936 |
|
|
|
400 |
|
2008 |
|
|
10,997 |
|
|
|
193 |
|
2009 |
|
|
9,838 |
|
|
|
146 |
|
2010 |
|
|
9,146 |
|
|
|
101 |
|
Thereafter |
|
|
62,894 |
|
|
|
495 |
|
| |
Total |
|
$ |
122,829 |
|
|
|
2,199 |
|
| |
NOTE 9: Deferred Tax Asset, net and Income Taxes
Income tax expense is comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
61,318 |
|
|
|
49,099 |
|
|
|
79,297 |
|
State and local |
|
|
531 |
|
|
|
834 |
|
|
|
1,219 |
|
| |
|
|
|
61,849 |
|
|
|
49,933 |
|
|
|
80,516 |
|
| |
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
25,209 |
|
|
|
19,165 |
|
|
|
(686 |
) |
State and local |
|
|
243 |
|
|
|
(200 |
) |
|
|
(58 |
) |
| |
|
|
|
25,452 |
|
|
|
18,965 |
|
|
|
(744 |
) |
| |
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
86,527 |
|
|
|
68,264 |
|
|
|
78,611 |
|
State and local |
|
|
774 |
|
|
|
634 |
|
|
|
1,161 |
|
| |
|
|
$ |
87,301 |
|
|
|
68,898 |
|
|
|
79,772 |
|
| |
The following reconciles the federal statutory tax rate to Webster’s effective tax rate based on
income before income taxes:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
Federal statutory tax rate |
|
|
35.0 |
% |
|
|
35.0 |
|
|
|
35.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
Tax-exempt income, net |
|
|
(2.0 |
) |
|
|
(1.8 |
) |
|
|
(0.7 |
) |
Increase in cash surrender value of life insurance |
|
|
(1.2 |
) |
|
|
(1.4 |
) |
|
|
(1.2 |
) |
Other, net |
|
|
— |
|
|
|
(1.1 |
) |
|
|
(0.6 |
) |
| |
Effective tax rate |
|
|
32.0 |
% |
|
|
30.9 |
|
|
|
32.8 |
|
| |
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of significant temporary differences comprising the deferred tax assets and
liabilities are summarized below:
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
|
| (In thousands) |
|
2005 |
|
|
2004 |
|
| |
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
$ |
60,721 |
|
|
|
59,865 |
|
Net operating loss and credit carryforwards |
|
|
19,350 |
|
|
|
13,800 |
|
Net unrealized loss on securities available for sale |
|
|
14,296 |
|
|
|
1,325 |
|
Compensation and employee benefit plans |
|
|
9,265 |
|
|
|
10,005 |
|
Intangible assets |
|
|
5,314 |
|
|
|
5,611 |
|
Deductible acquisition costs |
|
|
2,793 |
|
|
|
5,128 |
|
Premises and equipment |
|
|
— |
|
|
|
1,085 |
|
Purchase accounting and fair-value adjustments |
|
|
— |
|
|
|
991 |
|
Other |
|
|
3,594 |
|
|
|
3,252 |
|
| |
Total deferred tax assets |
|
|
115,333 |
|
|
|
101,062 |
|
Less: valuation allowance |
|
|
(21,320 |
) |
|
|
(17,578 |
) |
| |
Deferred tax assets, net of valuation allowance |
|
|
94,013 |
|
|
|
83,484 |
|
| |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred loan costs |
|
|
11,575 |
|
|
|
— |
|
Premises and equipment |
|
|
8,811 |
|
|
|
— |
|
Equipment financing leases |
|
|
7,174 |
|
|
|
3,386 |
|
Purchase accounting and fair-value adjustments |
|
|
4,968 |
|
|
|
— |
|
Mortgage servicing rights |
|
|
2,728 |
|
|
|
3,619 |
|
Loan discounts |
|
|
880 |
|
|
|
2,642 |
|
Other |
|
|
2,564 |
|
|
|
2,849 |
|
| |
Total deferred tax liabilities |
|
|
38,700 |
|
|
|
12,496 |
|
| |
Deferred tax asset, net |
|
$ |
55,313 |
|
|
|
70,988 |
|
| |
Utilizable federal net operating loss carryforwards (“NOLs”) totaled $7.2 million at December 31,
2005, and are scheduled to expire in various tax years through 2024. Connecticut NOLs totaled
$344.0 million at December 31, 2005, and are scheduled to expire in varying amounts, during tax
years 2020 through 2025. A valuation allowance has been established for the full amount of
Connecticut NOLs, due to uncertainties of realization.
A valuation allowance has been established for the full amount of Connecticut, Massachusetts and
Rhode Island net state deferred tax assets, due to uncertainties of realization. The state and
local portions of net deferred tax assets in jurisdictions where such uncertainties do not exist,
principally New York State and City, approximated $0.5 million and $0.8 million at December 31,
2005 and 2004, respectively.
Management believes it is more likely than not that Webster will realize its net deferred tax
assets, based upon its recent historical and anticipated future levels of pre-tax income. There can
be no absolute assurance, however, that any specific level of future income will be generated.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: Mortgage Servicing Rights
An analysis of mortgage servicing rights, which are included in other assets, for the three years
ended December 31, 2005 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mortgage Servicing Rights |
|
Balance of |
| |
|
|
|
|
|
|
|
|
|
Net |
|
Mortgage |
| |
|
Amortized |
|
Valuation |
|
Carrying |
|
Loans Serviced |
| (In thousands) |
|
Cost |
|
Allowance |
|
Value |
|
for Others |
| |
Balance at December 31, 2002 |
|
$ |
12,473 |
|
|
|
(1,153 |
) |
|
|
11,320 |
|
|
|
1,368,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights capitalized |
|
|
28,704 |
|
|
|
— |
|
|
|
28,704 |
|
|
|
|
|
Amortization charged against mortgage servicing fee income |
|
|
(2,585 |
) |
|
|
— |
|
|
|
(2,585 |
) |
|
|
|
|
Additional valuation allowance |
|
|
— |
|
|
|
(2,637 |
) |
|
|
(2,637 |
) |
|
|
|
|
Reduction of impairment allowance (credit to mortgage servicing
fee income) |
|
|
— |
|
|
|
1,687 |
|
|
|
1,687 |
|
|
|
|
|
Mortgage servicing rights sold |
|
|
(32,158 |
) |
|
|
— |
|
|
|
(32,158 |
) |
|
|
|
|
| |
Balance at December 31, 2003 |
|
|
6,434 |
|
|
|
(2,103 |
) |
|
|
4,331 |
|
|
|
584,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights acquired in acquisition |
|
|
8,970 |
|
|
|
— |
|
|
|
8,970 |
|
|
|
|
|
Mortgage servicing rights capitalized |
|
|
9,826 |
|
|
|
— |
|
|
|
9,826 |
|
|
|
|
|
Amortization charged against mortgage servicing fee income |
|
|
(3,280 |
) |
|
|
— |
|
|
|
(3,280 |
) |
|
|
|
|
Additional valuation allowance |
|
|
— |
|
|
|
(681 |
) |
|
|
(681 |
) |
|
|
|
|
Reduction of impairment allowance (credit to mortgage servicing
fee income) |
|
|
— |
|
|
|
542 |
|
|
|
542 |
|
|
|
|
|
Mortgage servicing rights sold |
|
|
(9,761 |
) |
|
|
— |
|
|
|
(9,761 |
) |
|
|
|
|
| |
Balance at December 31, 2004 |
|
|
12,189 |
|
|
|
(2,242 |
) |
|
|
9,947 |
|
|
|
1,450,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights capitalized |
|
|
1,829 |
|
|
|
— |
|
|
|
1,829 |
|
|
|
|
|
Amortization charged against mortgage servicing fee income |
|
|
(2,976 |
) |
|
|
— |
|
|
|
(2,976 |
) |
|
|
|
|
Additional valuation allowance |
|
|
— |
|
|
|
(505 |
) |
|
|
(505 |
) |
|
|
|
|
Reduction of impairment allowance (credit to mortgage servicing
fee income) |
|
|
— |
|
|
|
1,226 |
|
|
|
1,226 |
|
|
|
|
|
Mortgage servicing rights sold |
|
|
(1,829 |
) |
|
|
— |
|
|
|
(1,829 |
) |
|
|
|
|
| |
Balance at December 31, 2005 |
|
$ |
9,213 |
|
|
|
(1,521 |
) |
|
|
7,692 |
|
|
|
1,340,429 |
|
| |
Mortgage servicing rights represent the capitalized net present value of fee income streams
generated from servicing residential mortgage loans for other investors. A discounted cash flow
model is used to estimate fair value since observable market prices are not readily available. At
December 31, 2005, the fair value of servicing rights was $11.7 million.
Fair value is estimated on individual pools of loans grouped according to the following
characteristics: fixed versus adjustable coupons; government versus non-government backed
collateral; and acquired versus originated. The key assumptions used in the valuation model
include: current and future interest rates; expected prepayments of underlying mortgage loans;
servicing and other ancillary fees; and cost to service loans. Impairment results when the fair
market value of an individual pool has fallen below its amortized cost. A valuation allowance is
established by a charge or credit to noninterest income.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated annual amortization expense for mortgage servicing rights is summarized below for each of
the next five years and in the aggregate thereafter.
| |
|
|
|
|
| (In thousands) |
|
|
|
|
| |
For years ending December 31, |
|
|
|
|
2006 |
|
$ |
2,569 |
|
2007 |
|
|
2,245 |
|
2008 |
|
|
1,971 |
|
2009 |
|
|
1,506 |
|
2010 |
|
|
822 |
|
Thereafter |
|
|
100 |
|
| |
NOTE 11: Deposits
A summary of deposit types follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
|
|
% of |
| |
|
|
|
|
|
Average |
|
total |
|
|
|
|
|
Average |
|
total |
|
|
|
|
|
Average |
|
total |
| (Dollars in thousands) |
|
Amount |
|
rate* |
|
deposits |
|
Amount |
|
rate* |
|
deposits |
|
Amount |
|
rate* |
|
deposits |
| |
Demand |
|
$ |
1,546,096 |
|
|
|
— |
|
|
|
13.3 |
|
|
$ |
1,409,682 |
|
|
|
— |
|
|
|
13.4 |
|
|
$ |
1,090,060 |
|
|
|
— |
|
|
|
13.0 |
|
NOW |
|
|
1,622,403 |
|
|
|
0.89 |
% |
|
|
14.0 |
|
|
|
1,368,213 |
|
|
|
0.30 |
% |
|
|
12.9 |
|
|
|
1,052,690 |
|
|
|
0.26 |
% |
|
|
12.6 |
|
Money market |
|
|
1,789,781 |
|
|
|
2.55 |
|
|
|
15.4 |
|
|
|
1,996,918 |
|
|
|
1.45 |
|
|
|
18.9 |
|
|
|
1,581,276 |
|
|
|
1.22 |
|
|
|
18.9 |
|
Savings |
|
|
2,015,045 |
|
|
|
0.91 |
|
|
|
17.3 |
|
|
|
2,253,073 |
|
|
|
0.72 |
|
|
|
21.3 |
|
|
|
1,869,398 |
|
|
|
0.69 |
|
|
|
22.3 |
|
Retail certificates |
|
|
4,249,874 |
|
|
|
3.70 |
|
|
|
36.5 |
|
|
|
3,376,718 |
|
|
|
2.58 |
|
|
|
31.9 |
|
|
|
2,681,986 |
|
|
|
2.59 |
|
|
|
32.0 |
|
Treasury certificates |
|
|
407,946 |
|
|
|
4.14 |
|
|
|
3.5 |
|
|
|
166,684 |
|
|
|
2.29 |
|
|
|
1.6 |
|
|
|
96,725 |
|
|
|
1.25 |
|
|
|
1.2 |
|
| |
Total |
|
$ |
11,631,145 |
|
|
|
2.03 |
% |
|
|
100.0 |
|
|
$ |
10,571,288 |
|
|
|
1.33 |
% |
|
|
100.0 |
|
|
$ |
8,372,135 |
|
|
|
1.26 |
% |
|
|
100.0 |
|
| |
|
|
|
| *Average rate on deposits outstanding at year-end. |
Interest expense on deposits is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
NOW |
|
$ |
7,938 |
|
|
|
3,133 |
|
|
|
3,600 |
|
Money market |
|
|
40,792 |
|
|
|
27,603 |
|
|
|
22,858 |
|
Savings |
|
|
17,495 |
|
|
|
14,744 |
|
|
|
15,061 |
|
Retail certificates |
|
|
109,414 |
|
|
|
72,768 |
|
|
|
68,587 |
|
Treasury certificates |
|
|
12,798 |
|
|
|
2,358 |
|
|
|
1,205 |
|
| |
Total |
|
$ |
188,437 |
|
|
|
120,606 |
|
|
|
111,311 |
|
| |
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the amount of certificates of deposit, including Treasury
certificates, maturing during the periods indicated:
| |
|
|
|
|
| (In thousands) |
|
|
|
|
| |
Maturing in the years ending December 31: |
|
|
|
|
2006 |
|
$ |
3,472,528 |
|
2007 |
|
|
673,675 |
|
2008 |
|
|
368,442 |
|
2009 |
|
|
114,534 |
|
2010 |
|
|
26,983 |
|
Thereafter |
|
|
1,658 |
|
| |
Total |
|
$ |
4,657,820 |
|
| |
Certificates of deposit of $100,000 or more amounted to $1.9 billion and $1.1 billion and
represented approximately 16.0% and 10.8% of total deposits at December 31, 2005 and 2004,
respectively.
The following table represents the amount of certificates of deposit of $100,000 or more at
December 31, 2005 maturing during the periods indicated:
| |
|
|
|
|
| (In thousands) |
|
|
|
|
| |
Maturing: |
|
|
|
|
January 1, 2006 to March 31, 2006 |
|
$ |
510,227 |
|
April 1, 2006 to June 30, 2006 |
|
|
428,757 |
|
July 1, 2006 to December 31, 2006 |
|
|
336,783 |
|
January 1, 2007 and beyond |
|
|
586,508 |
|
| |
Total |
|
$ |
1,862,275 |
|
| |
NOTE 12: Federal Home Loan Bank Advances
Advances payable to the Federal Home Loan Bank are summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
2005 |
|
2004 |
| |
|
Total |
|
|
|
|
|
Total |
|
|
| (In thousands) |
|
Outstanding |
|
Callable |
|
Outstanding |
|
Callable |
| |
Fixed Rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.48% to 7.04% due in 2005 |
|
$ |
— |
|
|
|
— |
|
|
|
1,607,368 |
|
|
|
45,000 |
|
2.18% to 6.31% due in 2006 |
|
|
1,213,468 |
|
|
|
— |
|
|
|
368,695 |
|
|
|
— |
|
4.09% to 7.45% due in 2007 |
|
|
442,383 |
|
|
|
— |
|
|
|
244,648 |
|
|
|
— |
|
3.93% to 5.93% due in 2008 |
|
|
175,119 |
|
|
|
74,000 |
|
|
|
75,571 |
|
|
|
74,000 |
|
4.98% to 5.96% due in 2009 |
|
|
138,000 |
|
|
|
123,000 |
|
|
|
138,000 |
|
|
|
123,000 |
|
4.32% to 8.44% due in 2010 |
|
|
135,311 |
|
|
|
35,000 |
|
|
|
35,370 |
|
|
|
35,000 |
|
3.99% to 6.60% due in 2011 |
|
|
41,421 |
|
|
|
40,000 |
|
|
|
41,635 |
|
|
|
40,000 |
|
5.22% to 5.49% due in 2013 |
|
|
49,000 |
|
|
|
49,000 |
|
|
|
49,000 |
|
|
|
49,000 |
|
0.00% to 6.00% due in 2015 to 2023 |
|
|
1,325 |
|
|
|
— |
|
|
|
1,355 |
|
|
|
— |
|
| |
|
|
|
2,196,027 |
|
|
|
321,000 |
|
|
|
2,561,642 |
|
|
|
366,000 |
|
Unamortized premiums and hedge
accounting adjustments |
|
|
17,983 |
|
|
|
— |
|
|
|
28,693 |
|
|
|
— |
|
| |
Total advances, net |
|
$ |
2,214,010 |
|
|
|
321,000 |
|
|
|
2,590,335 |
|
|
|
366,000 |
|
| |
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Webster Bank had additional borrowing capacity from the FHLB of approximately $1.0 billion and
$651.6 million at December 31, 2005 and 2004, respectively. Advances are secured by a blanket
security agreement, which requires Webster Bank to maintain as collateral certain qualifying
assets, principally mortgage loans and securities. At December 31, 2005 and 2004, investment
securities were not fully utilized as collateral, and had all securities been used for collateral,
Webster Bank would have had additional borrowing capacity of approximately $737.1 million and
$913.6 million, respectively. At December 31, 2005 and 2004, Webster Bank was in compliance with
the FHLB collateral requirements.
During 2004, Webster completed its plan to de-leverage its balance sheet through the sale of $750.0
million of securities with an effective duration of 2.1 years. Proceeds from the de-leveraging were
used to prepay approximately $500.0 million of Federal Home Loan advances that were swapped to
floating rates and approximately $250.0 million of overnight borrowings. The yield on the
securities sold was 3.53% while the cost on the borrowings prepaid was 4.27%. Costs of $45.8
million resulted from the prepayment of the borrowings and are reflected in noninterest expenses in
2004.
NOTE 13: Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
The following table summarizes securities sold under agreements to repurchase and other short-term
borrowings:
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Securities sold under agreements to repurchase |
|
$ |
792,838 |
|
|
|
1,117,040 |
|
Federal funds purchased |
|
|
246,375 |
|
|
|
133,780 |
|
Treasury tax and loan |
|
|
477,066 |
|
|
|
164,592 |
|
Other |
|
|
77 |
|
|
|
1,286 |
|
| |
|
|
|
1,516,356 |
|
|
|
1,416,698 |
|
Unamortized premiums and hedge accounting adjustments |
|
|
6,025 |
|
|
|
11,785 |
|
| |
Total |
|
$ |
1,522,381 |
|
|
|
1,428,483 |
|
| |
During 2005 and 2004, securities sold under agreements to repurchase (“repurchase agreements”) were
also used as a primary source of borrowed funds in addition to FHLB advances. Repurchase agreements
were primarily collateralized by U.S. Government agency mortgage-backed securities. The collateral
for these repurchase agreements is delivered to broker/dealers. Repurchase agreements with
broker/dealers are limited to primary dealers in government securities or commercial and municipal
customers through Webster’s Treasury Sales desk. At December 31, 2005 and 2004, there were $83.5
million of repurchase agreements that were structured to be callable at the option of the
counterparty. The weighted-average rates on total repurchase agreements and other borrowings were
3.22% and 2.40% at December 31, 2005 and 2004, respectively.
Information concerning repurchase agreements outstanding at December 31, 2005 is presented below:
(Dollars in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
Weighted-Average |
| |
|
|
|
|
|
Amortized Cost |
|
Market Value |
|
Average |
|
Original |
| Original maturity |
|
Balance |
|
of Collateral |
|
of Collateral |
|
Rate |
|
Maturity |
| |
Up to 30 days |
|
$ |
300,733 |
|
|
|
314,099 |
|
|
|
304,163 |
|
|
|
2.99 |
% |
|
|
3.2 |
|
|
Days |
31 to 90 days |
|
|
243 |
|
|
|
257 |
|
|
|
249 |
|
|
|
3.39 |
|
|
|
2.4 |
|
|
Months |
Over 90 days |
|
|
491,862 |
|
|
|
539,808 |
|
|
|
522,875 |
|
|
|
3.64 |
|
|
|
35.8 |
|
|
Months |
| |
Totals |
|
$ |
792,838 |
|
|
|
854,164 |
|
|
|
827,287 |
|
|
|
3.39 |
% |
|
|
22.3 |
|
|
Months |
| |
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth certain information concerning short-term borrowings (with original
maturities of one year or less) at the dates and for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At and for the years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Repurchase agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
Average amount outstanding during the period |
|
$ |
537,151 |
|
|
|
714,320 |
|
|
|
1,064,404 |
|
Amount outstanding at end of period |
|
|
401,137 |
|
|
|
527,127 |
|
|
|
842,491 |
|
Highest month-end balance during the period |
|
|
592,216 |
|
|
|
1,023,826 |
|
|
|
1,270,166 |
|
Weighted-average interest rate at end of period |
|
|
3.16 |
% |
|
|
1.86 |
|
|
|
0.95 |
|
Weighted-average interest rate during the period |
|
|
2.53 |
|
|
|
1.17 |
|
|
|
1.08 |
|
Federal funds purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
Average amount outstanding during the period |
|
|
— |
|
|
|
— |
|
|
$ |
476,368 |
|
Amount outstanding at end of period |
|
|
— |
|
|
|
— |
|
|
|
400,000 |
|
Highest month-end balance during the period |
|
|
— |
|
|
|
— |
|
|
|
682,100 |
|
Weighted-average interest rate at end of period |
|
|
— |
|
|
|
— |
|
|
|
0.95 |
% |
Weighted-average interest rate during the period |
|
|
— |
|
|
|
— |
|
|
|
1.12 |
|
NOTE 14: Other Long-Term Debt
Other long-term debt consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Subordinated notes (due January 2013) |
|
$ |
200,000 |
|
|
|
200,000 |
|
Senior notes (due April 2014) |
|
|
150,000 |
|
|
|
150,000 |
|
Senior notes (due November 2007) |
|
|
50,400 |
|
|
|
75,600 |
|
Junior subordinated debt to related capital trusts (due 2027-2033): |
|
|
|
|
|
|
|
|
Webster Capital Trust I |
|
|
103,093 |
|
|
|
103,093 |
|
Webster Capital Trust II |
|
|
51,547 |
|
|
|
51,547 |
|
Webster Statutory Trust I |
|
|
77,320 |
|
|
|
77,320 |
|
People’s Bancshares Capital Trust |
|
|
10,309 |
|
|
|
10,309 |
|
Eastern Wisconsin Bancshares Capital Trust I |
|
|
2,070 |
|
|
|
— |
|
Eastern Wisconsin Bancshares Capital Trust II |
|
|
2,070 |
|
|
|
— |
|
Note payable |
|
|
— |
|
|
|
10,000 |
|
| |
|
|
|
646,809 |
|
|
|
677,869 |
|
Unamortized premiums and hedge accounting adjustments |
|
|
(5,903 |
) |
|
|
2,146 |
|
| |
Total other long-term debt |
|
$ |
640,906 |
|
|
|
680,015 |
|
| |
In January 2003, Webster Bank completed an offering of $200.0 million of subordinated notes that
bear an interest rate of 5.875% and mature on January 15, 2013. The notes were rated investment
grade by the major rating agencies and supplement existing regulatory capital. A futures derivative
contract in anticipation of the debt issuance was used to hedge the fixed rate on the subordinated
notes. The contract qualified as a cash flow hedge under SFAS No. 133, as amended. A gain of
$1.7 million realized on the futures contract transaction has been deferred as a component of
accumulated other comprehensive income and is being amortized over the life of the notes as a
reduction of interest expense. It is anticipated that approximately $168,000 will be reclassified
into earnings in 2006.
In April 2004, Webster completed an offering of $150.0 million of senior notes which are not
redeemable prior to their maturity on April 15, 2014, have an interest rate of 5.125% and were
priced to yield 5.187%. Net proceeds from this offering were used to partially fund the $184
million cash portion of the purchase price of the acquisition of FIRSTFED AMERICA BANCORP, INC.
(“FIRSTFED”).
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2000, a private placement of $126.0 million of 8.72% unsecured Senior Notes due in
November 2007 was completed. In November 2003 and each year thereafter, a mandatory repayment of
$25.2 million of principal is required. In addition, Webster may, at its option, prepay at any
time, in whole or in part, the outstanding principal amount at par plus a make-whole prepayment
penalty. The senior notes contain certain covenants that include a maximum amount of debt, a
minimum equity to assets ratio and a maximum nonperforming assets ratio. At December 31, 2005,
Webster is in compliance with all covenants.
In January 1997, a statutory business trust, Webster Capital Trust I (“Trust I”), was formed of
which Webster holds 100% of the common stock. Trust I exists for the sole purpose of issuing trust
preferred securities and investing the proceeds in an equivalent amount of subordinated debentures
of Webster. The sole asset of Trust I is $103.1 million of Webster’s 9.36% junior subordinated
deferrable interest debentures due in 2027 (“subordinated debt securities”).
In April 1997, Eagle Financial Capital Trust I, subsequently renamed Webster Capital Trust II
(“Trust II”), completed a private placement of capital securities. Proceeds from the issue were
invested by Trust II in $51.5 million of 10.0% subordinated debt securities issued by Eagle due in
2027. These debt securities represent the sole assets of Trust II. Webster holds 100% of the common
stock in Trust II.
In September 2003, a statutory business trust, Webster Statutory Trust I (“ST I”), was created of
which Webster holds 100% of the common stock. The sole asset of ST I is the $77.3 million of
Webster’s floating rate subordinated debt securities due in 2033. The interest rate on the
subordinated debt securities changes quarterly to 3-month LIBOR plus 2.95%. The subordinated debt
securities may be redeemed in whole or in part quarterly, beginning in September 2008. Earlier
redemption is possible prior to this date on the occurrence of a special qualifying event.
In May 2004, with the acquisition of FIRSTFED, Webster assumed junior subordinated debt (People’s
Bancshares Capital Trust) of $10.3 million. This debt has a coupon rate of 11.695% and matures in
July 2030. A purchase premium of $2.1 million resulted from the acquisition and is being amortized
over the life of the subordinated debt as an adjustment to interest expense. Additionally, Webster
assumed a $10.0 million note payable that was paid off in full on March 29, 2005.
In February 2005, with the acquisition of HSA Bank, Webster assumed junior subordinated debt
(Eastern Wisconsin Bancshares Capital Trust I & II) of $4.1 million, $2.07 million each. Eastern
Wisconsin Bancshares Capital Trust I has a coupon rate of 8.0% and matures in April 2032. Eastern
Wisconsin Bancshares Capital Trust II has a coupon rate of 7.4% and matures in November 2033. The
HSA acquisition created a premium for the capital trust securities of approximately $185,000.
Webster assumed the guarantee agreements executed by Eastern Wisconsin Bancshares, Inc. as
guarantor of these trust preferred securities.
The subordinated debt securities are unsecured obligations of Webster and are subordinate to and
junior in right of payment to all present and future senior indebtedness. Webster entered into a
guarantee, which together with its obligations under the subordinated debt securities and the
declaration of trust governing the various trusts, 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.
In December 2003, FIN 46R, which required Webster to deconsolidate its investment in the various
trusts, was adopted. In accordance with the provisions of FIN 46R, the capital security obligations
of the Trusts that had been classified as a separate line between debt and equity are no longer
consolidated. Webster’s junior subordinated debt obligations to the trusts, which are now
consolidated under FIN 46R, are included in other long-term debt on the Consolidated Statements of
Condition.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: Shareholders’ Equity
Capital guidelines issued by the Federal Reserve Board and the OCC require Webster Financial
Corporation and Webster Bank to maintain certain minimum ratios, as set forth below. At December
31, 2005 and 2004, both entities were deemed to be “well capitalized” and in compliance with the
applicable capital requirements.
The following table provides information on the capital ratios:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Actual |
|
Capital Requirements |
|
Well Capitalized |
| (Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |
At December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Webster Financial Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
1,537,032 |
|
|
|
11.1 |
% |
|
$ |
1,107,805 |
|
|
|
8.0 |
% |
|
$ |
1,384,756 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
1,179,158 |
|
|
|
8.5 |
|
|
|
553,902 |
|
|
|
4.0 |
|
|
|
830,853 |
|
|
|
6.0 |
|
Tier 1 leverage capital ratio (to adjusted total assets) |
|
|
1,179,158 |
|
|
|
6.9 |
|
|
|
688,133 |
|
|
|
4.0 |
|
|
|
860,166 |
|
|
|
5.0 |
|
Webster Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
1,532,996 |
|
|
|
11.2 |
% |
|
$ |
1,092,476 |
|
|
|
8.0 |
% |
|
$ |
1,365,595 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
1,177,364 |
|
|
|
8.6 |
|
|
|
546,238 |
|
|
|
4.0 |
|
|
|
819,357 |
|
|
|
6.0 |
|
Tier 1 leverage capital ratio (to adjusted total assets) |
|
|
1,177,364 |
|
|
|
6.9 |
|
|
|
680,675 |
|
|
|
4.0 |
|
|
|
850,844 |
|
|
|
5.0 |
|
At December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Webster Financial Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
1,410,329 |
|
|
|
11.2 |
% |
|
$ |
1,010,628 |
|
|
|
8.0 |
% |
|
$ |
1,263,286 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
1,055,636 |
|
|
|
8.4 |
|
|
|
505,314 |
|
|
|
4.0 |
|
|
|
757,971 |
|
|
|
6.0 |
|
Tier 1 leverage capital ratio (to average assets) |
|
|
1,055,636 |
|
|
|
6.4 |
|
|
|
663,853 |
|
|
|
4.0 |
|
|
|
829,817 |
|
|
|
5.0 |
|
Webster Bank, N.A. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets) |
|
$ |
1,451,810 |
|
|
|
11.6 |
% |
|
$ |
997,393 |
|
|
|
8.0 |
% |
|
$ |
1,246,741 |
|
|
|
10.0 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
1,101,698 |
|
|
|
8.8 |
|
|
|
498,696 |
|
|
|
4.0 |
|
|
|
748,045 |
|
|
|
6.0 |
|
Tier 1 leverage capital ratio (to average assets) |
|
|
1,101,698 |
|
|
|
6.7 |
|
|
|
657,714 |
|
|
|
4.0 |
|
|
|
822,143 |
|
|
|
5.0 |
|
A primary source of liquidity for Webster Financial Corporation is dividend payments from Webster
Bank, which are limited by various banking regulations to net profits for the current year plus net
retained profits from the preceding two years and further restricted by minimum capital
requirements at Webster Bank. Based on the most restrictive limitations, Webster Bank had excess
regulatory capital and could declare up to $186.8 million of dividends without prior regulatory
approval as of December 31, 2005. In addition, the OCC has the discretion to prohibit any otherwise
permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster
Bank to Webster Financial Corporation totaled $144.0 million in 2005 and $135.0 million in 2004.
At the time of the respective conversions of Webster Bank and certain predecessors from mutual to
stock form, each institution established a liquidation account for the benefit of eligible
depositors who continue to maintain their deposit accounts after conversion. In the event of a
complete liquidation, each eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account. Webster Bank may not declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would cause its regulatory capital to
be reduced below applicable regulatory capital requirements or the amount required for its
liquidation accounts.
Retained earnings at December 31, 2005 and 2004 included $57.4 million of certain “thrift bad debt”
reserves established before 1988. For federal income tax purposes, Webster Bank deducted those
reserves (including those deducted by certain thrift institutions later acquired by Webster) which
are subject to recapture in certain circumstances, including: (i) distributions by Webster Bank in
excess of certain earnings and profits; (ii) redemption of Webster Bank’s stock; or (iii)
liquidation. Because Webster does not expect those events to occur, no federal income tax liability
has been provided for the reserves.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1996, Webster’s Board of Directors adopted a stockholder’s rights plan in which
preferred stock purchase rights were granted as a dividend at the rate of one right for each share
of common stock held of record as of the close of business on February 16, 1996. The plan was
designed to protect all shareholders against hostile acquirers who may seek to take advantage of
Webster and its shareholders through coercive or unfair tactics aimed at gaining control without
paying all shareholders a fair price. Each right initially would entitle the holder thereof to
purchase under certain circumstances 1/1,000th of a share of a new Series C Preferred Stock at an
exercise price of $100 per share. The rights would be exercisable only if a person or group in the
future becomes the beneficial owner of 15% or more of the common stock, or announces a tender or
exchange offer which would result in its ownership of 15% or more of the common stock, or if the
Board declares any person or group to be an “adverse person” upon a determination that such person
or group has acquired beneficial ownership of 10% or more and that such ownership is not in the
best interests of Webster. On February 4, 2006, the rights issued under the rights plan expired.
Webster’s Board of Directors has elected not to renew the rights plan and has determined that such
action was in the best interests of Webster’s stockholders.
A total of 609,519 shares of common stock were repurchased during 2005 at an average cost of $46.16
per common share. Of the shares repurchased, 532,534 shares were repurchased as part of, and which
completed the July 2002, 2.4 million share stock buyback program and 2,704 shares were repurchased
as part of the July 2003, 2.3 million share stock buyback program. The remaining 74,281 shares were
repurchased for acquisition and other corporate purposes. A total of 95,677 shares of common stock
were repurchased during 2004 at an average cost of $48.29 per common share. Of the shares
repurchased, 12,889 shares were repurchased through the July 2002 stock buyback program. The
remaining 82,788 shares were repurchased for acquisitions and other corporate purposes.
A total of 51,311, 39,716 and 48,713 shares of restricted common stock were granted to senior
management and non-employee directors during 2005, 2004 and 2003, respectively. The cost of the
restricted shares was measured on the date of grant and is being charged to noninterest expense
over the restricted period. See Notes 1 and 19 for further information on stock-based compensation.
Accumulated other comprehensive loss is comprised of the following components:
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Unrealized loss on available for sale securities (net of tax) |
|
$ |
(26,550 |
) |
|
|
(2,461 |
) |
Unrealized loss upon transfer of available for sale securities
to held to maturity (net of tax and amortization) |
|
|
(2,518 |
) |
|
|
(3,438 |
) |
Deferred gain on hedge |
|
|
1,190 |
|
|
|
1,358 |
|
| |
Total accumulated other comprehensive loss |
|
$ |
(27,878 |
) |
|
|
(4,541 |
) |
| |
NOTE 16: Derivative Financial Instruments
At December 31, 2005, there were outstanding interest rate swaps with a total notional amount of
$802.5 million. These swaps are used to hedge FHLB advances, repurchase agreements and other
long-term debt (subordinated notes and senior notes). The swaps are used to transform the debt from
fixed rate to floating rate and qualify for fair value hedge accounting under SFAS No. 133. Of the
total, $50.0 million of the interest rate swaps mature in 2006, $200.0 million in 2007, $202.5
million in 2008, $200.0 million in 2013 and $150.0 million in 2014 and an equal amount of the
hedged debt matures on these dates. At December 31, 2004, there were outstanding interest rate
swaps with a notional amount of $802.5 million.
During the 2004 second quarter, Webster Bank purchased two $100 million swaptions with the right,
but not the obligation, to enter into two $100 million swaps, paying 6.15% fixed and receiving one
month LIBOR. These swaptions mature in 2007 and were purchased with the objective of establishing a
hedging relationship with certain debt that was subsequently prepaid in 2004. The swaptions are
carried at fair value with changes in fair value recognized in current period earnings.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Webster transacts certain derivative products with its customer base, primarily interest rate
swaps. These customer derivatives are offset with matching derivatives with other counterparties in
order to minimize risk. Exposure with respect to these derivatives is largely limited to
nonperformance by either the customer or the other counterparty. The notional amount of customer
derivatives and the related counterparty derivatives each totaled $261.4 million at December 31,
2005 and $186.2 million at December 31, 2004. The customer derivatives and the related counterparty
derivatives are marked to market and any difference is reflected in noninterest income.
The fair values and notional amounts of derivatives at December 31, 2005 and 2004 are summarized
below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| |
|
2005 |
|
2004 |
| |
|
Notional |
|
Estimated |
|
Notional |
|
Estimated |
| (In thousands) |
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
| |
Asset and liability management positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
Receive fixed/pay floating |
|
$ |
802,526 |
|
|
|
(13,013 |
) |
|
$ |
802,526 |
|
|
|
3,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed/pay floating |
|
$ |
(214,533 |
) |
|
|
(2,165 |
) |
|
$ |
(157,768 |
) |
|
|
(2,577 |
) |
Receive floating/pay fixed |
|
|
214,529 |
|
|
|
3,656 |
|
|
|
157,734 |
|
|
|
1,010 |
|
Purchased options-interest rate caps |
|
|
46,886 |
|
|
|
91 |
|
|
|
28,495 |
|
|
|
33 |
|
Written options-interest rate caps |
|
|
(46,886 |
) |
|
|
(91 |
) |
|
|
(28,495 |
) |
|
|
(33 |
) |
Certain derivative instruments, primarily forward sales of mortgage-backed securities (“MBSs”), are
utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage loan
commitments and mortgage loans held for sale. Prior to closing and funding a single-family
residential mortgage loan, an interest-rate locked commitment is generally extended to the
borrower. During the period from commitment date to closing date, Webster Bank is subject to the
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 gain on sale of the loans or, possibly,
a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster
agrees to deliver whole mortgage loans to various investors or issue MBSs, are established. At
December 31, 2005, outstanding rate locks totaled approximately $137.2 million and the residential
mortgage held for sale portfolio totaled $262.6 million. Forward sales, which include mandatory
forward commitments of approximately $256.8 million and best efforts forward commitments of
approximately $86.2 million at December 31, 2005, establish the price to be received upon the sale
of the related mortgage loan, thereby mitigating certain interest rate risk. Webster 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 interest rate locked loan commitments are recorded at fair value, with changes in fair value
recorded in current period earnings. The changes in the fair value of forward sales commitments are
also recorded in current period earnings. Loans held for sale are carried at the lower of aggregate
cost or fair value. The changes in fair value of forward sales commitments are adjusted monthly
based upon market interest rates and the level of locked loan commitments and unallocated forward
sales commitments.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17: Summary of Estimated Fair Values of Financial Instruments
A summary of estimated fair values of significant financial instruments consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, |
|
| |
|
2005 |
|
|
2004 |
|
| |
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
| (In thousands) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from depository institutions |
|
$ |
293,706 |
|
|
|
293,706 |
|
|
|
248,825 |
|
|
|
248,825 |
|
Short-term investments |
|
|
36,302 |
|
|
|
36,302 |
|
|
|
17,629 |
|
|
|
17,629 |
|
Securities |
|
|
3,700,585 |
|
|
|
3,689,899 |
|
|
|
3,724,019 |
|
|
|
3,729,035 |
|
Loans held for sale |
|
|
267,919 |
|
|
|
267,919 |
|
|
|
147,211 |
|
|
|
147,211 |
|
Total loans |
|
|
12,285,286 |
|
|
|
12,280,979 |
|
|
|
11,712,775 |
|
|
|
11,811,942 |
|
Allowance for loan losses |
|
|
(146,486 |
) |
|
|
(146,486 |
) |
|
|
(150,112 |
) |
|
|
(150,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
|
12,138,800 |
|
|
|
12,134,493 |
|
|
|
11,562,663 |
|
|
|
11,661,830 |
|
Mortgage servicing rights |
|
|
7,692 |
|
|
|
11,664 |
|
|
|
9,947 |
|
|
|
12,135 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits other than time deposits |
|
$ |
6,973,325 |
|
|
|
6,973,325 |
|
|
|
7,027,886 |
|
|
|
7,027,886 |
|
Time deposits |
|
|
4,657,820 |
|
|
|
4,628,713 |
|
|
|
3,543,402 |
|
|
|
3,544,047 |
|
Securities sold under agreements to repurchase and
other short-term borrowings |
|
|
1,522,381 |
|
|
|
1,520,690 |
|
|
|
1,428,483 |
|
|
|
1,427,993 |
|
FHLB advances and other long-term debt |
|
|
2,854,916 |
|
|
|
2,886,482 |
|
|
|
3,270,350 |
|
|
|
3,300,154 |
|
Preferred stock of subsidiary corporation |
|
|
9,577 |
|
|
|
9,907 |
|
|
|
9,577 |
|
|
|
9,801 |
|
An Asset/Liability simulation model is used to estimate the fair value of most assets and
liabilities. Fair value is estimated by discounting the average expected cash flows over multiple
interest rate paths. An arbitrage-free trinomial lattice term structure model generates the
interest rate paths. The month-end LIBOR/Swap yield curve and swap option volatilities are used as
the input for deriving forward rates for future months. Cash flows for all instruments are created
for each rate path using product specific behavioral models and account specific system data.
Discount rates are matched with the time period of the expected cash flow. The Asset/Liability
simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage
Obligation database. Instruments with explicit options (i.e., caps, floors, puts and calls) and
implicit options (i.e., prepayment and early withdrawal ability) require such a rate and cash flow
modeling approach to more accurately estimate fair value. A spread is added to the discount rates
to reflect credit and option risks embedded in each instrument. Spreads and prices are calibrated
to observable market instruments when available or to estimates based on industry standards.
The carrying amounts for short-term investments and deposits other than time deposits approximate
fair value since they mature in 90 days or less and do not present unanticipated credit concerns.
The fair value of securities (see Note 4) is estimated based on prices or quotations received from
third parties or pricing services. The fair value of derivative instruments was based on the amount
Webster could receive or pay to terminate the agreements. FHLB and FRB stock, which is included in
securities, has no active market and is required to be held by member banks. The estimated fair
value of FHLB and FRB stock equals the carrying amount. In estimating the fair value of loans and
time deposits, approximately 200 distinct types of products are separately valued and consolidated
for purposes of the table above. Whenever possible, observable market prices for similar loans or
deposits are used as benchmarks to calibrate Webster’s portfolios. The fair value of deposits with
no defined maturities is the amount payable on demand at the reporting date.
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire holdings or any part of a
particular financial instrument. Because no active market exists for a significant portion of
Webster’s financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These factors are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. For example, Webster has a substantial
insurance and trust and investment management operations that contribute noninterest income
annually. These operations are not considered financial instruments and their value has not been
incorporated into the fair value estimates. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimate of fair value.
NOTE 18: Employee Benefit Plans
Webster provides an employee investment savings plan governed by section 401(a) of the Internal
Revenue Code (“the Code”). Effective September 1, 2004, Webster matches 100% of the first 2% and
50% of the next 6% of the employee’s pretax contribution based on annual compensation. The employer
match was adjusted in 2004 in conjunction with revisions to the pension benefit payment formula and
to the value sharing component of the employee investment savings plan. Effective December 31,
2004, three benefit plans with combined assets of $92.3 million were terminated and merged with the
Webster Employee Investment Savings Plan. The Plans were the Webster ESOP Plan with assets of $41.0
million, the First Federal ESOP Plan with assets of $25.4 million and the First Federal 401(k) Plan
with assets of $25.9 million. Noninterest expense included $7.0 million in 2005, $4.5 million in
2004 and $3.4 million in 2003 for employer matching contributions to the plan.
An Employee Stock Ownership Plan (“ESOP”) was active through December 31, 2001. Effective as of
January 1, 2002, the ESOP did not receive any further employer contributions or allow any new
members to join the plan. Members continue to receive dividend payments on their vested balance in
Webster common stock. Benefit payments from the ESOP will continue under the benefit payment
provisions of the plan. The final release of unallocated shares from the ESOP occurred in January
2002. Effective December 31, 2004, the Webster ESOP Plan was terminated and the assets of $41.0
million were merged with the Webster Employee Investment Savings Plan. Noninterest expense included
$178,000 and $108,000 for 2004 and 2003, respectively, for ESOP administrative costs.
In 2002, the value sharing plan became a component of the 401(k) plan. Under the value sharing
plan, employer discretionary profit sharing contributions are made to the 401(k) plan for the
benefit of participants who are below the level of senior vice president. The contributions are
invested in Webster common stock until the participant becomes fully vested in his or her profit
sharing account. Employees become fully vested after three years of service. The employer
contributions are allocated proportionately for each eligible participant on the basis of their
compensation. There were no employer contribution payments to the value sharing plan in 2005,
$500,000 in 2004 and $799,000 in 2003.
A qualified Employee Stock Purchase Plan (“ESPP”), governed by section 423 of the Code, provides
eligible employees the opportunity to invest up to 10% of their after-tax base compensation to
purchase Webster common stock at a discounted price. Participants in the ESPP through December 31,
2004 were able to purchase Webster common stock at 85% of the lower of the market price on the
first or last trading day of each offering period. Beginning January 1, 2005, the price to ESPP
participants is 85% of the market price on the last trading day of the period. During 2005, 2004
and 2003, shares purchased totaled 51,572, 41,951 and 42,293, respectively. At December 31, 2005,
there were 524,235 shares available for future purchase under the ESPP. For the years ended
December 31, 2005, 2004 and 2003, charges to noninterest expense related to the ESPP totaled
$350,000, $469,000 and $460,000, respectively.
Webster employees may vote their shares of Webster common stock that is held in the Company’s
sponsored stock-based plans.
A defined benefit noncontributory pension plan is maintained for employees who meet certain minimum
service and age requirements. Pension plan benefits are based upon earnings of covered employees
during the period of credited service. A supplemental retirement plan is also maintained for the
benefit of certain employees who are at the executive vice president level or above. The
supplemental retirement plan provides eligible participants with an additional retirement benefit.
Webster also provides other postretirement benefits to certain retired employees.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the FIRSTFED acquisition on May 14, 2004, Webster assumed the obligations of all the
FIRSTFED pension plan during 2004. The FIRSTFED plan is currently administered by Pentegra (the
“Fund”). The Fund does not segregate the assets or liabilities of its participating employers in
the on-going administration of the fund and accordingly, disclosure of FIRSTFED accumulated vested
and nonvested benefits is not possible. According to the Fund’s administrators, as of July 1, 2004,
the date of the latest actuarial valuation, the market value of the Fund’s net assets exceeded the
actuarial present value of vested and nonvested benefits in the aggregate. Webster has requested
that the Fund determine the assets of the Fund attributed to FIRSTFED and anticipates the assets
will be merged into Webster’s pension plan during 2006, at which time Webster may make a
contribution to the plan. During 2005 and 2004, Webster accrued $105,000 and $360,000,
respectively, related to the FIRSTFED pension plan.
A December 31, measurement date is used for the pension, supplemental pension and postretirement
benefit plans. The following tables set forth changes in benefit obligation, changes in plan assets
and the funded status of the pension plans and other postretirement benefit plan at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
Other Benefits |
| (In thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
93,815 |
|
|
|
72,703 |
|
|
|
4,130 |
|
|
|
4,602 |
|
Service cost |
|
|
7,845 |
|
|
|
8,452 |
|
|
|
— |
|
|
|
— |
|
Interest cost |
|
|
5,558 |
|
|
|
4,889 |
|
|
|
252 |
|
|
|
267 |
|
Plan amendments |
|
|
— |
|
|
|
464 |
|
|
|
132 |
|
|
|
— |
|
Actuarial liability (gain) loss |
|
|
(76 |
) |
|
|
9,100 |
|
|
|
475 |
|
|
|
(445 |
) |
Benefits paid and administrative expenses |
|
|
(1,924 |
) |
|
|
(1,793 |
) |
|
|
(375 |
) |
|
|
(294 |
) |
| |
Benefit obligation at end of year |
|
|
105,218 |
|
|
|
93,815 |
|
|
|
4,614 |
|
|
|
4,130 |
|
| |
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value at beginning of year |
|
|
76,426 |
|
|
|
60,243 |
|
|
|
— |
|
|
|
— |
|
Actual return on plan assets |
|
|
4,632 |
|
|
|
5,470 |
|
|
|
— |
|
|
|
— |
|
Employer contributions |
|
|
11,609 |
|
|
|
12,506 |
|
|
|
375 |
|
|
|
294 |
|
Benefits paid and administrative expenses |
|
|
(1,924 |
) |
|
|
(1,793 |
) |
|
|
(375 |
) |
|
|
(294 |
) |
| |
Plan assets at fair value at end of year |
|
|
90,743 |
|
|
|
76,426 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(14,475 |
) |
|
|
(17,389 |
) |
|
|
(4,614 |
) |
|
|
(4,130 |
) |
Unrecognized prior service cost |
|
|
423 |
|
|
|
594 |
|
|
|
741 |
|
|
|
683 |
|
Unrecognized net loss |
|
|
28,443 |
|
|
|
27,459 |
|
|
|
502 |
|
|
|
26 |
|
Unrecognized transition asset |
|
|
(49 |
) |
|
|
(59 |
) |
|
|
— |
|
|
|
— |
|
Additional minimum liability |
|
|
(1,881 |
) |
|
|
(1,844 |
) |
|
|
— |
|
|
|
— |
|
| |
Prepaid (accrued) benefit cost |
|
$ |
12,461 |
|
|
|
8,761 |
|
|
|
(3,371 |
) |
|
|
(3,421 |
) |
| |
The pension plan held in its investment portfolio 97,000 shares and 62,000 shares of Webster
common stock at December 31, 2005 and 2004 with an approximate market value of $4.5 million and
$3.1 million at those dates, respectively.
The accumulated benefit obligation for all pension plans was $93.3 million and $77.6 million at
December 31, 2005 and 2004, respectively. The fair value of plan assets exceeds the accumulated
benefit obligation in all of Webster’s pension plans, except for the supplemental retirement plan.
Information concerning the supplemental plan is presented below.
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Projected benefit obligation |
|
$ |
6,272 |
|
|
|
6,806 |
|
Accumulated benefit obligation |
|
|
4,391 |
|
|
|
4,905 |
|
Fair value of plan assets |
|
|
— |
|
|
|
— |
|
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected future benefit payments for the pension plans and other postretirement benefit plans are presented below:
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
Pension Benefits |
|
Other Benefits |
| |
2006 |
|
$ |
1,974 |
|
|
|
431 |
|
2007 |
|
|
2,413 |
|
|
|
434 |
|
2008 |
|
|
3,495 |
|
|
|
437 |
|
2009 |
|
|
3,558 |
|
|
|
437 |
|
2010 |
|
|
4,074 |
|
|
|
430 |
|
2011-2015 |
|
|
33,598 |
|
|
|
2,009 |
|
Net benefit expense for the years ended December 31 included the following components.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
Other Benefits |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
|
2005 |
|
2004 |
|
2003 |
| |
Service cost (benefits earned during the period) |
|
$ |
7,845 |
|
|
|
8,452 |
|
|
|
6,799 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest cost on projected benefit obligations |
|
|
5,558 |
|
|
|
4,889 |
|
|
|
3,795 |
|
|
$ |
252 |
|
|
|
267 |
|
|
|
332 |
|
Expected return on plan assets |
|
|
(6,879 |
) |
|
|
(5,077 |
) |
|
|
(3,440 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Amortization of prior service cost and transition
asset |
|
|
161 |
|
|
|
199 |
|
|
|
56 |
|
|
|
73 |
|
|
|
62 |
|
|
|
62 |
|
Recognized net loss |
|
|
1,187 |
|
|
|
1,116 |
|
|
|
923 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Net pension expense |
|
$ |
7,872 |
|
|
|
9,579 |
|
|
|
8,133 |
|
|
$ |
325 |
|
|
|
329 |
|
|
|
394 |
|
| |
Webster plans to contribute at least an amount equal to the greater of the contribution
required to meet the minimum funding standards under Code section 412, or the amount necessary to
avoid an additional minimum liability as defined in SFAS No. 87. Additional contributions will be
made as deemed appropriate by management in conjunction with the plan actuaries. For 2006, the
preliminary estimated contribution is $6 million.
The allocation of the fair value of the pension plan’s assets at the December 31 measurement date
is shown in the following table:
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
| |
Assets Category: |
|
|
|
|
|
|
|
|
Cash/Cash Equivalents * |
|
|
2 |
% |
|
|
5 |
|
Fixed Income Investments |
|
|
31 |
|
|
|
26 |
|
Equity Investments |
|
|
67 |
|
|
|
69 |
|
| |
|
|
|
100 |
% |
|
|
100 |
|
| |
| * |
|
The December 31, 2004 percentage reflects an employer contribution of $7.8 million that was made in late December 2004. On average, over a complete
market cycle, cash and cash equivalents were within policy guidelines. |
The Retirement Plan Committee (the “Committee”) is a fiduciary under ERISA, and is charged with the
responsibility for directing and monitoring the investment management of the pension plan. To
assist the Committee in this function, it engages the services of investment managers and advisors
who possess the necessary expertise to manage the pension plan assets within the established
investment policy guidelines and objectives. The statement of investment policy guidelines and
objectives is not intended to remain static and is reviewed no less often than annually by the
Committee.
The primary objective of the pension plan investment strategy is to provide long-term total return
through capital appreciation and dividend and interest income. The plan invests in equity and
fixed-income securities. The performance benchmarks for the plan include a composite of the
Standard and Poor’s 500 stock index and the Lehman Brothers Corporate/Government Bond Index. The
volatility, as measured by standard deviation, of the pension plan’s assets should not exceed that
of the Composite Index. The investment policy guidelines allow the plan assets to be invested in
certain types of cash equivalents, fixed income securities, equity securities and mutual funds.
Investments in mutual funds must be only for funds that invest in the types of securities that are
specifically allowed by investment policy guidelines.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The investment policy guidelines in effect as of December 31, 2005 and 2004, on average, over a
complete market cycle, set the following asset allocation ranges:
| |
|
|
|
|
Target Asset Allocations: |
|
|
|
|
Cash/Cash Equivalents |
|
|
0% - 10 |
% |
Fixed Income Investments |
|
|
25% - 45 |
% |
Equity Investments |
|
|
50% - 70 |
% |
The basis for Webster’s 2005 assumption for the expected long-term rate of return on assets is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Percent of |
|
Expected |
Asset Category |
|
Portfolio |
|
Return |
| |
U.S. Bonds |
|
|
31 |
% |
|
|
6.5 |
% |
Large Cap Equity |
|
|
50 |
|
|
|
9.5 |
|
Small Cap Equity |
|
|
4 |
|
|
|
11.0 |
|
International Equity |
|
|
14 |
|
|
|
9.5 |
|
Short-term Investments |
|
|
1 |
|
|
|
5.0 |
|
| |
Total |
|
|
100 |
% |
|
|
8.8 |
% |
| |
On this basis, a reasonable range for the long-term return on assets assumption would be 8.0% to
9.0%. Webster selected 8.25% for 2005. The above assumes a long-term inflation rate of 3.0%.
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
Other Benefits |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
|
|
|
5.75 |
% |
|
|
6.00 |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.00 |
|
|
|
n/a |
|
|
|
n/a |
|
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension Benefits |
|
Other Benefits |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
| |
Discount rate |
|
|
6.00 |
% |
|
|
6.25 |
|
|
|
6.00 |
% |
|
|
6.25 |
|
Expected long-term return on assets |
|
|
8.25 |
|
|
|
8.50 |
|
|
|
n/a |
|
|
|
n/a |
|
Rate of compensation increase |
|
|
4.00 |
|
|
|
4.00 |
|
|
|
n/a |
|
|
|
n/a |
|
The assumed healthcare cost-trend rate is 8.0% for 2005 and 2006, declining 1.0% each year
until 2009 when the rate will be 5.0%. An increase of 1.0% in the assumed healthcare cost trend
rate for 2005 would have increased the net periodic postretirement benefit cost by $16,000 and
increased the accumulated benefit obligation by $312,000. A decrease of 1.0% in the assumed
healthcare cost trend rate for 2005 would have decreased the net periodic postretirement cost by
$14,000 and decreased the accumulated benefit obligation by $277,000.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19: Stock-Based Compensation Plans
The 1992 Stock Option Plan (the “Plan”) is a stock option plan maintained for the benefit of
Webster’s officers and directors. The Plan grants both incentive and nonqualified stock options. At
December 31, 2005, there were 3.3 million options outstanding, including 30,999 related to purchase
acquisitions. The Plan, as of December 31, 2005, had 1,376,953 common shares available for future
grants.
The fair value of each option is determined at the grant date using the Black-Scholes
Option-Pricing Model with the following weighted-average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted Average Assumptions |
| |
|
2005 |
|
2004 |
|
2003 |
| |
Expected term (years) |
|
|
6.5 |
|
|
|
7.2 |
|
|
|
7.2 |
|
Expected dividend yield |
|
|
2.16 |
% |
|
|
2.00 |
|
|
|
2.00 |
|
Expected volatility |
|
|
28.59 |
|
|
|
31.78 |
|
|
|
30.59 |
|
Expected forfeiture rate |
|
|
5.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
Risk-free interest rate |
|
|
4.32 |
|
|
|
3.97 |
|
|
|
3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of options granted |
|
$ |
13.44 |
|
|
|
15.73 |
|
|
|
13.37 |
|
The activity in the Plan for 2005, 2004 and 2003 follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
| |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
| |
Options outstanding at beginning of year |
|
|
3,546,356 |
|
|
$ |
32.62 |
|
|
|
3,470,688 |
|
|
$ |
28.91 |
|
|
|
3,362,299 |
|
|
$ |
25.62 |
|
Options granted |
|
|
247,779 |
|
|
|
46.22 |
|
|
|
509,269 |
|
|
|
49.05 |
|
|
|
461,748 |
|
|
|
44.58 |
|
Options issued in connection with
purchase acquisitions |
|
|
— |
|
|
|
— |
|
|
|
83,220 |
|
|
|
15.05 |
|
|
|
29,461 |
|
|
|
16.86 |
|
Options exercised |
|
|
(487,386 |
) |
|
|
20.94 |
|
|
|
(443,232 |
) |
|
|
18.97 |
|
|
|
(343,366 |
) |
|
|
16.72 |
|
Options forfeited/canceled |
|
|
(49,782 |
) |
|
|
45.83 |
|
|
|
(73,589 |
) |
|
|
33.55 |
|
|
|
(39,454 |
) |
|
|
29.34 |
|
| |
Options outstanding at end of year |
|
|
3,256,967 |
|
|
$ |
35.22 |
|
|
|
3,546,356 |
|
|
$ |
32.62 |
|
|
|
3,470,688 |
|
|
$ |
28.91 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year |
|
|
2,398,324 |
|
|
$ |
31.33 |
|
|
|
2,496,417 |
|
|
$ |
27.54 |
|
|
|
2,292,015 |
|
|
$ |
24.64 |
|
| |
The following table summarizes information about options outstanding and options exercisable at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
Options Exercisable |
| |
|
|
|
|
|
Weighted-Average |
|
Weighted- |
|
|
|
|
|
Weighted |
| |
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Average |
| |
|
Number |
|
Contractual Life |
|
Exercise |
|
Number |
|
Exercise |
| Range of Exercise Prices |
|
Outstanding |
|
(in years) |
|
Price |
|
Exercisable |
|
Price |
| |
$10.01 – 15.00 |
|
|
17,422 |
|
|
|
0.3 |
|
|
$ |
12.93 |
|
|
|
17,422 |
|
|
$ |
12.93 |
|
15.01 – 20.00 |
|
|
116,011 |
|
|
|
1.2 |
|
|
|
18.79 |
|
|
|
116,011 |
|
|
|
18.79 |
|
20.01 – 25.00 |
|
|
607,582 |
|
|
|
4.6 |
|
|
|
23.12 |
|
|
|
607,582 |
|
|
|
23.12 |
|
25.01 – 30.00 |
|
|
361,139 |
|
|
|
5.2 |
|
|
|
29.02 |
|
|
|
361,139 |
|
|
|
29.02 |
|
30.01 – 35.00 |
|
|
931,894 |
|
|
|
4.2 |
|
|
|
33.63 |
|
|
|
844,955 |
|
|
|
33.53 |
|
35.01 – 40.00 |
|
|
138,225 |
|
|
|
6.5 |
|
|
|
37.48 |
|
|
|
129,975 |
|
|
|
37.52 |
|
40.01 – 45.00 |
|
|
112,468 |
|
|
|
9.0 |
|
|
|
43.88 |
|
|
|
32,000 |
|
|
|
44.00 |
|
45.01 – 50.00 |
|
|
969,226 |
|
|
|
8.7 |
|
|
|
47.62 |
|
|
|
288,790 |
|
|
|
47.01 |
|
50.01 – 51.31 |
|
|
3,000 |
|
|
|
8.5 |
|
|
|
51.04 |
|
|
|
450 |
|
|
|
51.31 |
|
| |
|
|
|
3,256,967 |
|
|
|
5.9 |
|
|
$ |
35.22 |
|
|
|
2,398,324 |
|
|
$ |
31.33 |
|
| |
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2005, total options outstanding included 2,641,260 non-qualified and 615,707
incentive stock options. The options normally vest over a three to four year period, grant the
holder the right to acquire a share of Webster common stock for each option held and have a
contractual life of ten years. The Plan was amended in 2004 to add provisions for the deferral of
stock compensation incentive awards and to allow for the granting of stock appreciation rights
(“SARS”) to eligible employees and non-employee directors. No SARs have been granted through
December 31, 2005. The Plan was further amended in 2005 to establish a limit of 100,000 shares as
the number of shares that may be granted to an eligible individual in a calendar year as restricted
stock.
The Plan also permits grants of restricted stock. During 2005, 2004 and 2003, respectively, there
were 46,891, 35,817 and 43,638, restricted common shares granted to senior management under the
Plan, which normally vest over a period ranging from three to five years. A Director Retainer Fees
plan provides non-employee directors with restricted shares in lieu of an annual cash retainer for
their services rendered as directors. During 2005, 2004 and 2003, a total of 4,420, 3,899 and 5,075
restricted shares, respectively, were granted to directors with a vesting schedule of one year. The
cost of all restricted shares granted to directors and management is amortized to noninterest
expense over the service vesting period and such expense is reflected in compensation and benefits
expense. See Note 1 for further information on restricted stock grant expense.
NOTE 20: Business Segments
Webster has two operating segments for purposes of reporting business line results. These segments
are Retail Banking and Commercial Banking. The balance of Webster’s activity is reflected in Other.
The methodologies and organizational hierarchies that define the business segments are periodically
reviewed and revised. During the third quarter of 2005, Webster reevaluated its reportable segments
and combined Wealth and Investment Services into the Retail Banking segment. Wealth and Investment
Services accounted for less than one percent of the consolidated total assets and revenues. The
December 31, 2004 and 2003 amounts have been restated, to reflect changes in the organizational
hierarchies adopted and reflected in the results for the year ended December 31, 2005. The
following table presents the operating results and total assets for Webster’s reportable segments.
Year ended December 31, 2005
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retail |
|
Commercial |
|
|
|
|
|
Consolidated |
| (In thousands) |
|
Banking |
|
Banking |
|
Other |
|
Total |
| |
Net interest income |
|
$ |
389,421 |
|
|
|
123,189 |
|
|
|
4,731 |
|
|
|
517,341 |
|
Provision for credit losses |
|
|
13,373 |
|
|
|
21,684 |
|
|
|
(25,557 |
) |
|
|
9,500 |
|
| |
Net interest income after provision |
|
|
376,048 |
|
|
|
101,505 |
|
|
|
30,288 |
|
|
|
507,841 |
|
Noninterest income |
|
|
170,582 |
|
|
|
27,017 |
|
|
|
23,286 |
|
|
|
220,885 |
|
Noninterest expense |
|
|
334,308 |
|
|
|
58,832 |
|
|
|
62,430 |
|
|
|
455,570 |
|
| |
Income (loss) before income taxes |
|
|
212,322 |
|
|
|
69,690 |
|
|
|
(8,856 |
) |
|
|
273,156 |
|
Income taxes expense (benefit) |
|
|
67,858 |
|
|
|
22,273 |
|
|
|
(2,830 |
) |
|
|
87,301 |
|
| |
Net income (loss) |
|
$ |
144,464 |
|
|
|
47,417 |
|
|
|
(6,026 |
) |
|
|
185,855 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
9,636,322 |
|
|
|
3,892,668 |
|
|
|
4,307,572 |
|
|
|
17,836,562 |
|
| |
Year ended December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retail |
|
Commercial |
|
|
|
|
|
Consolidated |
| (In thousands) |
|
Banking |
|
Banking |
|
Other |
|
Total |
| |
Net interest income (loss) |
|
$ |
357,619 |
|
|
|
115,735 |
|
|
|
(5,193 |
) |
|
|
468,161 |
|
Provision for credit losses |
|
|
11,644 |
|
|
|
19,722 |
|
|
|
(13,366 |
) |
|
|
18,000 |
|
| |
Net interest income after provision |
|
|
345,975 |
|
|
|
96,013 |
|
|
|
8,173 |
|
|
|
450,161 |
|
Noninterest income |
|
|
159,766 |
|
|
|
30,127 |
|
|
|
29,814 |
|
|
|
219,707 |
|
Noninterest expense |
|
|
286,186 |
|
|
|
57,280 |
|
|
|
103,671 |
|
|
|
447,137 |
|
| |
Income (loss) before income taxes |
|
|
219,555 |
|
|
|
68,860 |
|
|
|
(65,684 |
) |
|
|
222,731 |
|
Income taxes expense (benefit) |
|
|
67,915 |
|
|
|
21,301 |
|
|
|
(20,318 |
) |
|
|
68,898 |
|
| |
Net income (loss) |
|
$ |
151,640 |
|
|
|
47,559 |
|
|
|
(45,366 |
) |
|
|
153,833 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
8,932,907 |
|
|
|
3,527,147 |
|
|
|
4,560,543 |
|
|
|
17,020,597 |
|
| |
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2003
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Retail |
|
Commercial |
|
|
|
|
|
Consolidated |
| (In thousands) |
|
Banking |
|
Banking |
|
Other |
|
Total |
| |
Net interest income |
|
$ |
309,402 |
|
|
|
96,861 |
|
|
|
7,256 |
|
|
|
413,519 |
|
Provision for credit losses |
|
|
8,363 |
|
|
|
17,506 |
|
|
|
(869 |
) |
|
|
25,000 |
|
| |
Net interest income after provision |
|
|
301,039 |
|
|
|
79,355 |
|
|
|
8,125 |
|
|
|
388,519 |
|
Noninterest income |
|
|
147,238 |
|
|
|
50,263 |
|
|
|
34,982 |
|
|
|
232,483 |
|
Noninterest expense |
|
|
253,093 |
|
|
|
75,949 |
|
|
|
48,940 |
|
|
|
377,982 |
|
| |
Income (loss) before income taxes |
|
|
195,184 |
|
|
|
53,669 |
|
|
|
(5,833 |
) |
|
|
243,020 |
|
Income taxes expense (benefit) |
|
|
64,070 |
|
|
|
17,617 |
|
|
|
(1,915 |
) |
|
|
79,772 |
|
| |
Net income (loss) |
|
$ |
131,114 |
|
|
|
36,052 |
|
|
|
(3,918 |
) |
|
|
163,248 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at period end |
|
$ |
6,844,840 |
|
|
|
2,879,955 |
|
|
|
4,843,895 |
|
|
|
14,568,690 |
|
| |
Retail Banking
Included in the Retail Banking segment is Retail and Business Banking, Consumer Finance, Wealth
Management and Insurance. The growth in net interest income in 2005 is attributable to the
increases in the residential and consumer loan portfolios, as well as growth in retail deposits,
including HSA Bank. The increase in noninterest income in 2005 relates primarily to deposit
services fees from insufficient funds charges and HSA account fees. Noninterest expenses also rose
in 2005 as a result of acquisitions, de novo branch expansion and infrastructure costs.
Commercial Banking
The Commercial Banking segment includes middle market, specialized, equipment financing,
asset-based lending and Commercial Real Estate. During 2004 and 2003, the segment also included
financial advisory services prior to the sale of Duff & Phelps. The net interest income increase in
2005 was due to growth in equipment financing and middle market loans. The lower 2005 noninterest
income is due to the sale of Duff & Phelps in March 2004. The increase in noninterest expense in
2005 reflects the continued investment in staff to meet the growth in loans.
Other
Other 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, and the
residual impact of methodology allocations such as the provision for credit losses and funds
transfer pricing, which are further discussed below.
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 credit
losses is allocated to business lines on an “expected loss” basis. Expected loss is an estimate of
the average loss rate that individual portfolios will experience over an economic cycle, based on
historical loss experiences and the gradings assigned. This economic cycle methodology differs from
that used to determine our consolidated provision for credit losses, which is based on an
evaluation of the adequacy of the allowance for credit 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 Other. 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.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21: Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trusts
In December 2003, the FASB issued FASB Interpretation (“FIN”) No. 46 (revised), “Consolidation of
Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than voting rights and,
accordingly, should consolidate the variable interest entity (“VIE”). FIN 46R replaces FIN 46 that
was issued in January 2003.Webster applied FIN 46R to variable interests generally as of March 31,
2004 and to special-purpose entities as of December 31, 2003. FIN 46R resulted in the
deconsolidation of Webster Capital Trusts I and II and Webster Statutory Trust I. See Note 14 for
further information. Dividends of $11.9 million in 2003 on the capital trust securities are
included in noninterest expenses in the Consolidated Statements of Income, prior to the adoption of
FIN 46R.
NOTE 22: Preferred Stock of Subsidiary Corporation
The Series B preferred stock was not redeemable prior to January 15, 2003, except upon the
occurrence of a specified tax event. Redemption after January 15, 2003 is at the option of the
subsidiary, Webster Preferred Capital Corporation. As of December 31, 2005, there have been no
redemptions. Dividend expense on the preferred stock, inclusive of issuance cost amortization, was
$863,000 for 2005, 2004 and 2003. The preferred shares are not exchangeable into common stock or
any other securities, and do not constitute regulatory capital of either Webster Bank or Webster
Financial Corporation. The Series B preferred shares are listed on NASDAQ under the symbol “WBSTP”.
NOTE 23: Legal Proceedings
Webster is involved in routine legal proceedings occurring in the ordinary course of business,
which in the aggregate management believes are immaterial to Webster’s consolidated financial
condition and results of operations.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24: Parent Company Condensed Financial Information
The Parent Company Condensed Statements of Condition at December 31, 2005 and 2004, and the
Condensed Statements of Income and Cash Flows for each of the years in the three-year period ended
December 31, 2005 are presented below:
Condensed Statements of Condition
| |
|
|
|
|
|
|
|
|
| |
|
At December 31, |
| (In thousands) |
|
2005 |
|
2004 |
| |
Assets: |
|
|
|
|
|
|
|
|
Cash and due from depository institutions |
|
$ |
3,036 |
|
|
|
6,033 |
|
Short-term investments |
|
|
79,594 |
|
|
|
92,701 |
|
Securities available for sale |
|
|
135,488 |
|
|
|
113,002 |
|
Commercial loans |
|
|
— |
|
|
|
1,145 |
|
Loans to subsidiaries |
|
|
1,750 |
|
|
|
2,750 |
|
Investment in subsidiaries |
|
|
1,844,640 |
|
|
|
1,784,564 |
|
Due from subsidiaries |
|
|
394 |
|
|
|
1,191 |
|
Other direct investments |
|
|
18,892 |
|
|
|
14,696 |
|
Other assets |
|
|
23,346 |
|
|
|
20,799 |
|
| |
Total assets |
|
$ |
2,107,140 |
|
|
|
2,036,881 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Senior notes (Note 14) |
|
$ |
200,400 |
|
|
|
225,600 |
|
Junior subordinated debt (Note 14) |
|
|
240,506 |
|
|
|
244,415 |
|
Other borrowings |
|
|
— |
|
|
|
10,000 |
|
Accrued interest payable |
|
|
9,489 |
|
|
|
9,103 |
|
Other liabilities |
|
|
9,519 |
|
|
|
3,789 |
|
| |
Total liabilities |
|
|
459,914 |
|
|
|
492,907 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
1,647,226 |
|
|
|
1,543,974 |
|
| |
Total liabilities and shareholders’ equity |
|
$ |
2,107,140 |
|
|
|
2,036,881 |
|
| |
Condensed Statements of Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
Operating Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary |
|
$ |
144,000 |
|
|
|
135,000 |
|
|
|
70,000 |
|
Interest on securities and short-term investments |
|
|
12,396 |
|
|
|
9,427 |
|
|
|
5,863 |
|
Interest on loans |
|
|
138 |
|
|
|
134 |
|
|
|
240 |
|
Gain on sale of securities, net |
|
|
2,726 |
|
|
|
8,204 |
|
|
|
8,026 |
|
Other noninterest income |
|
|
3,866 |
|
|
|
1,126 |
|
|
|
1,438 |
|
| |
Total operating income |
|
|
163,126 |
|
|
|
153,891 |
|
|
|
85,567 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on borrowings |
|
|
33,639 |
|
|
|
30,624 |
|
|
|
10,967 |
|
Capital securities expense |
|
|
— |
|
|
|
— |
|
|
|
11,924 |
|
Compensation and benefits |
|
|
8,899 |
|
|
|
6,954 |
|
|
|
6,795 |
|
Other expenses |
|
|
4,783 |
|
|
|
5,976 |
|
|
|
5,310 |
|
| |
Total operating expenses |
|
|
47,321 |
|
|
|
43,554 |
|
|
|
34,996 |
|
| |
Income before income tax benefit and equity in
undistributed earnings of subsidiaries |
|
|
115,805 |
|
|
|
110,337 |
|
|
|
50,571 |
|
Income tax benefit |
|
|
11,359 |
|
|
|
10,327 |
|
|
|
7,760 |
|
| |
Income before equity in undistributed
earnings of subsidiaries |
|
|
127,164 |
|
|
|
120,664 |
|
|
|
58,331 |
|
Equity in undistributed earnings of subsidiaries |
|
|
58,691 |
|
|
|
33,169 |
|
|
|
104,917 |
|
| |
Net income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
| |
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
| (In thousands) |
|
2005 |
|
2004 |
|
2003 |
| |
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
185,855 |
|
|
|
153,833 |
|
|
|
163,248 |
|
(Increase) decrease in other assets |
|
|
(42,313 |
) |
|
|
7,584 |
|
|
|
(9,635 |
) |
Gain on sale of securities, net |
|
|
(2,726 |
) |
|
|
(8,204 |
) |
|
|
(8,026 |
) |
Equity in undistributed earnings of subsidiaries |
|
|
(58,691 |
) |
|
|
(33,169 |
) |
|
|
(104,917 |
) |
(Increase) decrease in other liabilities |
|
|
(2,477 |
) |
|
|
1,306 |
|
|
|
5,664 |
|
Stock-based compensation |
|
|
8,611 |
|
|
|
7,387 |
|
|
|
5,618 |
|
Other |
|
|
(620 |
) |
|
|
(265 |
) |
|
|
26 |
|
| |
Net cash provided by operating activities |
|
|
87,639 |
|
|
|
128,472 |
|
|
|
51,978 |
|
| |
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
(41,707 |
) |
|
|
(35,963 |
) |
|
|
(24,257 |
) |
Sales proceeds, paydowns and maturities of securities available for sale |
|
|
16,680 |
|
|
|
40,037 |
|
|
|
45,221 |
|
Decrease (increase) in short-term investments |
|
|
13,107 |
|
|
|
(37,278 |
) |
|
|
(44,263 |
) |
Decrease (increase) in loans to subsidiaries |
|
|
1,000 |
|
|
|
3,799 |
|
|
|
(2,543 |
) |
Net decrease (increase) in commercial loans |
|
|
1,145 |
|
|
|
(1,145 |
) |
|
|
— |
|
Net cash received (paid) for purchase and sale transactions |
|
|
22,216 |
|
|
|
(182,771 |
) |
|
|
(25,438 |
) |
| |
Net cash provided (used) by investing activities |
|
|
12,441 |
|
|
|
(213,321 |
) |
|
|
(51,280 |
) |
| |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of senior notes |
|
|
— |
|
|
|
150,000 |
|
|
|
— |
|
Repurchase of capital securities |
|
|
— |
|
|
|
— |
|
|
|
(12,342 |
) |
Issuance of capital securities |
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
Repayment of debt |
|
|
(35,200 |
) |
|
|
(25,200 |
) |
|
|
(25,200 |
) |
Exercise of stock options |
|
|
11,805 |
|
|
|
12,114 |
|
|
|
8,269 |
|
Cash dividends to common shareholders |
|
|
(52,701 |
) |
|
|
(44,361 |
) |
|
|
(37,422 |
) |
Common stock repurchased |
|
|
(28,135 |
) |
|
|
(4,620 |
) |
|
|
(12,400 |
) |
Capital return from subsidiary |
|
|
— |
|
|
|
— |
|
|
|
4,500 |
|
Employer contribution for common stock sold to Employee Stock Purchase Plan |
|
|
1,154 |
|
|
|
— |
|
|
|
— |
|
| |
Net cash (used) provided by financing activities |
|
|
(103,077 |
) |
|
|
87,933 |
|
|
|
405 |
|
| |
(Decrease) increase in cash and cash equivalents |
|
|
(2,997 |
) |
|
|
3,084 |
|
|
|
1,103 |
|
Cash and cash equivalents at beginning of year |
|
|
6,033 |
|
|
|
2,949 |
|
|
|
1,846 |
|
| |
Cash and cash equivalents at end of year |
|
$ |
3,036 |
|
|
|
6,033 |
|
|
|
2,949 |
|
| |
86
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Webster’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of the design and operation of Webster’s disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
“Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation,
management, including the Chief Executive Officer and Chief Financial Officer, concluded that
Webster’s disclosure controls and procedures are effective in timely alerting them to any material
information relating to Webster and its subsidiaries required to be included in the its Exchange
Act filings.
Internal Control Over Financial Reporting
Webster’s management has issued a report on its assessment of the effectiveness of Webster’s
internal control over financial reporting as of December 31, 2005. This report can be found on page
42 of this Form 10-K.
Webster’s independent registered public accounting firm has issued a report on (1) management’s
assessment of the effectiveness of Webster’s internal control over financial reporting and (2) the
effectiveness of Webster’s internal control over financial reporting as of December 31, 2005. The
report, which expresses unqualified opinions on management’s assessment of and the effective
operation of the Company’s internal control over financial reporting as of December 31, 2005, is
included on page 43 of this Form 10-K.
Except as noted in this paragraph, there were no changes made in Webster’s internal control over
financial reporting that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal controls over
financial reporting. During the quarter ended December 31, 2005, Webster completed a conversion of
its core banking systems to a Fidelity Information Services, Inc. platform. In connection with this
conversion, Webster substantially changed certain internal controls over financial reporting. Both
prior to and following the conversion, management assessed the effectiveness of the related
controls and found such controls to be effective.
ITEM 9B. Other Information
None
87
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information for the executive officers of Webster, each of
whom is elected to serve for a one-year period.
| |
|
|
|
|
|
|
| |
|
Age at |
|
Positions Held with Webster |
| Name |
|
December 31, 2005 |
|
and Webster Bank |
|
|
|
|
|
|
|
James C. Smith
|
|
|
56 |
|
|
Chairman, Chief Executive Officer and Director |
|
|
|
|
|
|
|
William T. Bromage
|
|
|
60 |
|
|
President and Chief Operating Officer and Director; Vice Chairman, Webster Bank |
|
|
|
|
|
|
|
William J. Healy
|
|
|
61 |
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
Jeffery N. Brown
|
|
|
48 |
|
|
Executive Vice President, Marketing, Communications and Strategy |
|
|
|
|
|
|
|
Joseph J. Savage
|
|
|
53 |
|
|
Executive Vice President, Commercial Banking |
|
|
|
|
|
|
|
Jo D. Keeler
|
|
|
55 |
|
|
Executive Vice President and Chief Risk Officer of Webster and Webster Bank; Chief
Credit Policy Officer of Webster Bank |
|
|
|
|
|
|
|
Scott M. McBrair
|
|
|
49 |
|
|
Executive Vice President, Retail Banking |
|
|
|
|
|
|
|
Harriet Munrett Wolfe
|
|
|
52 |
|
|
Executive Vice President, General Counsel and Secretary |
Information concerning the principal occupation of these executive officers of Webster and Webster
Bank during at least the last five years is set forth below.
James C. Smith is Chairman, Chief Executive Officer and a director of Webster and Webster
Bank, having been elected Chief Executive Officer in 1987 and Chairman in 1995. Mr. Smith joined
Webster Bank in 1975, and was elected President, Chief Operating Officer and a director of Webster
Bank in 1982 and of Webster in 1986. Mr. Smith served as President of Webster and Webster Bank
until April 2000. Mr. Smith is Chairman of the Executive Committee. Mr. Smith is a member of the
Federal Advisory Council, which advises the deliberations of the Federal Reserve Board of
Governors. He is a member of the executive committee of the Connecticut Bankers Association and is
a former member of the board of directors of the American Bankers Association (ABA), serving as
chairman of the ABA’s Corporate Governance Task Force in 2002-2003. He is a director of MacDermid,
Incorporated (NYSE: MRD), the Palace Theater and St. Mary’s Hospital in Waterbury, Connecticut.
William T. Bromage is President, Chief Operating Officer and a director of Webster and Webster
Bank and Vice Chairman of Webster Bank. Mr. Bromage was elected President in April 2000 and Chief
Operating Officer in January 2002. From September 1999 to April 2000, he served as Senior Executive
Vice President — Business Banking and Corporate Development of Webster and Webster Bank. From May
1996 to August 1999, Mr. Bromage served as Executive Vice President — Business Banking of Webster
and Webster Bank.
William J. Healy is Executive Vice President and Chief Financial Officer of Webster and
Webster Bank, positions he has held since March 2001. Prior to joining Webster, Mr. Healy was the
Executive Vice President and Chief Financial Officer for Summit Bancorp, a bank holding company in
Princeton, New Jersey.
Jeffrey N. Brown is Executive Vice President of Marketing, Communications and Strategy of
Webster and Webster Bank. Mr. Brown was elected Executive Vice President of Marketing and
Communications for Webster in March 2004. He has served as Executive Vice President of Marketing
and Communications of Webster Bank since joining Webster Bank in 1996.
Joseph J. Savage is Executive Vice President of Webster and Executive Vice President,
Commercial Banking for Webster Bank. He joined Webster in April 2002. Prior to joining Webster, Mr.
Savage was Executive Vice President of the Communications and Energy Banking Group for CoBank in
Denver, Colorado from 1996 to April 2002.
88
Jo D. Keeler is Executive Vice President and Chief Risk Officer of Webster and Webster Bank
and Chief Credit Policy Officer of Webster Bank. Mr. Keeler joined Webster in 2001. Prior to
joining Webster, Mr. Keeler was an Executive Credit Officer for FleetBoston Financial in Boston,
Massachusetts, from June 1993 to March 2001.
Scott M. McBrair is Executive Vice President of Webster and Executive Vice President, Retail
Banking of Webster Bank. Prior to joining Webster in 2005, Mr. McBrair had a 21-year career with
Chicago’s Bank One Corporation, which was acquired by JP Morgan Chase in 2004. In his most recent
position with Chase, he was Executive Vice President and Region Executive and served as National
Director-New Branches.
Harriet Munrett Wolfe is Executive Vice President, General Counsel and Secretary of Webster
and Webster Bank. Ms. Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice President
and Counsel, was appointed Secretary in June 1997 and General Counsel in September 1999. In January
2003, she was appointed Executive Vice President. Prior to joining Webster and Webster Bank, she
was in private practice. From November 1990 to January 1996, she was Vice President and Senior
Counsel of Shawmut Bank Connecticut, N.A., Hartford, Connecticut.
Webster has adopted a code of business conduct and ethics that applies to all directors, officers
and employees, including the principal executive officers, principal financial officer and
principal accounting officer. It has also adopted Corporate
Governance Guidelines (“Guidelines”) and
charters for the Audit, Compensation, Nominating and Corporate Governance, Executive and Risk
Committees of the Board of Directors. The Guidelines and the charters of the Audit, Compensation,
and Nominating and Corporate Governance Committees can be found on Webster’s website
(www.wbst.com).
You can also obtain a printed copy of any of these documents without charge by contacting Webster
at the following address:
| |
|
|
|
|
Webster Financial Corporation |
|
|
Webster Plaza |
|
|
145 Bank Street |
|
|
Waterbury, Connecticut 06702 |
|
|
Attn: Investor Relations |
|
|
Telephone: (203) 578-2295 |
Additional information required under this item may be found under the sections captioned
“Information as to Nominees and Other Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in Webster’s Proxy Statement (“the Proxy Statement”), which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of our fiscal year ended
December 31, 2005, and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information regarding compensation of executive officers and directors is omitted from this Report
and may be found in the Proxy Statement under the sections captioned “Executive Compensation and
Other Information” and “Compensation of Directors”, and the information included therein is
incorporated herein by reference.
89
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2005).
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| |
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|
|
Number of securities remaining |
| |
|
Number of Securities to |
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Weighted-average exercise |
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available for future issuance |
| |
|
be issued upon exercises |
|
price of outstanding |
|
under equity compensation |
| |
|
of outstanding options, |
|
options, warrants and |
|
plans (excluding securities |
| Plan category |
|
warrants and rights (a) |
|
rights (b) |
|
reflected in column (a)) (c) |
| |
Equity compensation plans
approved by security
holders |
|
|
3,225,968 |
|
|
$ |
34.87 |
|
|
|
1,376,953 |
|
Equity compensation
plans not
approved by security
holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Total |
|
|
3,225,968 |
|
|
$ |
34.87 |
|
|
|
1,376,953 |
|
|
|
|
| * |
|
This table does not include 30,999 options assumed in mergers and acquisitions transactions on an aggregated basis. |
Additional information required by this Item is omitted from this Report and may be found under the
sections captioned “Stock Owned by Management” and “Principal Holders of Voting of Securities of
Webster” in the Proxy Statement and the information included therein is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is omitted from this Report
and may be found under the section captioned “Certain Relationships” and “Compensation Committee
Interlocks and Insider Participation” in the Proxy Statement and the information included therein
is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is omitted from this Report and may be
found under the section captioned “Auditor Fee Information” in the Proxy Statement and the
information included therein is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
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(a)(1)
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The Consolidated Financial Statements of Registrant and its subsidiaries are included within
Item 8 of Part II of this Report. |
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(a)(2)
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All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted. |
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(a)(3)
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A list of the exhibits to this Form 10-K is set forth on the Exhibit Index immediately
preceding such exhibits and is incorporated herein by reference. |
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 10, 2006.
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WEBSTER FINANCIAL CORPORATION |
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By
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/s/ James C. Smith |
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James C. Smith
Chairman and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on March 10, 2006.
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| Signature: |
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Title: |
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/s/ James C. Smith
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Chairman and Chief Executive Officer |
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(Principal
Executive Officer) |
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/s/ William J. Healy
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Executive Vice President and |
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Chief
Financial Officer |
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(Principal Financial and Accounting Officer) |
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/s/ Joel S. Becker
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Director |
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/s/ William T. Bromage
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President and Director |
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/s/ George T. Carpenter
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Director |
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/s/ John J. Crawford
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Director |
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91
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| Signature: |
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Title: |
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/s/ Robert A. Finkenzeller
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Director |
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/s/ Roger A. Gelfenbien
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Director |
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/s/ C. Michael Jacobi
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Director |
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/s/ Laurence C. Morse
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Director |
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/s/ Robert F. Stoico
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Director |
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92
WEBSTER FINANCIAL CORPORATION
EXHIBIT INDEX
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| Exhibit No. |
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Exhibit Description |
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| Exhibit No. 2 |
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Plan of Acquisition and Reorganization. |
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2.1 |
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Agreement and Plan of Merger by and among Webster Financial Corporation,
Webster Bank and First City Bank, dated as of July 16, 2004 (filed as Exhibit 2.1 to
the Corporation’s Registration Statement on Form S-4 (File No. 333-118923) filed
with the SEC on September 10, 2004 and incorporated herein by reference). |
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| Exhibit No. 3. |
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Certificate of Incorporation and Bylaws. |
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3.1 |
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Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the
Corporation’s Annual Report on Form 10-K filed within the SEC on March 29, 2000 and
incorporated herein by reference). |
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3.2 |
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Certificate of Amendment (filed as Exhibit 3.2 to the Corporation’s
Annual Report on Form 10-K filed with the SEC on March 29, 2000 and incorporated
herein by reference). |
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3.3 |
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Certificate of Elimination Relating to the Corporation’s Series C
Participating Preferred Stock (filed as Exhibit 3.1 to the Corporation’s Current
Report on Form 8-K filed with the SEC on February 9, 2006 and incorporated herein by
reference). |
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3.4 |
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Bylaws, as amended (filed as Exhibit 3.3 to the Corporation’s Quarterly
Report on Form 10-Q filed with the SEC on May 10, 2004 and incorporated herein by
reference). |
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| Exhibit No. 4 |
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Instruments Defining the Rights of Security Holders. |
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4.1 |
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Specimen common stock certificate. |
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| Exhibit No. 10. |
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Material Contracts. |
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10.1 |
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1986 Stock Option Plan of Webster Financial Corporation (filed as Exhibit
10(a) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1986 and incorporated here in by reference). |
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10.2 |
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Amendment to 1986 Stock Option Plan (filed as Exhibit 10.3 to the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and incorporated herein by reference). |
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10.3 |
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Mechanics Savings Bank 1996 Officer Stock Plan (filed as Exhibit 10.1 of
MECH Financial, Inc.’s Annual Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference). |
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10.4 |
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Amendment No. 1 to Mechanics Savings Bank 1996 Officer Stock Option Plan
(filed as Exhibit 4.1 (b) of MECH Financial Inc.’s Registration Statement on Form
S-8 as filed with the SEC on April 2, 1998 and incorporated herein by reference). |
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10.5 |
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Mechanics Savings Bank 1996 Director Stock Option Plan (incorporated by
reference to Exhibit 10.2 of MECH Financial, Inc.’s Annual Report on Form 10-K filed
with the SEC on March 30, 1998 and incorporated herein by reference). |
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10.6 |
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Amendment No. 1 to Mechanics Savings Bank 1996 Director Stock Option Plan
(filed as Exhibit 4.2 (b) of MECH Financial, Inc.’s Registration Statement on Form
S-8 as filed with the SEC on April 2, 1998 and incorporated herein by reference). |
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10.7 |
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New England Community Bancorp, Inc., 1997 Non-Officer’s Directors’ Stock
Option Plan (filed as Exhibit 4.1 of New England Community Bancorp, Inc.’s
Registration Statement on Form S-8 as filed with the SEC on October 6, 1998 and
incorporated herein by reference). |
93
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| Exhibit No. |
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Exhibit Description |
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10.8 |
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Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.1 to the
Corporation’s Current Report on Form 8-K filed with the SEC on February 4, 2005 and
incorporated herein by reference). |
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10.9 |
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Amended and Restated Deferred Compensation Plan for Directors and
Officers of Webster Bank (filed as Exhibit 10.12 to the Corporation’s Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by
reference). |
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10.10 |
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2001 Directors Retainer Fees Plan (filed as Exhibit A to the
Corporation’s Definitive Proxy Statement filed with the SEC on March 21, 2001 and
incorporated herein by reference). |
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10.11 |
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Supplemental Retirement Plan for Employees of Webster Bank, as amended
and restated effective January 1, 2003 (filed as Exhibit 10.14 to Webster’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated
herein by reference). |
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10.12 |
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Qualified Performance-Based Compensation Plan (filed as Exhibit A to the
Corporation’s definitive proxy materials for the Corporation’s 1998 Annual Meeting
of Shareholders and incorporated herein by reference). |
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10.13 |
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Employee Stock Purchase Plan (filed as Appendix A to Webster’s
Definitive Proxy Statement filed with the SEC on March 23, 2000 and incorporated
herein by reference). |
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10.14 |
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Change of Control Agreement, dated as of December 15, 1997, by and
between the Corporation and James C. Smith (filed as Exhibit 10.29 to the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997
and incorporated herein by reference). |
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10.15 |
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Change of Control Agreement, dated as of December 15, 1997, by and
between the Corporation and William T. Bromage (filed as Schedule 10.29 to Exhibit
10.29 to the Corporation’s Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 and incorporated herein by reference). |
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10.16 |
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Change of Control Agreement, dated as of April 24, 2002, by and between
the Corporation and Joseph J. Savage (filed as Exhibit 10.27 to Webster’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2002 and incorporated
herein by reference). |
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10.17 |
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Change of Control Agreement, dated as of March 30, 2001, by and between
Webster Financial Corporation and William J. Healy (filed as Exhibit 10.2 to the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2001 and
incorporated herein by reference). |
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10.18 |
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Change of Control Agreement, dated as of December 15, 1997, by and
between Webster Financial Corporation and Jeffrey N. Brown (filed as Exhibit 10.18
to the Corporation’s Form 10-K for the fiscal year ended December 31, 2004 and
incorporated herein by reference) |
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10.19 |
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Change of Control Agreement, dated as of August 13, 2001, by and between
Webster Financial Corporation and Jo D. Keeler (filed as Exhibit 10.19 to the
Corporation’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated
herein by reference). |
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10.20 |
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Change of Control Agreement, dated as of January 1, 2003, by and between
Webster Financial Corporation and Harriet Munrett Wolfe (filed as Exhibit 10.20 to
the Corporation’s Form 10-K for the fiscal year ended December 31, 2004 and
incorporated herein by reference). |
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10.21 |
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Form of Change of Control Agreement, dated as of April 21, 2005, by and
between Webster Financial Corporation and Scott McBrair (filed as Exhibit 10.3 to
the Corporation’s Current Report on Form 8-K, filed with the SEC on April 26, 2005
and incorporated herein by reference). |
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10.22 |
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Form of Amendment to Change of Control Agreement, dated as of January
31, 2005, by and between Webster Financial Corporation and the
following executives: James C. Smith, William T. Bromage, William J. Healy, Joseph J. Savage, Jeffrey N.
Brown, Jo D. Keeler and Harriet Munrett Wolfe (filed as Exhibit 10.3 to the
Corporation’s Current Report on Form 8-K filed with the SEC on February 4, 2005 and
incorporated herein by reference). |
94
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| Exhibit No. |
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Exhibit Description |
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10.23 |
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Form of Non-Competition Agreement, dated as of January 31, 2005, by and between
Webster Financial Corporation and the following executives: James C. Smith, William
T. Bromage, William J. Healy, Joseph J. Savage, and Jeffrey N. Brown (filed as
Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed with the SEC on
February 4, 2005 and incorporated herein by reference). |
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10.24 |
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Form of Non-Competition Agreement, dated as of April 21, 2005, by and
between Webster Financial Corporation and Scott McBrair (filed as Exhibit 10.2 to
the Corporation’s Current Report on Form 8-K filed with the SEC on April 26, 2005
and incorporated herein by reference). |
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10.25 |
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Junior Subordinated Indenture, dated as of January 29, 1997 between the
Corporation and The Bank of New York, as trustee, relating to the Corporation’s
Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 10.41 to the
Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996
and incorporated herein by reference). |
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10.26 |
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Senior Indenture, dated as of April 12, 2004, between the Corporation
and The Bank of New York, as trustee, (filed as Exhibit 4.1 to the Corporation’s
Current Report on Form 8-K filed with the SEC on April 12, 2004, and incorporated
herein by reference). |
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10.27 |
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Supplemental Indenture, dated as of April 12, 2004, between the
Corporation and The Bank of New York, as trustee, relating to the Corporation’s
5.125% Senior Notes due April 15, 2014 (filed as Exhibit 4.2 to the Corporation’s
Current Report on Form 8-K filed with the SEC on April 12, 2004, and incorporated
herein by reference). |
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10.28 |
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Description of Arrangement for Directors Fees. |
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10.29 |
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Description of Arrangement for Named Executive Officer Compensation
(filed under Item 1.01 to the Corporation’s Current Report on Form 8-K filed with
the SEC on March 1, 2006, and incorporated herein by reference). |
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| Exhibit No. 21 |
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Subsidiaries. |
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| Exhibit No. 23 |
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Consent of KPMG LLP |
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| Exhibit No. 31.1 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, signed by the Chief Executive Officer. |
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| Exhibit No. 31.2 |
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, signed by the Chief Financial Officer. |
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| Exhibit No. 32.1 |
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Written statement pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by the Chief Executive Officer. |
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| Exhibit No. 32.2 |
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Written statement pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by the Chief Financial Officer. |
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Note:
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Exhibit numbers 10.1 — 10.24 and 10.29 — 10.30 are
management contracts or compensatory plans or
arrangements in which directors or executive officers
are eligible to participate. |
(b) Exhibits to this Form 10-K are attached or incorporated herein by reference as stated above.
(c) Not applicable.
95