As filed with the Securities and Exchange Commission on October 10, 1995
Registration No. 33-61403
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Webster Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware 6712 06-1187536
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
First Federal Plaza
Waterbury, Connecticut 06720
(203) 753-2921
(Address, including zip code, and telephone
number, including area code, of Registrant's principal
executive offices)
John V. Brennan
Executive Vice President
Webster Financial Corporation
First Federal Plaza
Waterbury, Connecticut 06702
(203) 753-2921
(Name, address including zip code, and telephone number,
including area code, of Registrant's agent for service)
------------------------
Copy to:
Charles E. Allen, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
WEBSTER FINANCIAL CORPORATION
Cross Reference Sheet
---------------------
Pursuant to Item 501 of Regulation S-K, the following table sets forth
the location in the Proxy Statement/Prospectus and the Supplement to the Joint
Proxy Statement/Prospectus (the "Supplement") of the information required by
Part I of Form S-4.
Items of Form S-4 Location in Prospectus
----------------- ----------------------
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus........................... Facing Page; Cross Reference Sheet; and Front
Cover Page of the Joint Proxy
Statement/Prospectus
Facing Page; Cross Reference Sheet; and Front
Cover Page of the Supplement
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Available Information; Incorporation of Certain
Documents by Reference; and Table of Contents
in the Joint Proxy Statement/Prospectus
Available Information; and Incorporation of
Certain Documents by Reference in the Supplement
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............................ Summary; Risk Factors; and Market Prices and
Dividends in the Joint Proxy
Statement/Prospectus
Additional Risk Factors; Updated Market Prices;
Book Value per Common Share; and Selected
Significant Statistical Data Pro Forma Combined
in the Supplement
4. Terms of the Transaction................................... Summary; The Merger in the Joint Proxy
Statement/ Prospectus
Additional Risk Factors in the Supplement
5. Pro Forma Financial Information............................ Pro Forma Combined Financial Statements in the
Joint Proxy Statement/Prospectus
Pro Forma Combined Financial Statements in the
Supplement
i
6. Material Contracts With the Company Being
Acquired................................................. Not applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................................... Not applicable
8. Interests of Named Experts and Counsel..................... Not applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Not applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants................ Summary; Risk Factors; Incorporation of Certain
Documents by Reference; and Description of
Capital Stock and Comparison of Shareholder
Rights in the Joint Proxy Statement/Prospectus
Strategic Rationale, Additional Risk Factors;
and Map in the Supplement
11. Incorporation of Certain Information by
Reference................................................ Incorporation of Certain Documents by Reference
in the Joint Proxy Statement/
Prospectus
Incorporation of Certain Documents by Reference
in the Supplement
12. Information with Respect to S-2 or S-3
Registrants.............................................. Not applicable
13. Incorporation of Certain Information by
Reference................................................ Not applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants.............................. Not applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies.................. Not applicable
16. Information with Respect to S-2 or S-3
Companies................................................ Summary; The Merger; Shelton Bancorp, Inc.;
Market Prices and Dividends; Appendix B and
Appendix C in the Joint Proxy
Statement/Prospectus
ii
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................................ Not applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited....................... Summary; Shelton Meeting; Webster Meeting; The
Merger; Shelton Stock Ownership by Certain
Persons; Description of Capital Stock and
Comparison of Shareholder Rights in the Joint
Proxy Statement/Prospectus
Front Cover Page of the Supplement
19. Information if Proxies, Consents or
Authorizations are Not to be Solicited or
in an Exchange Offer..................................... Not applicable
iii
Webster Financial
Corporation
October ___, 1995
To the Shareholders of
Webster Financial Corporation:
On September 18, 1995, Webster Financial Corporation ("Webster") mailed
to you a Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") relating to the special meeting of shareholders of
Webster to be held on October 31, 1995 at 4:00 p.m. at the Waterbury Club, 30
Holmes Avenue, Waterbury, Connecticut (the "Webster Meeting"). As described in
the Joint Proxy Statement/Prospectus, shareholders of Webster are being asked at
the Webster Meeting to approve the proposed issuance of up to 1,337,618 shares
of common stock of Webster to shareholders of Shelton Bancorp, Inc. ("Shelton"),
with respect to an agreement and plan of merger, dated June 20, 1995, as
amended, among Webster, Webster Acquisition Corp., and Shelton, pursuant to
which Shelton will be acquired by Webster and each outstanding share of Shelton
common stock will be converted into .92 of a share of Webster common stock, in a
tax free exchange, plus cash to be paid in lieu of fractional shares.
Subsequent to the mailing of the Joint Proxy Statement/Prospectus, a
Webster subsidiary bank on October 1, 1995 entered into a Purchase and
Assumption Agreement with Shawmut Bank Connecticut, National Association
("Shawmut"), as part of the Fleet/Shawmut Divestiture, to acquire 20 Shawmut
branch banking offices in the greater Hartford banking market, including
deposits and loans at or allocated to such offices (the "Shawmut Transaction").
Webster is furnishing to you information regarding the Shawmut Transaction
through the attached Supplement to the Joint Proxy Statement/Prospectus (the
"Supplement"). The Supplement, which should be read in conjunction with the
Joint Proxy Statement/Prospectus, describes the Shawmut Transaction and provides
information that may be relevant to you at the Webster Meeting.
In the event that you have not yet signed and returned the proxy card
enclosed with the Joint Proxy Statement/Prospectus or if you wish to revoke such
proxy and change your vote, you may execute, date, and return the enclosed proxy
card in the enclosed postage-paid envelope as soon as possible to ensure that
your shares will be voted at the Webster Meeting. You need not execute the
enclosed proxy card if you have previously executed, dated and returned a proxy
card and do not wish to change your vote.
It is very important that your shares be represented at the Webster
Meeting, regardless of whether you plan to attend in person. If you have not
already executed and returned a proxy card, please promptly execute and return
the enclosed proxy card.
Sincerely,
JAMES C. SMITH
Chairman and Chief Executive Officer
First Federal Plaza, Waterbury, Connecticut 06720
SHELTON BANCORP, INC.
375 Bridgeport Avenue
Shelton, Connecticut 06484
October ___, 1995
To the Shareholders of
Shelton Bancorp, Inc.:
On September 18, 1995, Shelton Bancorp, Inc. ("Shelton") mailed to you
a Joint Proxy Statement/Prospectus ("Joint Proxy Statement/Prospectus") relating
to the annual meeting of shareholders of Shelton (the "Shelton Meeting") to be
held on October 31, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee
Terrace, Ansonia, Connecticut. As described in the Joint Proxy
Statement/Prospectus, shareholders of Shelton are being asked at the Shelton
Meeting to approve an agreement and plan of merger, dated June 20, 1995, as
amended (the "Merger Agreement), pursuant to which Shelton will be acquired by
Webster Financial Corporation ("Webster") and each outstanding share of Shelton
common stock will be converted into .92 of a share of Webster common stock in a
tax free exchange, plus cash to be paid in lieu of fractional shares.
Shareholders of Shelton also are being asked at the Shelton Meeting to elect
three directors of Shelton.
Subsequent to the mailing of the Joint Proxy Statement/Prospectus, a
Webster subsidiary bank on October 1, 1995 entered into a Purchase and
Assumption Agreement with Shawmut Bank Connecticut, National Association
("Shawmut"), as part of the Fleet/Shawmut Divestiture, to acquire 20 Shawmut
branch banking offices in the greater Hartford banking market, including
deposits and loans at or allocated to such offices (the "Shawmut Transaction").
Shelton is furnishing you information regarding the Shawmut Transaction through
the attached Supplement to the Joint Proxy Statement/Prospectus (the
"Supplement"). The Supplement, which should be read in conjunction with the
Joint Proxy Statement/Prospectus, describes the Shawmut Transaction and provides
information that may be relevant to you at the Shelton Meeting.
Your Board of Directors has determined that the acquisition of Shelton
and Shelton Savings Bank by Webster is in the best interests of Shelton and its
shareholders and has unanimously approved the Merger Agreement with Webster. The
Board recommends that you vote "FOR" approval of the Merger Agreement with
Webster.
In the event that you have not yet signed and returned the proxy card
enclosed with the Joint Proxy Statement/Prospectus or if you wish to revoke such
proxy and change your vote, you may execute, date, and return the enclosed proxy
card in the enclosed postage-paid envelope as soon as possible to ensure that
your shares will be voted at the Shelton Meeting. You need not execute the
enclosed proxy card if you have previously executed, dated and returned a proxy
card and do not wish to change your vote.
It is very important that your shares be represented at the Shelton
Meeting, regardless of whether you plan to attend in person. If you have not
already executed and returned a proxy card, please promptly execute and return
the enclosed proxy card. Failure to return a properly executed proxy card or to
vote at the Shelton Meeting will have the same effect as a vote against the
Merger Agreement with Webster.
Sincerely,
KENNETH E. SCHAIBLE
President and Treasurer
SHELTON BANCORP, INC. WEBSTER FINANCIAL CORPORATION
375 Bridgeport Avenue First Federal Plaza
Shelton, Connecticut 06484 Waterbury, Connecticut 06702
SUPPLEMENT TO JOINT PROXY STATEMENT/PROSPECTUS
This Supplement, dated October __, 1995 (the "Supplement"), is being
furnished to shareholders of Shelton Bancorp, Inc. ("Shelton") and to
shareholders of Webster Financial Corporation ("Webster"). This Supplement
should be read in conjunction with the Joint Proxy Statement/Prospectus, dated
September 18, 1995 (the "Joint Proxy Statement/Prospectus"), relating to the
annual meeting of shareholders of Shelton (the "Shelton Meeting") to be held on
October 31, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee Terrace,
Ansonia, Connecticut, and to the special meeting of shareholders of Webster (the
"Webster Meeting") to be held on October 31, 1995 at 4:00 p.m. at the Waterbury
Club, 30 Holmes Avenue, Waterbury, Connecticut (jointly, the "Shareholders
Meetings"), and to any adjournments of the Shareholders Meetings.
As described in the Joint Proxy Statement/Prospectus, at the Shelton
Meeting, shareholders of Shelton are being asked to approve an agreement and
plan of merger, dated June 20, 1995, as amended (the "Merger Agreement"),
pursuant to which Shelton will be acquired by Webster and each outstanding share
of Shelton common stock ("Shelton Stock") will be converted into .92 of a share
of Webster common stock ("Webster Stock") in a tax free exchange, plus cash to
be paid in lieu of fractional shares (the "Merger"). In addition, at the Shelton
Meeting, shareholders of Shelton are being asked to elect three directors of
Shelton. At the Webster Meeting, shareholders of Webster are being asked to
approve the proposed issuance of up to 1,337,618 shares of Webster Stock to
shareholders of Shelton with respect to the Merger. The Office of Thrift
Supervision (the "OTS") has approved the Merger. Subject to the expected
approval of the Merger by the Connecticut Commissioner of Banking (the
"Connecticut Commissioner") and to favorable shareholder votes at both
Shareholders Meetings on October 31, 1995, it is expected that the Merger will
be consummated immediately after the Shareholders Meetings.
On October 1, 1995, Webster through its subsidiary, Webster Bank,*
entered into a Purchase and Assumption Agreement (the "Shawmut Agreement") with
Shawmut Bank Connecticut, National Association ("Shawmut"), as part of the
Fleet/Shawmut Divestiture (as defined), to acquire 20 Shawmut branch banking
offices in the greater Hartford, Connecticut banking market (the "Hartford
Banking Market), including deposits and loans at or allocated to such offices
(the "Shawmut Transaction"). See "MAP." In the Supplement, see `THE SHAWMUT
TRANSACTION" for a description of the transactions constituting the Shawmut
Transaction, "CAPITAL FINANCING" as to additional equity capital which Webster
intends to raise prior to consummation of the Shawmut Transaction, and "PRO
FORMA COMBINED STATEMENT OF CONDITION," giving effect to both the Shawmut
Transaction and the Capital Financing. Webster anticipates that the Shawmut
Transaction will be completed during the first quarter of 1996, but this can not
be assured. In connection with the Shawmut Transaction, Webster received an
opinion from Merrill Lynch & Co., its financial advisor, to the effect that the
proposed consideration to be paid or delivered in the manner contemplated in the
Shawmut Transaction is fair to Webster from a financial point of view. A copy of
such opinion is attached to the Supplement as Annex A.
Any statement in the Joint Proxy Statement/Prospectus will be deemed to
be modified or superseded to the extent that a statement contained in the
Supplement modifies or supersedes such statement. However, except as so modified
or superseded, all statements contained in the Joint Proxy Statement/Prospectus
will remain in full force and effect as if fully set forth herein. All
_______________________
* References herein to "Webster Bank" reflect the merger and renaming of
Webster's wholly-owned subsidiary banks, First Federal Bank, a federal savings
bank ("First Federal") and Bristol Savings Bank, which merger and renaming will
occur immediately prior to the Merger with Shelton.
S-1
defined terms used in the Supplement have the same meanings as set forth in the
Joint Proxy Statement/Prospectus, unless otherwise indicated. The Supplement is
first being mailed to the shareholders of Shelton and Webster on or about
October ____, 1995.
New proxy cards for the Shareholders Meetings are being provided with
the Supplement to the shareholders of Shelton and Webster. Shareholders of
Webster and Shelton are entitled to revoke a proxy at any time prior to its
exercise. Shelton shareholders may revoke a proxy: (i) by delivering a written
notice of revocation prior to the Shelton Meeting to William C. Nimons,
Executive Vice President and Secretary, Shelton Bancorp, Inc., 375 Bridgeport
Avenue, Shelton, Connecticut 06484; (ii) by delivering to Shelton prior to the
Shelton Meeting a duly executed proxy bearing a later date, or (iii) by
attending the Shelton Meeting and voting in person. Webster shareholders may
revoke a proxy: (i) by delivering a written notice of revocation prior to the
Webster Meeting to Lee A. Gagnon, Executive Vice President and Secretary,
Webster Financial Corporation, First Federal Plaza, Waterbury, Connecticut
06702, (ii) by delivering to Webster prior to the Webster Meeting a duly
executed proxy bearing a later date, or (iii) by attending the Webster Meeting
and voting in person.
THE SECURITIES OFFERED IN THE SUPPLEMENT AND THE JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), ANY STATE SECURITIES COMMISSION, THE OTS, THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), OR THE CONNECTICUT COMMISSIONER,
NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION, THE OTS, THE FDIC, OR THE
CONNECTICUT COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THE SUPPLEMENT
OR THE JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SHARES OF WEBSTER COMMON STOCK OFFERED IN THE SUPPLEMENT
AND THE JOINT PROXY STATEMENT/PROSPECTUS ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND ARE NOT INSURED BY THE FDIC, THE BANK INSURANCE FUND ("BIF"), THE
SAVINGS ASSOCIATION INSURANCE FUND ("SAIF') OR ANY OTHER GOVERNMENT AGENCY.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THE SUPPLEMENT OR THE JOINT PROXY
STATEMENT/PROSPECTUS, OR INCORPORATED BY REFERENCE HEREIN OR THEREIN, WITH
RESPECT TO THE SOLICITATION OF PROXIES BY SHELTON OR WEBSTER OR THE OFFERING OF
WEBSTER COMMON STOCK MADE HEREBY AND THEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY SHELTON OR WEBSTER. THE SUPPLEMENT AND THE JOINT PROXY
STATEMENT/PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, ANY WEBSTER COMMON STOCK OFFERED BY THE SUPPLEMENT AND THE
JOINT PROXY STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THE SUPPLEMENT OR THE JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE WEBSTER COMMON STOCK OFFERED PURSUANT TO THE SUPPLEMENT OR
THE JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SHELTON OR WEBSTER
OR THE INFORMATION HEREIN OR THE DOCUMENTS OR REPORTS INCORPORATED BY REFERENCE
SINCE THE DATES OF THE SUPPLEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS.
----------------------
The date of the Supplement is October ___, 1995
S-2
AVAILABLE INFORMATION
Shelton and Webster are both subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder, and in accordance therewith file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, such reports, proxy statements and other information filed
by Shelton and Webster may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite
1300, Seven World Trade Center, New York, New York 10048.
Webster has filed with the SEC a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the Webster Stock to be issued to the
shareholders of Shelton with respect to the Merger. As permitted by the rules
and regulations of the SEC, the Supplement and the Joint Proxy
Statement/Prospectus do not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
SEC's principal office in Washington, D.C. as set forth above. Statements
contained in the Supplement and in the Joint Proxy Statement/Prospectus or in
any document incorporated by reference herein or therein as to the contents of
any contract or other document are not necessarily complete and, in each
instance where such contract or document is filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by Shelton with the SEC (File No. 0-17495)
under the Exchange Act are hereby incorporated in the Supplement and the Joint
Proxy Statement/Prospectus by reference: Shelton's Annual Report on Form 10-K
for the year ended June 30, 1995.
The following documents filed by Webster with the SEC (File No.
0-15213) under the Exchange Act are hereby incorporated in the Supplement and
the Joint Proxy Statement/Prospectus by reference: (i) Webster's Annual Report
on Form 10-K for the year ended December 31, 1994; (ii) Webster's Quarterly
Report on Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995; and
(iii) Webster's Current Reports on Form 8-K dated March 1, 1995, June 20, 1995,
October 10, 1995, and on Form 8-K/A dated July 27, 1995.
All documents filed by Shelton or Webster pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the respective dates of the
Supplement and the Joint Proxy Statement/Prospectus and prior to the Merger
shall be deemed to be incorporated by reference in the Supplement and the Joint
Proxy Statement/Prospectus. In lieu of incorporating by reference the
description of the capital stock of Webster which is contained in a registration
statement filed under the Exchange Act, such description is included in the
Joint Proxy Statement/Prospectus. See "DESCRIPTION OF WEBSTER CAPITAL STOCK AND
COMPARISON OF SHAREHOLDER RIGHTS" in the Joint Proxy Statement/Prospectus.
The Supplement and the Joint Proxy Statement/Prospectus incorporate
documents by reference which are not presented herein or delivered herewith.
These documents are available upon request directed to: Lee A. Gagnon, Executive
Vice President, Chief Operating Officer and Secretary, Webster Financial
Corporation, First Federal Plaza, Waterbury, Connecticut 06702; telephone (203)
753-2921. In order to ensure timely delivery of the documents, any request
should be made at least five business days prior to the Shareholders Meetings.
S-3
(MAP)
See Annex B
S-4
THE SHAWMUT TRANSACTION
The following information is intended to provide certain information
regarding the Shawmut Transaction. This summary is necessarily incomplete and
qualified in its entirety by reference to the full text of the Shawmut
Agreement, including Schedules 1.1(f) and 1.1(i) thereto, the material features
of which are described in the Supplement. Copies of the Shawmut Agreement and
such schedules will be provided promptly to shareholders of Shelton or Webster
without charge upon written or oral request. An additional copy of the Joint
Proxy Statement/Prospectus will be provided without charge to shareholders of
Shelton or Webster upon written or oral request. Such requests should be
addressed to Lee A. Gagnon, Executive Vice President, Chief Operating Officer
and Secretary, Webster Financial Corporation, First Federal Plaza, Waterbury,
Connecticut 06702, telephone (203) 753-2921.
Background of the Acquisition
As of February 20, 1995, Shawmut National Corporation and Fleet
Financial Group, Inc. ("Fleet") (hereinafter jointly referred to as
"Fleet/Shawmut") entered into an Agreement and Plan of Merger (the
"Fleet/Shawmut Merger"). As a condition of regulatory approval of the
Fleet/Shawmut Merger, Fleet/Shawmut are required to have their subsidiary banks
divest certain branches in Connecticut, Massachusetts, New Hampshire and Rhode
Island to avoid anticompetitive effects that could be caused by the
Fleet/Shawmut Merger (the "Fleet/Shawmut Divestiture"). In August 1995,
Fleet/Shawmut announced guidelines that were designed to foster competition,
preserve jobs and continue to meet customer needs in the states where
divestitures are required. Fleet/Shawmut then solicited preliminary bids from
potential acquirors with respect to the branches to be divested.
In early September 1995, Webster Bank, along with Eagle Federal Savings
Bank, Bristol, Connecticut ("Eagle"), submitted a preliminary joint bid for all
25 branch banking offices of the Fleet/Shawmut subsidiary banks to be divested
in the Hartford Banking Market. On September 26, 1996, a formal joint bid was
submitted by Webster Bank and Eagle. After extensive negotiations, Fleet/Shawmut
selected Webster Bank and Eagle to acquire all 25 branch banking offices being
divested in the Hartford Banking Market. On October 1, 1995, Webster Bank and
Eagle executed separate purchase and assumption agreements for 20 and five,
respectively, of these offices with Fleet/Shawmut subsidiary banks, which
agreements are required to be consummated concurrently.
Acquired Branches, Deposits and Loans
Upon consummation of the Shawmut Transaction, Webster Bank will acquire
20 Shawmut Branches in the Hartford Banking Market, which at June 30, 1995,
included approximately $1.0 billion of deposit liabilities and $683 million of
loans at or allocated to the Shawmut Branches. The Shawmut Branches are located
in the following Connecticut cities or towns in the Hartford Banking Market:
Berlin, Bristol, Cromwell, East Hartford, Elmwood, Enfield, Farmington,
Glastonbury, Hartford (three offices), Manchester, Middletown, New Britain,
Newington, Simsbury, Southington, West Hartford, Wethersfield and Windsor. See
"MAP" herein. Webster Bank will be acquiring consumer time deposits, savings and
money market deposit accounts, NOW and checking accounts, and business checking
and deposit accounts. The loans to be acquired will consist of first mortgage
residential loans, commercial real estate loans, commercial and industrial
loans, home equity loans, and other consumer installment loans. Of the 20
Shawmut Branches, nine offices are owned and 11 offices are leased. Webster Bank
also will sublease office space at One Constitution Plaza in downtown Hartford
as headquarters for its commercial banking operations.
Strategic Rationale
The Shawmut Transaction will significantly increase Webster Bank's
commercial and retail banking activities in the Hartford Banking Market. After
giving effect to the Shawmut Transaction, Webster Bank will be the second
largest independent bank in Connecticut and the largest Connecticut-based bank
in the Hartford Banking Market. Webster Bank will have banking offices extending
from the Massachusetts border through central Connecticut to the Connecticut
shoreline. Over the last ten years, Webster Bank has expanded its commercial
banking operations serving small and medium sized businesses in its market
areas. The Shawmut Transaction will enhance Webster Bank's ability to provide a
broad line of deposit, cash management and other credit services and a full
range of loan services for commercial banking customers with credit needs up to
$10 million.
S-5
The Shawmut Transaction will expand Webster Bank's lending capacity and
increase its emphasis on commercial and industrial loans and commercial real
estate loans to small and medium sized businesses as compared to its traditional
emphasis on retail banking. After the Shawmut Transaction, the amount of
commercial loans in Webster Bank's loan portfolio will increase from
approximately 14% to 19%. Residential first mortgage loans will decrease from
approximately 79% to 74% of Webster Bank's loan portfolio. Consumer loans,
including home equity loans, will remain at approximately 7% of Webster Bank's
loan portfolio.
Webster expects that the Shawmut Transaction, including the Capital
Financing (as defined), will have an accretive effect on its net income per
share while reducing tangible book value per share because of the tax deductible
core deposit intangible. After giving effect to the Shawmut Transaction and to
the Capital Financing, Webster Bank's capital is expected at the closing date to
satisfy the regulatory capital ratios required for a "well-capitalized" bank.
See "BOOK VALUE PER COMMON SHARE," "UPDATED MARKET PRICES," and "SELECTED
SIGNIFICANT STATISTICAL DATA--PRO FORMA COMBINED" below.
Purchase Price
Under the terms of the Shawmut Agreement, Webster Bank will acquire 20
Shawmut Branches for the following purchase price:
(a) Webster Bank will make a cash payment equal to (i) 5.1% of
the average daily balances (including accrued interest) of
assumed deposit liabilities at or allocated to the Shawmut
Branches for the period commencing either 30 days or seven
days prior to the third business day prior to the closing
date, whichever amount is lower, subject to adjustment, as
described below in the last paragraph, less (ii) $2 million;
(b) Webster Bank will pay cash for the stated value of the
real property of the nine owned Shawmut Branches; estimated
payment of approximately $4 million;
(c) Webster Bank will pay cash for the net book value of the
personalty property (excluding automatic teller machines) at
the 20 Shawmut Branches, as of the closing
S-6
date, based on this book value; plus the greater of $5,000 or
net book value, for each of the automatic teller machines;
estimated payment of approximately $4 million;
(d) Webster Bank will swap two of its branch banking offices
and related deposits (the "Webster Branches") located in
Fairfield and Stamford, Connecticut to Shawmut (the "Branch
Swap"); Webster Bank to be paid the net book value of the real
and personalty properties (other than automated teller
machines not being transferred) at the two Webster Branches,
but no separate deposit premium;
(e) Webster will issue a five year nontransferable warrant to
Fleet for 300,000 shares of Webster Stock, with an exercise
price of $32.50 per share, subject to certain antidilution
adjustments (see "THE WARRANT" below); and
(f) Webster Bank will agree to make a contingent payment (the
"Contingent Payment") in the event of a Change of Control (as
defined below) of Webster within five years of the closing
date in which Fleet would be entitled to receive a cash
payment from First Federal equal to (i) the excess of the
offer price per share of Webster Stock over (ii) $32.50,
multiplied by (iii) 150,000 (see "CONTINGENT PAYMENT" below).
At June 30, 1995, there were approximately $1 billion in deposit
liabilities at or allocated to the 20 Shawmut Branches and $177 million in
deposit liabilities at the two Webster Branches. Webster Bank will receive a
cash payment from Shawmut for the net deposit liabilities at closing date, less
(i) the aggregate cash payments described in (a), (b) and (c) above, less (ii)
the unpaid principal balances (based on the general ledger balances), plus
accrued interest, on approximately $683 million in loans to be acquired that are
at or allocated to the Shawmut Branches, plus (iii) the net book value of the
real and personalty properties at the two Webster Branches as described in (d)
above.
Pursuant to purchase and assumption agreements between Eagle and
Fleet/Shawmut subsidiary banks (the "Eagle Purchase Agreements") and subject to
all required regulatory approvals, Eagle will acquire five branch banking
offices from the subsidiary banks, with estimates of approximately $290 million
in deposit liabilities and $49 million in loans to be acquired. The cash deposit
premium to be paid to the Fleet/Shawmut subsidiary banks by Webster Bank and
Eagle combined is required to average 5.5% of the total amount of the deposit
liabilities to be acquired by both Webster Bank and Eagle combined. The 5.1%
deposit premium referred to above to be paid by Webster Bank will be increased
or decreased so as to achieve the 5.5% average deposit premium with Eagle on a
combined basis.
Additional Risk Factors
The Shawmut Transaction will increase the percentage of commercial
loans in Webster Bank's loan portfolio. See "STRATEGIC RATIONALE" above.
Commercial loans generally have a higher degree of risk and return compared to
first mortgage residential loans that Webster has traditionally emphasized. The
Shawmut Transaction will impose increased challenges to Webster Bank in its
integration of the commercial and retail banking operations of the 20 Shawmut
Branch offices, retention of deposit liabilities, loan portfolio, lending
activities, and employees into the current Webster Bank structure. Based upon
its experience in five previous acquisitions, Webster Bank plans a smooth
integration of the operations of the Shawmut Branches, though this cannot be
assured.
See also "RECENT LEGISLATIVE DEVELOPMENTS" as to various pending
legislation that could have an adverse effect on Webster.
The Warrant
At the closing of the Shawmut Transaction, Webster will issue to Fleet
a warrant for 300,000 shares of Webster Stock (the "Warrant"). The exercise
price will be $32.50 per share, subject to customary pro rata antidilution
adjustments in the event of an issuance of Webster Stock (or securities
convertible into or exercisable for Webster Stock) at a price per share of less
than $32.50. Such adjustments will not be applicable as to Webster Stock issued
in the Capital Financing, in the Merger involving Shelton, pursuant to
employee/director benefit plans of Webster, upon the conversion of Webster's
Series B convertible preferred stock, or pursuant to Webster's dividend
reinvestment plan. The Warrant may be exercised in whole, but not in part,
within five years of the date of issuance, but not within the first two years
from the closing date, unless a Change of Control of Webster has occurred, as
defined below. The Warrant may not be sold or otherwise transferred by Fleet.
The $32.50 exercise price represents a premium of 25% over the approximately
$26.00 market price of the Webster Stock prevailing at the time of the
negotiation of the Shawmut Transaction.
As defined in the Warrant, a "Change of Control" will be deemed to have
occurred in the event that any person or company: (i) acquires voting rights as
to more than 25% of the outstanding Webster Stock or (ii) executes a definitive
merger or other acquisition agreement with Webster.
S-7
However, no Change in Control will be deemed to have occurred, if the directors
of Webster serving prior to such acquisition of Webster Stock or execution of
such definitive agreement (or successor directors selected by such continuing
directors and unaffiliated with such acquiror) will continue to constitute at
least 50% of the parent holding company board of directors after such
acquisition.
In the event that a Change of Control of Webster is deemed to have
occurred, Fleet would have the right to sell the Warrant to Webster (the "Put").
The price of the Put would be an amount equal to the number of shares issuable
under the Warrant, multiplied by (i) the cash price for the Webster Stock set
forth in the definitive agreement relating to the Change of Control transaction
(or, in the case of a stock for stock transaction, an amount equal to the five
day trailing average closing price of the acquiror's stock following the public
announcement of the transaction, multiplied by the exchange ratio), less (ii)
the then exercise price per share of the shares issuable under the Warrant. The
Put, however, would not be available if the Change of Control transaction would
be accounted for as a pooling of interests and Webster's independent
accountants, within ten business days of the exercise of the Put, issue an
opinion indicating that the exercise of the Put would result in the inability to
account for the Change of Control transaction as a pooling of interests. If
Fleet disagrees with such accounting opinion, Webster, at its expense, will
promptly submit the matter to the accounting staff of the SEC for an
interpretation which will be controlling.
The Standstill Agreement
Webster and Fleet also will enter into a standstill agreement at the
time of the closing of the Shawmut Transaction (the "Standstill Agreement").
Under the Standstill Agreement, for a period of five years, Fleet will (a) vote
all shares of Webster Stock it holds (including shares obtained upon exercise of
the Warrant) on all matters (including the election of directors) as recommended
by the Webster Board of Directors and (b) will not initiate a tender offer for
shares of Webster Stock or participate in a publicly announced tender offer for
Webster that is opposed by the Webster Board of Directors. However, if during
such five year period a bona fide third party announces or makes an unsolicited
offer to acquire more than 25% of the Webster Stock, that is not solicited by
the Webster Board of Directors, Webster will permit Fleet to make an acquisition
proposal to the Webster Board of Directors or release Fleet from the
restrictions set forth in the Standstill Agreement. Fleet also has agreed that
it will not sell the shares of Webster Stock issued upon exercise of the Warrant
in a private sale transaction (i) to any person as to whom Webster has advised
Fleet has filed a Form 13-D or 13-G under the Exchange Act as to beneficial
ownership of more than 5% of the Webster Stock or (ii) to any person whom Fleet
knows or who confirms to Fleet that such person beneficially owns, or would
beneficially own upon such purchase, more than 4.9% of the then outstanding
Webster Stock. All voting restrictions will terminate upon Fleet's sale of the
Webster Stock issued under the Warrant or upon the execution of a definitive
agreement relating to a Change of Control of Webster, as defined in the Warrant.
Contingent Payment
Pursuant to the Shawmut Agreement, Webster Bank and Fleet will enter
into a contingent payment agreement at the time of the closing of the Shawmut
Transaction (the "Contingent Payment Agreement"). If Webster executes a
definitive agreement that would result, if completed, in a Change of Control of
Webster (as defined in the Warrant), Fleet would be entitled to a cash payment
from Webster Bank equal to 150,000 times an amount equal to (i) the cash price
per share for the Webster Stock as set forth in the definitive agreement
relating to the Change of Control transaction (or in the case of a stock for
stock transaction, the five day trailing average closing price of the acquiror's
stock following the public announcement of the transaction multiplied by the
exchange ratio, as defined in the definitive agreement relating to the Change of
Control transaction), less (ii) $32.50 (the "Contingent Payment"). The
Contingent Payment also will be due (a) within 30 days of the public
announcement of a tender offer supported by the Webster Board of Directors or
(b) upon the consummation of a tender offer that the Webster Board of Directors
has not recommended to its shareholders.
S-8
Fleet would not be entitled to receive the Contingent Payment in cash
as to any Change of Control transaction that would be accounted for as a pooling
of interests, if Fleet receives an opinion from Webster's independent
accountants, within ten business days of Fleet's written request for payment,
indicating that payment of the Contingent Payment would result in the inability
to account for the Change of Control transaction as a pooling of interests. In
such event, the Contingent Payment would be made, at Fleet's option, either (a)
by Webster issuing Webster Stock to Fleet immediately before the consummation of
the Change of Control transaction, having a market value equal to the cash
amount of the Contingent Payment, or (b) in cash, plus interest at the "prime
rate" as published from time to time by The Wall Street Journal, at such time as
Webster's independent accountants certify that a cash payment by Webster Bank of
the Contingent Payment would not result in the inability to treat the Change of
Control transaction as a pooling of interests method of accounting.
The Sublease Agreement
Pursuant to the Shawmut Agreement, Webster Bank and Fleet Bank,
National Association ("Fleet Bank") will enter into a sublease agreement with
respect to a total of 50,000 square feet of office space in One Constitution
Plaza in downtown Hartford (the "Sublease Agreement") at the time of the closing
of the Shawmut Transaction. The Sublease Agreement will provide that Webster
Bank will sublease office space from Fleet Bank at One Constitution Plaza until
December 31, 2003. Under the terms of the Sublease Agreement, Webster Bank will
sublease 20,000 square feet of office space commencing on the closing date, and
will add an additional 10,000 square feet on each of January 1, 1997, January 1,
1998 and January 1, 1999. The Sublease Agreement will provide that Webster Bank
will assume and pay its pro rata portion of taxes and operating expenses over
base rent, based on its sublease percentage of the total square footage leased
by Fleet Bank. Webster Bank will also be entitled to its pro rata portion of the
build-out provisions contained in the master lease agreement relating to One
Constitution Plaza.
Capital Financing
Webster intends to raise additional capital through an issuance of
equity and/or debt securities prior to the consummation of the Shawmut
Transaction ("Capital Financing") so as to assure that Webster Bank will have
sufficient capital to obtain the regulatory approvals required for the Shawmut
Transaction. Webster currently expects to raise net proceeds of approximately
$27 million through the sale of approximately 1.1 million additional shares of
Webster Stock in an underwritten public offering. The net proceeds will be
contributed by Webster as equity capital to Webster Bank in order to increase
its regulatory capital ratios, which would otherwise have decreased as a result
of its increase in size due to the Shawmut Transaction. There can be no
assurance as to the amount of capital that will be raised or the number of
shares of Webster Stock or other securities that will be issued.
Pursuant to the Shawmut Agreement, Webster has agreed to file a
registration statement with the SEC relating to the Capital Financing by
November 15, 1995, and to have the registration statement declared effective by
January 31, 1996, unless prior to such date Webster obtains a "firm commitment
underwriting letter" from a reputable investment banking firm as to the Capital
Financing. Webster has selected a nationally recognized investment banking firm
as lead manager for the underwritten public offering of additional shares of
Webster Stock. Webster intends to file the registration statement prior to
November 15, 1995. Webster expects to have the registration statement declared
effective prior to January 31, 1996, provided that Webster has then entered into
an underwriting agreement with the investment banking firms that would
underwrite the sale of the additional shares of Webster Stock. While this cannot
be assured, Webster anticipates entering into the underwriting agreement and
commencing the public offering prior to January 31, 1996 or alternatively
receiving a firm commitment underwriting letter from the lead manager by such
date.
Shawmut could terminate the Shawmut Agreement if the Merger with
Shelton is not consummated by December 31, 1995, unless Webster obtains a
"highly confident letter" by January 15, 1996 from a reputable investment
banking firm as to Webster being able to raise the
S-9
capital necessary to complete the Shawmut Transaction. While this cannot be
assured, Webster expects to obtain such letter by January 15, 1996, if
necessary. Webster has not conditioned its obligation to complete the Shawmut
Transaction upon the consummation of the Merger with Shelton.
Effect of the Capital Financing and Shawmut Transaction on the Merger
Webster and Shelton expect that the Merger will be consummated promptly
after the Shareholder Meetings on October 31, 1995, assuming favorable
shareholder votes at both Shareholder Meetings [and receipt of all required
regulatory approvals]. The Capital Financing and Shawmut Transaction will not
impact: (i) the representations and warranties given by Webster to Shelton in
the Merger Agreement; (ii) the federal income tax consequences of the Merger;
(iii) the accounting treatment of the Merger; (iii) the ability to resell the
Webster Stock received in the Merger; (iv) the lack of dissenters' appraisal
rights for Shelton and Webster shareholders with respect to the Merger; (iv) the
interests of directors and officers in the Merger; (v) the structure of the
Webster Board of Directors after the Merger; (vi) the Option Agreement between
Webster and Shelton, or (vii) the quarterly cash dividend policy of Webster. The
Capital Financing and the Shawmut Transaction may affect the market price of the
Webster Stock, and will affect earnings and shareholders' equity per share.
Effect of Shawmut Transaction on Proportion of BIF/SAIF Deposit Premiums
Webster Bank's deposits will be insured by the FDIC through the BIF.
After giving effect to the Shawmut Transaction, approximately 71% of Webster
Bank's deposits will then be assessed at BIF premium rates and only 29% of its
deposits will then be assessed at SAIF premium rates. This compares with
approximately 59% BIF and 41% SAIF before the Merger with Shelton and
approximately 63% BIF and 37% SAIF after the Merger prior to the Shawmut
Transaction. See "RECENT LEGISLATIVE DEVELOPMENTS" herein.
Regulatory Approvals for the Shawmut Transaction
Consummation of the Shawmut Transaction is conditioned upon the receipt
of all required regulatory approvals. An application for approval by the OTS, as
Webster Bank's primary federal regulator, is expected to be filed prior to
November 15, 1995. Subject to completion of the Capital Financing, Webster is
not aware of any reasons why the approval of the OTS for the Shawmut Transaction
should not be received on a timely basis. However, this cannot be assured.
Webster does not anticipate the need to obtain any other regulatory approval for
the Shawmut Transaction.
In addition to the OTS regulatory approval needed to be obtained by
Webster for the Shawmut Transaction, other regulatory approvals must be received
by Fleet/Shawmut, including various bank regulatory agency approvals for the
Fleet/Shawmut Merger and Fleet/Shawmut Divestiture and no objection from the
United States Department of Justice. Webster can provide no assurances as to
receipt of such regulatory approvals by Fleet/Shawmut.
OTS regulatory approval is required to be received by Eagle as to its
acquisition of branches from Fleet/Shawmut under the Eagle Purchase Agreements.
Such acquisition by Eagle is required to be consummated concurrently with the
Shawmut Transaction by Webster. While Webster expects that Eagle will receive
OTS regulatory approval on a timely basis, this cannot be assured.
Conditions to the Shawmut Transaction
The respective obligations of Webster and Shawmut to effect the Shawmut
Transaction are subject to various conditions, including the following: (a) the
prior consummation of the Fleet/Shawmut Merger; (b) the receipt of all required
regulatory approvals (without material conditions) to the Shawmut Transaction
and the expiration of any related regulatory waiting periods; (c) the completion
of the Capital Financing; (d) customary closing conditions, such as continued
accuracy of representations and warranties, delivery of legal opinions,
officers' certificates and
S-10
transfer and assignment documents at the closing; (e) the execution and delivery
of the Warrant, the Standstill Agreement, the Contingent Payment Agreement and
the Sublease Agreement; and (f) the concurrent consummation of the acquisition
by Eagle under the Eagle Purchase Agreements.
In the event of a Change of Control of Webster (as defined in the
Warrant Agreement) prior to the closing of the Shawmut Transaction, Shawmut at
its option may terminate the Shawmut Agreement.
Conduct of Business Pending the Shawmut Transaction
The Shawmut Agreement contains various restrictions on the operations
of the branches to be sold while the Shawmut Transaction is pending. In general,
the Shawmut Agreement obligates Shawmut (and Webster Bank vis a vis the Webster
Branches) to (a) conduct its business of banking in the usual, regular and
ordinary course, consistent with past practices; (b) to use reasonable efforts
to maintain and preserve intact its relationships with branch employees, and
advantageous business relationships, including branch customers; and (c) to take
no action that would adversely affect or delay the ability of any party to
obtain any regulatory approval. Branch employees may not be transferred to any
facilities other than the branches to be acquired, except upon the request of a
branch employee.
Updated Market Prices
Both Webster Stock and Shelton Stock are traded on the Nasdaq National
Market. The symbol for Webster Stock is "WBST." The symbol for Shelton Stock is
"SSBC."
The following table sets forth per share closing prices of the Webster
Stock and the Shelton Stock on the Nasdaq National Market as of the dates
specified and the pro forma equivalent market value of the Webster Stock to be
issued for the Shelton Stock in the Merger.
Shelton Stock
Last Reported Sale Price Pro Forma
--------------------------------------- Equivalent Market
Date Webster Stock Shelton Stock Value (a)
- ---- ------------- ------------- -----------------
December 31, 1992...................... $ 17.25 $ 11.43 $ 15.87
December 31, 1993....................... 22.875 15.50 21.05
December 30, 1994....................... 18.50 15.25 17.02
March 31, 1995.......................... 21.625 15.00 19.90
June 20, 1995 (b)....................... 24.125 17.50 22.20
September 14, 1995(c)................... 28.50 25.25 26.22
September 29, 1995 (d).................. 26.25 22.50 24.15
October 2, 1995 (e)..................... 26.75 23.00 24.61
October ___, 1995 (f)...................
_______________
<FN>
(a) Calculated by multiplying the respective closing prices of the Webster Stock by the .92 Exchange Ratio.
(b) Last trading date prior to announcement of the execution of the Merger Agreement.
(c) The most recent practicable date prior to the printing of the Joint Proxy Statement/Prospectus.
(d) Last trading date prior to announcement of the Shawmut Transaction.
(e) First trading date following announcement of the Shawmut Transaction.
(f) The most recent practicable date prior to the printing of the Supplement.
</FN>
Shareholders are advised to obtain current market quotations for the
Webster Stock. It is expected that the market price of the Webster Stock will
continue to fluctuate before the Merger is consummated and thereafter. The
number of shares of Webster Stock to be received by Shelton shareholders in the
Merger is fixed, and will not be adjusted to reflect any changes in the market
price of the Webster Stock. The Capital Financing may affect the market price of
the Webster Stock.
S-11
Book Value per Common Share
See "SELECTED SIGNIFICANT STATISTICAL DATA PRO FORMA COMBINED" herein.
At June 30, 1995, the book value per common share would be as follows:
Book Value
----------
Webster - historical................................................... $24.08
Shelton - historical................................................... 14.92
Webster/Shelton Pro Forma Combined (a)................................. 22.33
Shelton Equivalent Pro Forma (b)....................................... 20.54
Webster/Shelton/ Shawmut Pro Forma Combined (c)........................ 22.63
Shelton/Shawmut Equivalent Pro Forma (d)............................... 20.82
______________
<FN>
(a) Reflects the Merger with Webster, as if it had occurred on June 30, 1995.
(b) Shelton equivalent pro forma per share amounts are calculated by multiplying
the Webster/Shelton pro forma combined amounts by the .92 Exchange Ratio.
(c) Reflects the Merger with Webster, the Capital Financing (based on 1.1
million additional shares of Webster Stock and net proceeds of $27 million)
and the Shawmut Transaction, as if they had all occurred on June 30, 1995.
(d) Shelton/Shawmut equivalent pro forma per share amounts are calculated by
multiplying the Webster/Shelton/Shawmut pro forma combined amounts by the
.92 Exchange Ratio.
</FN>
Tangible book value per share will be reduced as a result of the tax
deductible core deposit intangible. See "SELECTED SIGNIFICANT STATISTICAL DATA--
PRO FORMA COMBINED."
Fairness Opinion as to the Merger
The Merger Agreement does not provide for an update of the fairness
opinion rendered by Alex. Brown & Sons Incorporated ("Alex. Brown") to the Board
of Directors of Shelton on June 20, 1995. On June 20, 1995, the date that Alex.
Brown delivered its opinion, Webster Stock closed at $24.125 per share. On
October __, 1995, the most recent practicable date prior to the printing of the
Supplement, the closing price of the Webster Stock was $____. The fairness
opinion of Alex. Brown is attached to the Joint Proxy Statement/Prospectus. The
Shawmut Transaction, the Capital Financing and other developments subsequent to
June 20, 1995 could affect the Alex. Brown opinion, but Alex. Brown has not been
asked to update its opinion to reflect such developments.
Accounting Treatment
The Shawmut Transaction is intended to be accounted for as a "purchase"
by Webster.
RECENT LEGISLATIVE DEVELOPMENTS
The current financial condition of the SAIF has resulted in the
introduction of various legislation in both the United States Senate ("Senate")
and the United States House of Representatives ("House") to recapitalize the
SAIF and then to merge the SAIF into the BIF. Both Senate and House legislation,
as currently proposed, would generally impose a special one-time assessment of
approximately 85 cents to 90 cents per $100 of assessable SAIF deposits, which
would apply to certain deposits at Webster Bank. See "EFFECT OF SHAWMUT
TRANSACTION ON PROPORTION OF BIF/SAIF DEPOSIT PREMIUMS" above.
Legislation also has been introduced in the House that would eliminate
the federal savings association charter by January 1, 1998. The proposed SAIF
recapitalization legislation in the Senate
S-12
also would have the effect of eliminating the savings association charter. If
such legislation is enacted Webster Bank would be required to convert its
federal savings bank charter to either a national bank charter or to a state
depository institution charter. Pending legislation also may result in Webster
becoming regulated by the Board of Governors of the Federal Reserve System at
the holding company level rather than by the OTS. Regulation by the Federal
Reserve could subject Webster to capital requirements that are not currently
applicable to Webster as a holding company under OTS regulation. If as a result
of pending legislation Webster Bank is unable to continue as a qualified savings
institution for federal tax purposes and such legislation does not otherwise
provide relief as to recapture of the bad debt deduction, Webster Bank would
incur additional tax liability for certain bad debts deductions previously
taken.
At this time, Webster can not predict whether any of the proposed
legislation will be enacted and the effects of any resulting laws on Webster.
Such legislation generally, and in particular the proposed one-time special
assessment on SAIF deposits and the possible recapture of the bad debt
deduction, could have an adverse effect on Webster.
PRO FORMA COMBINED STATEMENT OF CONDITION
The following Pro Forma Combined Statement of Condition as of June 30,
1995 combines the pro forma combined statement of financial condition of Webster
and Shelton as reflected in the Joint Proxy Statement/Prospectus with the
Shawmut assets acquired and liabilities assumed as if the Merger, the Shawmut
Transaction and the Capital Financing had occurred on June 30, 1995, after
giving effect to the Pro Forma adjustments described in the accompanying notes.
The Pro Forma Combined Statement of Condition should be read in
conjunction with the separate historical consolidated financial statements and
notes of Webster and of Shelton incorporated by reference or appearing in the
Joint Proxy Statement/Prospectus and the Pro Forma Combined Statements of
Webster and Shelton appearing in the Joint Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" herein. The Pro Forma Combined
Statement of Condition is not necessarily indicative of the consolidated
financial position that would have been achieved had the Merger, the Capital
Financing and the Shawmut Transaction been consummated on the date indicated.
S-13
PRO FORMA COMBINED STATEMENT OF CONDITION
AT JUNE 30, 1995 (Unaudited)
Pro Forma Fleet Assets Purchase Pro Forma
Combined Acquired And Accounting Combined
Webster/ Liabilities And Other Webster/
Shelton Assumed Adjustments Shelton/Shawmut
----------- ------------ ------------ ------------
(In Thousands)
ASSETS
Cash and Due from Depository Institutions.......... $ 33,960 $ 304,074 $ (307,000)(a) $ 31,034
Interest-bearing Deposits.......................... 42,672 -- -- 42,672
Securities......................................... 168,583 -- -- 168,583
Mortgage-backed Securities......................... 837,367 -- (147,000)(b) 690,367
Loans Receivable, Net.............................. 1,873,375 682,777 (12,000)(c) 2,544,152
Accrued Interest Receivable........................ 19,534 5,000 -- 24,534
Premises and Equipment, Net........................ 36,135 8,149 4,000 (d) 48,284
Segregated Assets, Net............................. 124,319 -- -- 124,319
Other Real Estate Acquired Through Foreclosure
and In-Substance Foreclosure, Net................ 21,719 -- -- 21,719
Core Deposit Intangible............................ 5,095 -- 45,000 (e) 50,095
Prepaid Expenses and Other Assets.................. 27,649 -- -- 27,649
----------- ----------- ----------- -----------
TOTAL ASSETS.................................... $ 3,190,408 $ 1,000,000 $ (417,000) $ 3,773,408
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits........................................... $ 2,465,291 $ 1,000,000 $ (277,000)(a) $ 3,188,291
Federal Home Loan Bank Advances.................... 411,505 -- (170,000)(b) 241,505
Other Borrowings................................... 43,130 -- -- 43,130
Advanced Payments by Borrowers for Taxes
and Insurance.................................... 16,273 -- -- 16,273
Accrued Expenses and Other Liabilities............. 86,659 -- 3,000 (f) 89,659
----------- ----------- ----------- -----------
Total Liabilities............................... 3,022,858 1,000,000 (444,000) 3,578,858
SHAREHOLDERS' EQUITY............................... 167,550 -- 27,000 (g) 194,550
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY......................................... $ 3,190,408 $ 1,000,000 $ (417,000) $ 3,773,408
=========== =========== =========== ===========
The Pro Forma Combined Statement of Condition does not include results of
operations subsequent to June 30, 1995, which are expected to increase
shareholders' equity.
The Pro Forma Combined Statement of Condition has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton or the Shawmut Transaction.
See footnotes on following page.
SELECTED SIGNIFICANT STATISTICAL DATA - PRO FORMA COMBINED
AT JUNE 30, 1995 (Unaudited)
Pro Forma
Pro Forma Combined Combined Webster/
Webster/Shelton Shelton/Shawmut
--------------- -----------------
Book value per common share................................. $22.33 $22.63
Tangible book value per common share........................ 21.57 16.24 (h)
Common shares outstanding (000's)........................... 6,734 7,839
Shareholders' equity to total assets........................ 5.25% 5.16%
Nonaccrual loans and OREO to total assets................... 1.87% 1.58%
Allowance for loan losses to nonaccrual loans............... 118.22% 131.82%
Allowance for loan and OREO losses to nonaccrual loans and OREO 74.82% 83.21%
S-14
Notes to Pro Forma Combined Financial Statements
(a) As part of the Shawmut Transaction, Webster will swap two of its
Fairfield County branch banking offices (the "Branch Swap"), the effect
of which is expected to reduce cash and deposits by approximately $177
million. Included below is a summary of the projected effect on cash of
the Branch Swap, the effect of adjustments to cash for estimated
run-off of assumed deposits of $100 million and the acquired loan
repayments and prepayments of principal balances of $15 million. Such
deposit run-off is based on actual activity from July 1, 1995 to
September 30, 1995 and projections up to the date of the Shawmut
Transaction closing. The amount reflected as loan repayments and
prepayments of principal are primarily estimates of such activity from
July 1, 1995 to the date of the Shawmut Transaction closing. The
remaining $45 million projected reduction in cash represents the
estimated net impact of the Shawmut Transaction, Capital Financing and
other adjustments as described in footnote (b) below.
(In thousands)
Branch Swap....................................... $ (177,000)
Projected deposit run-off......................... (100,000)
------------
Total cash adjustments related to deposits...... (277,000)
------------
Projected loan prepayments........................ 15,000
Net cash reduction................................ (45,000)
------------
Total adjustments to Cash....................... $ (307,000)
============
(b) Webster expects to sell $147 million of available for sale
mortgage-backed securities and use excess cash to payoff $170 million
of outstanding Federal Home Loan Bank advances so as to continue to be
"well capitalized" for regulatory capital ratio purposes after giving
effect to the Shawmut Transaction and the Capital Financing, described
in footnote (f) below.
(c) Purchase accounting and other adjustments related to the acquired loan
portfolio reflect additional loan loss reserves, projected repayments
and prepayments of principal balances offset by mark to market premium
adjustments.
(d) The stated book value of premises and equipment acquired of $8.1
million approximates market value. Webster expects to purchase $4
million of additional data processing and other equipment.
(e) Represents a tax deductible core deposit intangible estimated at $45
million based on $900 million of deposit liabilities assumed (after the
projected deposit run-off).
(f) Includes estimated transaction costs of $3 million (principally
financial advisory and other professional fees and computer conversion
costs).
S-15
(g) In the Capital Financing, Webster expects to raise approximately $27
million in net shareholders' equity in an underwritten public offering
of additional shares of Webster Stock. On this basis and using a market
price of $26.25 per share of Webster Stock (the closing price of
Webster Stock on the Nasdaq National Market on September 29, 1995,
which was the last business day immediately preceding the announcement
of the Shawmut Transaction), Webster would issue 1,104,762 shares of
Webster Stock in the Capital Financing. There can be no assurance that
the Capital Financing will be consummated or as to the price per share
of the additional shares of Webster Stock to be issued.
(In thousands)
Estimated common equity raised...................... $ 29,000
Expenses (including underwriting discount)
related to the sale of common equity............... (2,000)
------------
Estimated net proceeds from the sale of
common equity.................................... $ 27,000
============
(h) On a Webster/Shelton/Shawmut pro forma combined basis, the tangible
book value per share is computed by subtracting the tax deductible core
deposit intangible of $50 million from common shareholders' equity of
$177 million, divided by the common shares outstanding of 7.8 million
shares.
S-16
ANNEX A
Investment Banking Group
World Financial Center
North Tower
New York, New York 10281-1325
212/449-1000
[LOGO] Merrill Lynch
October 1, 1995
Board of Directors
Webster Financial Corporation
First Federal Plaza
Waterbury, CT 06702
Members of the Board:
Webster Financial Corporation ("Webster"), acting through its
wholly-owned subsidiary, First Federal Bank ("First Federal"), has entered into
a purchase and assumption agreement dated October 1, 1995 (the "Agreement") with
Shawmut Bank Connecticut, National Association ("Shawmut") pursuant to which
First Federal will acquire certain assets and assume certain liabilities (the
"Acquisition Transaction") of Shawmut (the "Hartford Commercial Bank Divestiture
Package") in consideration of payment of the purchase price determined pursuant
to Article III of the Agreement (the "Consideration"). We understand that the
Acquisition Transaction is occurring in the context of Fleet Financial Group's
("Fleet") divestiture of certain assets and certain liabilities of Shawmut in
conjunction with Fleet's pending acquisition of Shawmut.
You have asked us whether, in our opinion, the proposed Consideration
to be paid or delivered in the manner contemplated in the Agreement is fair to
Webster from a financial point of view.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed Webster's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended December
31, 1994 and Webster's Quarterly Reports on Form 10-Q and the
related unaudited financial information for the quarterly periods
ending March 31, 1995 and June 30, 1995;
(2) Reviewed certain information furnished to us by Webster,
including financial and other forecasts and assumptions, relating
to the business, earnings, assets and prospects of Webster;
(3) Reviewed certain information provided to us by Fleet relating to
the assets and liabilities of the Hartford Commercial Bank
Divestiture Package;
(4) Conducted discussions with members of senior management of
Webster concerning the financial condition, businesses, assets
and prospects of Webster and such senior management's views as to
the financial forecasts and pro forma analysis of Webster;
A-1
(5) Compared the proposed deposit premium to be paid in the
Acquisition Transaction with deposit premiums in certain
transactions which we deemed to be relevant;
(6) Reviewed the pro forma balance sheets and estimated income
statements for Webster as prepared by the management of Webster
and analyzed, based upon information provided by Webster's senior
management, the pro forma impact of the Acquisition Transaction
on the earnings and tangible book value per share, consolidated
capitalization and certain balance sheet and profitability ratios
of Webster, including the impact of an assumed capital financing
plan as more completely described in the agreement (the "Equity
Offering");
(7) Compared the results of operations of Webster with that of
certain publicly traded companies which we deemed to be relevant;
(8) Reviewed certain information and reports and conducted
discussions with certain members of senior management of Webster
concerning this information and reports related to Webster's
review of Fleet;
(9) Reviewed the Agreement dated October 1, 1995; and
(10) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other
matters as we deemed necessary to the rendering of this opinion.
In preparing our opinion, we have assumed and relied on the accuracy
and completeness of all of the financial and other information supplied or
otherwise made available to us by Webster and Fleet, and we have not
independently verified such information or undertaken an independent evaluation
or appraisal of the assets or liabilities of Webster or Fleet or any of their
respective subsidiaries, nor have we been furnished any such independent
evaluation or appraisal. We have also assumed and relied upon the senior
management of Webster as to the reasonableness and achievability of the
financial and operating forecasts (and the assumptions and bases therefore)
provided to, and discussed with, us. In that regard, we have assumed with your
consent that such forecasts, including without limitation, financial forecasts
resulting from the Acquisition Transaction and projections regarding future
economic conditions and results of operations reflect the best currently
available estimates and judgments of Webster's senior management as to the
future financial performance of Webster or the Hartford Connecticut Commercial
Bank Divestiture Package, as the case may be, and that such projections and
forecasts will be realized in the amounts and the time periods currently
estimated by the senior management of Webster. We are not experts in the
evaluation of allowances for loan losses, and we have not assumed any
responsibility for making an independent evaluation of the adequacy of the
allowance for loan losses of the Hartford Commercial Bank Divestiture Package
nor have we reviewed any individual credit files, and we have assumed that the
aggregate allowances for loan losses are adequate to cover such losses. In
addition, we are not experts in the evaluation of the loans and other assets to
be acquired and the liabilities to be assumed in connection with the Acquisition
Transaction as provided for in the Agreement and have assumed, with your
permission, that all such assets and liabilities have the market valuations
ascribed to them in the financial records supplied by the senior management of
Webster, and we have not assumed any responsibility for undertaking an
independent inquiry as to the accuracy of such valuations. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
Our opinion is being rendered without regard to (i) the necessity for,
or level of, any restrictions, obligations or undertakings which may be imposed
or required by or upon Webster or First Federal in the course of obtaining
regulatory approval for the Acquisition Transaction, including any restrictions
imposed under applicable law on the ability of First Federal to pay dividends to
Webster following consummation of the Acquisition Transaction and related
A-2
transactions, and (ii) any financial or other effects of the conversion of
Bristol Savings Bank, the renaming of Bristol Savings Bank as Webster Bank and
the merger of First Federal with and into Webster Bank as contemplated in the
Agreement. Our opinion is also based on the assumption that Webster will be able
to complete the Equity Offering and take all of the other actions contemplated
to be taken by it in the Agreement, and this opinion is not addressed to the
fairness of any of the foregoing.
We have been retained by the Board of Directors of Webster as an
independent contractor to act as financial advisor to Webster with respect to
the Acquisition Transaction and will receive a fee for our services. We have, in
the past, provided financial advisory and financing services to Webster and
Fleet and certain of their respective affiliates and have received customary
fees for the rendering of such services. In addition, in the ordinary course of
business, we may actively trade debt and/or equity securities of Webster and
Fleet and/or their respective affiliates for our own account and the accounts of
our customers, and we therefore may from time to time hold a long or short
position in such securities.
Our opinion is directed to the Board of Directors of Webster, and,
while we understand that no stockholder meeting is necessary for approval of the
Acquisition Transaction, our opinion does not constitute nor should it be
construed as constituting a recommendation to any stockholder of Webster as to
how such stockholder should vote at any stockholder meeting of Webster that may
be held in connection with the Acquisition Transaction.
This opinion is directed only to the proposed Consideration and is
solely for the confidential use the Board of Directors of Webster and may not be
reproduced, summarized, described or referred to or given to any person without
our prior written consent, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, it is understood that this opinion can be
summarized and reproduced (in such form as Merrill Lynch shall approve) in
connection with the description of the Acquisition Transaction in the joint
proxy statement/prospectus relating to shareholder approval for the issuance of
additional shares of Webster common stock in its pending acquisition of Shelton
Bancorp, Inc.
On the basis of, and subject to the foregoing, we are of the opinion
that the proposed Consideration to be paid in the Acquisition Transaction is
fair to Webster from a financial point of view.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
-----------------------------------
Director
Investment Banking Group
A-3
APPENDIX B
Description of Graphic Material
A map of the State of Connecticut is included as a part of the
Supplement. Each branch of Webster Bank after giving effect to the Merger with
Shelton is represented on the map as a dot; the 20 branches to be acquired in
the Shawmut Transaction are represented by a dot with a circle surrounding it;
and the two branches of Webster Bank being swapped to Shawmut are each
represented by a dot surrounded by a box.
B-1
Webster Financial Corporation
First Federal Plaza,
Waterbury, Connecticut 06702
September 18, 1995
To the Shareholders of
Webster Financial Corporation:
You are cordially invited to attend a special meeting of shareholders
(the "Webster Meeting") of Webster Financial Corporation ("Webster") to be held
on October 31, 1995 at 4:00 p.m. at the Waterbury Club, 30 Holmes Avenue,
Waterbury, Connecticut.
As described in the enclosed Joint Proxy Statement/Prospectus, at the
Special Meeting, you will be asked to approve the proposed issuance of up to
1,337,618 shares of common stock of Webster ("Webster Stock") to shareholders of
Shelton Bancorp, Inc. ("Shelton") in connection with the acquisition of Shelton
by Webster. In the acquisition, Shelton shareholders will receive .92 of a share
of Webster Stock for each share of Shelton common stock. The presence, in person
or by proxy, of at least a majority of the Webster Stock entitled to vote at the
Webster Meeting, and the affirmative vote of the holders of a majority of the
votes cast, is necessary to approve the issuance of these shares of Webster
Stock.
Your Board of Directors has unanimously approved the issuance of the
shares of Webster Stock and recommends that you vote "FOR" approval of the
issuance of these shares.
You are urged to read the accompanying Joint Proxy
Statement/Prospectus, which provides you with a description of the terms of the
acquisition. It is very important that your shares be represented at the Webster
Meeting. Whether or not you plan to attend the Webster Meeting, you are
requested to complete, date and sign the proxy card and return it as soon as
possible in the enclosed postage paid envelope.
Sincerely,
/s/ James C. Smith
JAMES C. SMITH
Chairman and Chief Executive Officer
WEBSTER FINANCIAL CORPORATION
First Federal Plaza
Waterbury, Connecticut 06702
-------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
OCTOBER 31, 1995
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Webster Meeting") of Webster Financial Corporation ("Webster") will be held on
October 31, 1995 at 4:00 p.m. at the Waterbury Club, 30 Holmes Avenue,
Waterbury, Connecticut for the following purposes:
1. To authorize the issuance of up to 1,337,618 shares of
common stock of Webster ("Webster Stock") to shareholders of Shelton
Bancorp, Inc. ("Shelton") in connection with the acquisition of Shelton
by Webster pursuant to an agreement and plan of merger, dated June 20,
1995, as amended, among Webster, Webster Acquisition Corp. and Shelton
(the "Merger Agreement"). As more fully described in the Joint Proxy
Statement/Prospectus, the Merger Agreement provides for Webster to
issue .92 of a share of Webster Stock for each outstanding share of
Shelton common stock in the acquisition; and
2. To transact such other business as may properly come before
the Webster Meeting, or any adjournments thereof.
The Board of Directors of Webster has fixed the close of business on
September 29, 1995 as the record date for the determination of shareholders of
Webster entitled to notice of and to vote at the Webster Meeting. Only holders
of Webster Stock of record at the close of business on that date will be
entitled to notice of and to vote at the Webster Meeting or any adjournments
thereof.
By Order of the Board of Directors
/s/ James C. Smith
JAMES C. SMITH
Chairman and Chief Executive Officer
Waterbury, Connecticut
September 18, 1995
WE URGE YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
RETURN IT AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR
NOT YOU PLAN TO ATTEND THE WEBSTER MEETING IN PERSON. YOUR PROXY MAY BE REVOKED
IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT
ANY TIME BEFORE IT IS VOTED AT THE WEBSTER MEETING.
SHELTON BANCORP, INC.
375 Bridgeport Avenue
Shelton, Connecticut 06484
September 18, 1995
To the Shareholders of
Shelton Bancorp, Inc.:
You are cordially invited to attend the 1995 annual meeting of
shareholders (the "Shelton Meeting") of Shelton Bancorp, Inc. ("Shelton") to be
held on October 31, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee
Terrace, Ansonia, Connecticut.
As described in the enclosed Joint Proxy Statement/Prospectus, at the
Shelton Meeting, in addition to the election of directors as is customary at our
annual meeting, you will be asked to approve an agreement and plan of merger,
dated June 20, 1995, as amended (the "Merger Agreement"), pursuant to which
Shelton and Shelton Savings Bank would be acquired by Webster Financial
Corporation ("Webster"). The Merger Agreement provides for the acquisition to
occur by merging a wholly-owned subsidiary of Webster formed for such purpose
into Shelton (the "Merger"). As part of the Merger, each outstanding share of
Shelton common stock ("Shelton Stock") will be converted into .92 of a share of
Webster common stock ("Webster Stock") in a tax free exchange, plus cash to be
paid in lieu of fractional shares.
Your Board of Directors has determined that the Merger is in the best
interests of Shelton and its shareholders and has unanimously approved the
Merger Agreement. The Board unanimously recommends that you vote "FOR" approval
of the Merger Agreement.
Consummation of the Merger is subject to certain conditions, including
approval of the Merger Agreement by at least two-thirds of the outstanding
shares of Shelton Stock entitled to be voted at the Shelton Meeting and to the
receipt of certain regulatory approvals. The Merger Agreement is also subject to
the approval by the Webster shareholders of the issuance of the shares of
Webster Stock in the Merger.
Alex. Brown & Sons Incorporated, Shelton's financial advisor in
connection with the Merger, has delivered its written opinion to Shelton's Board
of Directors that, as of the date of the Merger Agreement, the consideration to
be received by the shareholders of Shelton in the Merger was fair to such
holders from a financial point of view. The written opinion of Alex. Brown &
Sons Incorporated is reproduced in full as Appendix A to the accompanying Joint
Proxy Statement/Prospectus.
You are urged to read the Joint Proxy Statement/Prospectus, which
provides you with a description of the terms of the Merger. It is very important
that your shares be represented at the Shelton Meeting. Whether or not you plan
to attend the Shelton Meeting, you are requested to complete, date and sign the
proxy card and return it as soon as possible in the enclosed postage paid
envelope. Failure to return a properly executed proxy card or to vote at the
Shelton Meeting will have the same effect as a vote against the Merger
Agreement.
Sincerely,
/s/ Kenneth E. Schaible
KENNETH E. SCHAIBLE
President and Treasurer
SHELTON BANCORP, INC.
375 Bridgeport Avenue
Shelton, Connecticut 06484
-------------------
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON
OCTOBER 31, 1995
-------------------
NOTICE IS HEREBY GIVEN that the 1995 annual meeting of shareholders
(the "Shelton Meeting") of Shelton Bancorp, Inc. ("Shelton") will be held on
October 31, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee Terrace,
Ansonia, Connecticut for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
an agreement and plan of merger, dated June 20, 1995, as amended, among
Webster Financial Corporation ("Webster"), Webster Acquisition Corp.
and Shelton (the "Merger Agreement"). As more fully described in the
Joint Proxy Statement/Prospectus, the Merger Agreement provides for
Shelton and Shelton Savings Bank to be acquired by Webster through a
merger of a wholly-owned subsidiary of Webster formed for such purpose
into Shelton (the "Merger"). As part of the Merger, each outstanding
share of Shelton common stock ("Shelton Stock") will be converted into
.92 of a share of Webster common stock in a tax free exchange, plus
cash to be paid in lieu of fractional shares;
2. To elect three persons to serve as directors of Shelton for
a three-year term and until the election and qualification of their
successors; and
3. To transact such other business as may properly come before
the Shelton Meeting, or any adjournments thereof, including, without
limitation, a motion to adjourn the Shelton Meeting to another time
and/or place for the purpose of soliciting additional proxies in order
to approve the Merger Agreement or otherwise.
The Board of Directors of Shelton has fixed the close of business on
September 29, 1995 as the record date for the determination of shareholders
entitled to notice of and to vote at the Shelton Meeting. Only holders of the
Shelton Stock of record at the close of business on that date will be entitled
to notice of and to vote at the Shelton Meeting or any adjournments thereof.
By Order of the Board of Directors
/s/ Kenneth E. Schaible
KENNETH E. SCHAIBLE
President and Treasurer
Shelton, Connecticut
September 18, 1995
WE URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SHELTON MEETING IN PERSON. YOUR PROXY MAY BE REVOKED
IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT
ANY TIME BEFORE IT IS VOTED AT THE SHELTON MEETING.
SHELTON BANCORP, INC. WEBSTER FINANCIAL CORPORATION
375 Bridgeport Avenue First Federal Plaza
Shelton, Connecticut 06484 Waterbury, Connecticut 06702
JOINT PROXY STATEMENT
----------------------
WEBSTER FINANCIAL CORPORATION
PROSPECTUS
1,337,618 Shares of Common Stock
----------------------
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of Shelton Bancorp, Inc. ("Shelton") and to shareholders of Webster
Financial Corporation ("Webster"). This Joint Proxy Statement/Prospectus relates
to the annual meeting of shareholders of Shelton (the "Shelton Meeting") to be
held on October 31, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee
Terrace, Ansonia, Connecticut, and to the special meeting of shareholders of
Webster (the "Webster Meeting") to be held on October 31, 1995 at 4:00 p.m. at
the Waterbury Club, 30 Holmes Avenue, Waterbury, Connecticut (collectively, the
"Shareholders Meetings"), and to any adjournments of the Shareholders Meetings.
This Joint Proxy Statement/Prospectus is first being mailed to shareholders of
Shelton and to shareholders of Webster on or around September 18, 1995.
At the Shelton Meeting, the principal items of business will be: (i) to
consider and vote upon an agreement and plan of merger, dated June 20, 1995, as
amended, among Webster, Webster Acquisition Corp. ("Merger Sub"), and Shelton
(the "Merger Agreement"); and (ii) to elect three persons to serve as directors
of Shelton for a three-year term and until the election and qualification of
their successors.
The Merger Agreement provides for Shelton to be acquired by Webster
through a merger of Merger Sub, a wholly-owned subsidiary of Webster formed for
such purpose, into Shelton (the "Merger"). As part of the Merger, each
outstanding share of Shelton common stock, par value $1.00 per share ("Shelton
Stock"), will be converted into .92 of a share of Webster common stock, par
value $.01 per share ("Webster Stock") (the "Exchange Ratio"), plus cash in lieu
of fractional shares. Based on the last reported sales price per share of
Webster Stock on September 14, 1995 (the most recent practicable date prior to
the printing of this Joint Proxy Statement/Prospectus) of $28.50 and the
Exchange Ratio, the calculated value of each share of Shelton Stock to be
exchanged in the Merger is $26.22. No assurance can be given as to the market
price of Webster Stock at or after consummation of the Merger. Because the
market price of Webster Stock is subject to fluctuation, the value of the shares
of Webster Stock that holders of Shelton Stock will receive in the Merger may
materially increase or decrease prior to or after consummation of the Merger.
See "MARKET PRICES AND DIVIDENDS." In connection with the Merger Agreement,
Shelton has granted Webster an irrevocable option (the "Option") to purchase up
to 267,324 shares of newly issued Shelton Stock at a purchase price of $17.00
per share upon the occurrence of certain events. The Merger is subject to
various conditions, including approvals of applicable federal and Connecticut
regulatory authorities. Shelton and Webster expect that the Merger will be
consummated on November 1, 1995, or as soon as possible after the receipt of all
regulatory and shareholder approvals, and the expiration of all regulatory
waiting periods. If the Merger is not consummated by March 31, 1996, the Merger
Agreement will be terminated unless Shelton and Webster mutually consent to an
extension. For a more detailed description of the Merger and the Option, see
"THE MERGER."
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Webster with respect to up to 1,337,618 shares of Webster Stock to be issued to
Shelton shareholders as part of the Merger.
1
At the Webster Meeting, the principal item of business will be to
authorize the issuance of up to 1,337,618 shares of Webster Stock to Shelton
shareholders as part the Merger.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), ANY STATE SECURITIES COMMISSION,
THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), OR THE CONNECTICUT COMMISSIONER OF BANKING (THE
"CONNECTICUT COMMISSIONER"), NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION,
THE OTS, THE FDIC, OR THE CONNECTICUT COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF WEBSTER STOCK OFFERED HEREBY ARE
NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY.
The information set forth in this Joint Proxy Statement/Prospectus
concerning Shelton has been furnished by Shelton. The information concerning
Webster and Merger Sub has been furnished by Webster. The description of the
Merger Agreement and other documents in this Joint Proxy Statement/Prospectus is
qualified by reference to the text of those documents, copies of which will be
provided without charge upon written or oral request addressed to Lee A. Gagnon,
Executive Vice President, Chief Operating Officer and Secretary of Webster
Financial Corporation, First Federal Plaza, Waterbury, Connecticut 06702,
telephone (203) 753-2921.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, OR
INCORPORATED BY REFERENCE HEREIN, IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY SHELTON OR WEBSTER OR THE OFFERING OF WEBSTER STOCK MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY SHELTON OR WEBSTER. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY WEBSTER STOCK OFFERED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN
OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE WEBSTER STOCK
OFFERED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF SHELTON OR WEBSTER OR THE INFORMATION HEREIN OR THE DOCUMENTS OR
REPORTS INCORPORATED BY REFERENCE SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
----------------------
The date of this Joint Proxy Statement/Prospectus is
September 18, 1995.
2
TABLE OF CONTENTS
Page
----
Available Information....................... 4
Incorporation of Certain Documents
by Reference........................... 4
Merger Summary.............................. 6
The Parties............................ 6
The Merger............................. 7
Comparison of Shareholder Rights....... 11
Market Prices of Common Stock.......... 11
Comparative Per Share Data............. 11
Summary Financial and Other
Data............................... 13
Risk Factors................................ 19
Issuance of Webster Stock.............. 19
Legislative and General Regulatory
Developments....................... 19
Sources of Funds for Dividends;
Stock Repurchases.................. 20
Effect of Interest Rate Fluctuations... 20
Shelton Meeting............................. 21
Matters to be Considered at the
Shelton Meeting.................... 21
Record Date and Voting................. 22
Vote Required; Revocability of
Proxies............................ 23
Solicitation of Proxies................ 23
Webster Meeting............................. 24
Matters to be Considered at the
Webster Meeting.................... 24
Record Date and Voting................. 24
Vote Required; Revocability of
Proxies............................ 25
Solicitation of Proxies................ 25
Item 1 - The Merger......................... 25
The Parties............................ 26
Background of the Merger............... 27
Recommendations of Shelton
Board of Directors................. 27
Purpose and Effects of the Merger...... 29
Structure.............................. 29
Exchange Ratio......................... 29
Regulatory Approvals................... 31
Conditions to the Merger............... 31
Conduct of Business Pending
the Merger......................... 32
Third Party Proposals.................. 32
Expenses; Breakup Fee.................. 33
Opinion of Financial Advisor........... 33
Certain Provisions of the Merger
Agreement.......................... 36
Termination and Amendment of
the Merger Agreement............... 37
Certain Federal Income Tax
Consequences....................... 37
Accounting Treatment................... 38
Resales of Webster Stock Received in
the Merger......................... 38
No Appraisal Rights.................... 38
Interests of Certain Persons in
the Merger......................... 39
Option Agreement....................... 40
Pro Forma Combined Financial
Statements......................... 43
Shelton Bancorp, Inc........................ 50
General................................ 50
Competition............................ 50
Regulation............................. 50
Economic Conditions and
Governmental Policy................ 51
Taxation............................... 51
Market Prices and Dividends................. 52
Description of Capital Stock and
Comparison of Shareholder Rights....... 54
Webster Stock.......................... 54
Series B Stock......................... 55
Senior Notes........................... 56
Certificate of Incorporation and Bylaw
Provisions......................... 57
Applicable Law......................... 59
Legal Matters............................... 60
Experts ................................... 60
Item 2 - Election of Directors ............. 61
Stock Owned by Principal Holders,
and Directors and Executive
Officers as a Group ............... 61
Election of Directors.................. 61
Committees of the Board of Directors... 63
Director Meeting Attendance and
Fee Arrangements .................. 63
Personnel Committee Report on
Executive Compensation............. 63
Compensation Committee Interlocks and
Insider Participation.............. 64
Compensation of Executive Officers .... 65
Option Grants in Last Fiscal Year ..... 65
Option Exercises and Year-End
Option Value Table ................ 65
Pension Plan .......................... 66
Employment Agreements ................. 66
Comparative Stock Performance ......... 67
Transactions with Directors and
Management ........................ 69
Appointment of Independent
Accountants............................ 69
Section 16(a) Compliance ................... 69
Other Matters .............................. 69
Proposal for 1996 Annual Meeting ........... 69
Appendix A -- Opinion of Alex. Brown
& Sons Incorporated.................... A-1
Appendix B -- Shelton Bancorp, Inc.
1995 Annual Report .................... B-1
3
AVAILABLE INFORMATION
Shelton and Webster are both subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder, and in accordance therewith file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, such reports, proxy statements and other information filed
by Shelton and Webster may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite
1300, Seven World Trade Center, New York, New York 10048.
Webster has filed with the SEC a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the Webster Stock to be issued to the
shareholders of Shelton in connection with the Merger. As permitted by the rules
and regulations of the SEC, this Joint Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement. Such
additional information may be obtained from the SEC's principal office in
Washington, D.C. as set forth above. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated by reference herein as to
the contents of any contract or other document are not necessarily complete and,
in each instance where such contract or document is filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Shelton with the SEC (File No.
0-17495) under the Exchange Act are hereby incorporated in this Joint Proxy
Statement/Prospectus by reference: [(i) Shelton's Annual Report on Form 10-K for
the year ended June 30, 1995;] (ii) Shelton's Quarterly Reports on Form 10-Q for
the quarters ended September 30, 1994, December 31, 1994 and March 31, 1995; and
(ii) Shelton's Current Report on Form 8-K dated June 20, 1995.
The following documents filed by Webster with the SEC (File No.
0-15213) under the Exchange Act are hereby incorporated in this Joint Proxy
Statement/Prospectus by reference: (i) Webster's Annual Report on Form 10-K for
the year ended December 31, 1994; (ii) Webster's Quarterly Report on Form 10-Q
for the quarters ended March 31, 1995 and June 30, 1995; and (iii) Webster's
Current Reports on Form 8-K dated March 1, 1995 and June 20, 1995 and on Form
8-K/A dated July 27, 1995.
All documents filed by Shelton or Webster pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Joint
Proxy Statement/Prospectus and prior to the Merger shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus. In lieu of
incorporating by reference the description of the capital stock of Webster which
is contained in a registration statement filed under the Exchange Act, such
description is included in this Joint Proxy Statement/Prospectus. See
"DESCRIPTION OF WEBSTER CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS."
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Joint
Proxy Statement/Prospectus. Webster will provide without charge to each person
to whom a copy of this Joint Proxy Statement/Prospectus
4
is delivered, upon written or oral request of such person, a copy of any or all
of the documents incorporated herein by reference and not delivered herewith
(other than exhibits to such documents which are not specifically incorporated
by reference into the text of such documents).
This Joint Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. These documents
are available upon request directed to: Lee A. Gagnon, Executive Vice President,
Chief Operating Officer and Secretary, Webster Financial Corporation, First
Federal Plaza, Waterbury, Connecticut 06702; telephone (203) 753-2921. In order
to ensure timely delivery of the documents, any request should be made at least
five business days prior to the Meetings.
5
MERGER SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Joint Proxy Statement/Prospectus. This summary is not intended
to be a complete description and is qualified in its entirety by reference to
the more detailed information contained in this Joint Proxy Statement/Prospectus
herein. Shareholders of Shelton and of Webster are urged before voting to give
careful consideration to all of the information contained in this Joint Proxy
Statement/Prospectus.
THE MERGER AGREEMENT TO BE CONSIDERED AT THE SHELTON MEETING INVOLVES A
MATTER OF GREAT IMPORTANCE TO SHELTON'S SHAREHOLDERS. IF THE MERGER AGREEMENT IS
APPROVED AND THE MERGER CONSUMMATED, EACH SHARE OF SHELTON STOCK WILL BE
CONVERTED INTO .92 OF A SHARE OF WEBSTER STOCK, PLUS CASH IN LIEU OF FRACTIONAL
SHARES, AND EACH SHELTON SHAREHOLDER'S SEPARATE EQUITY INTEREST IN SHELTON WILL
CEASE.
THE ISSUANCE OF UP TO 1,337,618 SHARES OF WEBSTER STOCK TO THE SHELTON
SHAREHOLDERS AS PART OF THE MERGER IS ALSO A MATTER OF GREAT IMPORTANCE TO
WEBSTER'S SHAREHOLDERS.
The Parties
Webster. Webster, a Delaware corporation, is the holding company of
First Federal Bank, a federal savings bank headquartered in Waterbury,
Connecticut ("First Federal"), and Bristol Savings Bank, a state chartered
savings bank headquartered in Bristol, Connecticut ("Bristol"). Deposits at
First Federal and Bristol are insured by the FDIC. Through First Federal and
Bristol, Webster is engaged primarily in the business of attracting deposits
from the general public and investing those funds in mortgage loans for the
purchase, construction and refinancing of one-to-four family homes. Webster also
provides commercial banking services to businesses in its primary market areas.
Webster currently serves customers from 39 banking offices located in New Haven,
Fairfield, Litchfield and Hartford Counties in Connecticut.
Prior to consummation of the Merger involving Shelton, Webster intends to
(i) convert Bristol into a federal savings bank under the name "Webster Bank"
and (ii) then merge First Federal into Webster Bank (the "Webster Bank Merger").
Webster Bank will be a federal savings bank, headquartered in Waterbury, with
its deposits insured by the Bank Insurance Fund ("BIF") of the FDIC. Before
giving effect to the Merger involving Shelton, approximately 59% of the deposits
at Webster Bank will be assessed at BIF premium rates and approximately 41%
assessed at premium rates applicable to the Savings Association Insurance Fund
("SAIF") of the FDIC. After giving effect to the Merger involving Shelton,
approximately 63% of the deposits at Webster Bank will be assessed at BIF
premium rates and approximately 37% assessed at SAIF premium rates.
At June 30, 1995, Webster had consolidated total assets of $2.9
billion, total deposits of $2.2 billion, and shareholders' equity of $149.6
million, or 5.17% of total assets. The Webster Stock is quoted on the Nasdaq
National Market under the symbol "WBST". The address of Webster's principal
executive offices is First Federal Plaza, Waterbury, CT 06702.
Webster, as a holding company, is regulated primarily by the OTS at the
federal level and by the Connecticut Commissioner. First Federal, as a federal
savings bank, is regulated primarily by the OTS and as to certain matters also
by the FDIC. Bristol, as a state-chartered savings bank, is regulated by the
Connecticut Commissioner and by the FDIC. Webster Bank, as a federal savings
bank, will be regulated primarily by the OTS and as to certain matters also by
the FDIC. See "THE MERGER -- The Parties" and "-- Structure."
Merger Sub. Merger Sub, a Delaware corporation, is a wholly-owned
subsidiary of Webster formed to facilitate the Merger. The separate corporate
existence of Merger Sub will terminate upon its merger into Shelton. See "THE
MERGER -- The Parties."
6
Shelton. Shelton, a Delaware corporation, is the holding company of
Shelton Savings Bank ("Shelton Bank"), a state-chartered savings bank
headquartered in Shelton, Connecticut. Deposits at Shelton Bank are insured by
the BIF of the FDIC. Through Shelton Bank, Shelton is engaged primarily in the
business of attracting deposits from the general public and investing those
funds primarily in residential mortgage loans. Shelton Bank also makes
commercial mortgage and consumer loans. Shelton Bank has six banking offices
located in Ansonia, Bethany, Oxford and Shelton. Its general market area is
eastern Fairfield County and southwestern New Haven County. Shelton Bank
provides a wide range of retail deposit and credit services, with special
emphasis on residential real estate lending.
At June 30, 1995, Shelton had consolidated total assets of $299.0
million, total deposits of $266.7 million and shareholders' equity of $20.0
million, or 6.7% of total assets. The address of Shelton's principal executive
office is 375 Bridgeport Avenue, Shelton, Connecticut 06484 and its telephone
number is (203) 944-2200.
Shelton, as a holding company, is regulated primarily by the OTS at the
federal level and by the Connecticut Commissioner. Shelton Bank, as a
state-chartered savings bank, is regulated by the Connecticut Commissioner and
by the FDIC. See "THE MERGER -- The Parties."
The Merger
General. The Merger Agreement provides for the acquisition of Shelton
by Webster through the merger of Shelton into Webster's subsidiary, Merger Sub,
with Shelton being the surviving corporation (the "Merger"). Immediately after
the Merger, Shelton will merge into Webster, with Webster being the surviving
holding company (the "Holding Company Merger"). Immediately after the Holding
Company Merger, Webster will cause Shelton Bank to be merged into Webster Bank,
as the surviving federal savings bank (the "Surviving Bank") (the "Shelton Bank
Merger"). The Surviving Bank will be headquartered in Waterbury, Connecticut,
and will be a FDIC/BIF insured federally chartered savings bank, with
approximately 63% of its deposit premiums assessed at BIF rates and
approximately 37% assessed at SAIF rates. Shelton and Webster expect that the
Merger will be consummated on November 1, 1995, or as soon as possible after the
receipt of all regulatory and shareholder approvals, and the expiration of all
regulatory waiting periods. If the Merger is not consummated by March 31, 1996,
the Merger Agreement will be terminated unless Shelton and Webster mutually
consent to an extension. See "THE MERGER - Structure."
Upon consummation of the Merger, each outstanding share of Shelton
Stock, except for shares held, directly or indirectly, by Shelton or Webster
(other than shares held in a fiduciary capacity ("Trust Account Shares") or in
respect of a debt previously contracted ("DPC Shares")), will be converted into
.92 of a share of Webster Stock, plus cash to be paid in lieu of fractional
shares. The Merger will not change the outstanding Webster Stock held by the
Webster shareholders.
Exchange Ratio. The Merger Agreement provides that upon consummation of
the Merger, each of the 1,362,566 outstanding shares of Shelton Stock, except
for shares held, directly or indirectly, by Shelton or Webster (other than Trust
Account Shares or DPC Shares), will be automatically converted into .92 share of
Webster Stock, plus cash to be paid in lieu of fractional shares (the "Exchange
Ratio"). This would involve the issuance of up to 1,285,469 shares of Webster
Stock to the Shelton shareholders. The Exchange Ratio is not subject to market
price adjustment. On September 14, 1995 (the most recent practicable date prior
to the printing of this Joint Proxy Statement/Prospectus), the closing sale
price of the Webster Stock on the Nasdaq National Market was $28.50 per share.
See "THE MERGER -- Exchange Ratio."
Shelton Stock Options. Under the Merger Agreement, shares of Shelton
Stock issued prior to consummation of the Merger upon the exercise of the 56,683
outstanding options held by directors, officers and other employees of Shelton
will also be converted into Webster Stock at the Exchange Ratio, which would
involve the issuance of up to 52,148 additional shares of Webster Stock as part
of the Merger. Any of these options that are not exercised prior to the
consummation of
7
the Merger will remain outstanding, but automatically become options to purchase
Webster Stock, with the exercise price and number of shares covered by each
option to be adjusted to reflect the Exchange Ratio. The duration and other
terms of these options will otherwise remain the same, except that the options
held by non-employee directors of Shelton will be modified to permit their
exercise until three months after termination of service as advisory directors
of the Surviving Bank rather than expiring three months after the Merger when
their service as directors of Shelton and Shelton Bank will cease. Options held
by officers and other employees of Shelton and Shelton Bank whose employment
does not continue with the Surviving Bank will terminate three months after such
employment ceases. See "THE MERGER -- Interests of Certain Persons in the
Merger."
Shelton Meeting. The Shelton Meeting will be held on October 31, 1995
at 10:00 a.m. at the Rapp's Paradise Inn, 557 Wakelee Terrace, Ansonia,
Connecticut, at which time the holders of record of the Shelton Stock at the
close of business on September 15, 1995 (the "Shelton Record Date") will be
asked to consider and vote upon: (i) a proposal to approve and adopt the Merger
Agreement; (ii) the election of three persons to serve as directors of Shelton
for a three-year term and until the election and qualification of their
successors; and (iii) such other matters as may properly be brought before the
Shelton Meeting. The affirmative vote of the holders of two-thirds of the
outstanding shares of Shelton Stock entitled to vote at the Shelton Meeting is
required to approve and adopt the Merger Agreement. In addition, the affirmative
vote of the holders of a plurality of the outstanding shares of Shelton Stock
entitled to vote at the Shelton Meeting is required to elect each nominee as a
director of Shelton.
All nine directors and executive officers of Shelton, who beneficially
own an aggregate of 249,385 shares of Shelton Stock (excluding stock options),
or approximately 18% of the outstanding Shelton Stock, as of the Shelton Record
Date, have entered into a stockholder agreement, dated June 20, 1995 (the
"Stockholder Agreement"), with Webster pursuant to which they have each agreed,
among other things, to vote their shares of Shelton Stock in favor of the
approval and adoption of the Merger Agreement and against any third party Merger
proposal. No consideration was paid to any of the directors or executive
officers of Shelton for entering into the Stockholder Agreement. Webster
required that the Stockholder Agreement with the directors and executive
officers of Shelton be executed as a condition to Webster entering into the
Merger Agreement. See "SHELTON MEETING." A similar agreement was executed
subsequently by family members of one of the directors in connection with a gift
of up to 2,500 shares by such director.
The Board of Directors of Shelton believes that the terms of the Merger
Agreement are fair to, and in the best interests of, Shelton and its
shareholders. The Board of Directors of Shelton unanimously approved the Merger
Agreement and recommends that holders of Shelton Stock vote FOR approval and
adoption of the Merger Agreement. For a discussion of the factors considered by
the Board of Directors in reaching its decision, see "THE MERGER -- Background
of the Merger" and "-- Recommendations of the Shelton Board of Directors and
Reasons for the Merger."
Webster Meeting. The Webster Meeting will be held on October 31, 1995
at 4:00 p.m. at the Waterbury Club, 30 Holmes Avenue, Waterbury, Connecticut
06710, at which time the holders of record of the Webster Stock at the close of
business on September 14, 1995 (the "Webster Record Date") will be asked to
consider and vote upon the issuance of up to 1,337,618 shares of Webster Stock
to the Shelton shareholders as part of the Merger. The Merger is conditioned on
the approval by the Webster shareholders of the issuance of these shares of
Webster Stock to the Shelton shareholders as part of the Merger, which approval
requires an affirmative vote of a majority of the votes cast by the Webster
shareholders entitled to vote at the Webster Meeting, and that a majority of the
outstanding Webster Stock be represented in person or by proxy thereat. The
Board of Directors of Webster unanimously recommends that its shareholders vote
FOR approval of the issuance of these shares to the Shelton shareholders as part
of the Merger.
Fairness Opinion. On June 20, 1995, Alex. Brown & Sons Incorporated
("Alex. Brown") delivered its written opinion to the Board of Directors of
Shelton to the effect that, as of such date,
8
the terms of the Merger Agreement, including the Exchange Ratio, are fair, from
a financial point of view, to Shelton and its shareholders. The receipt of this
opinion was a condition to Shelton's obligations under the Merger Agreement. The
opinion of Alex. Brown describes the matters considered and the scope of the
review undertaken in rendering such opinion. Alex. Brown's opinion and
presentation to the Shelton Board, together with a review by the Shelton Board
of the assumptions used by Alex. Brown, were among the factors considered by the
Shelton Board in reaching its determination to approve the Merger. On June 20,
1995, the date that Alex. Brown delivered its opinion, Webster Stock closed at
$24.125 per share. The Merger Agreement does not provide for an update by Alex.
Brown of its opinion. See "THE MERGER -- Opinion of Financial Advisor." A copy
of Alex. Brown's opinion letter dated June 20, 1995 is attached as Appendix A to
this Joint Proxy Statement/Prospectus and should be read by Shelton shareholders
in its entirety.
Webster consulted with its outside financial advisor, Merrill Lynch &
Co., as to certain issues concerning the Merger. However, Webster did not engage
any financial advisor to render a fairness opinion with respect to the terms of
the Merger. The Board of Directors of Webster relied primarily upon the
financial analysis, experience and recommendations of Webster's senior executive
officers in considering the Merger.
Regulatory Approvals. In order for the Merger to be consummated, the
approvals of the Connecticut Commissioner and the OTS must be obtained.
Applications are pending to obtain such approvals. See "THE MERGER -- Regulatory
Approvals."
Accounting Treatment. The Merger is intended to qualify as a "pooling
of interests" for accounting and financial reporting purposes. Consummation of
the Merger is conditioned upon the Merger so qualifying. See "THE MERGER --
Accounting Treatment."
Federal Income Tax Consequences. The Merger has been structured as a
tax-free exchange for federal income tax purposes as to the Webster Stock issued
to the Shelton shareholders. See "THE MERGER -- Certain Federal Income Tax
Consequences."
Lack of Appraisal Rights. Under Delaware law, holders of the Shelton
Stock will not be entitled to any dissenters' appraisal rights with respect to
the Merger. Delaware law exempts the Merger from dissenters' appraisal rights
since the Webster Stock is traded on the Nasdaq National Market. There are also
no dissenters' appraisal rights to the holders of Webster Stock. See "THE MERGER
- -- No Appraisal Rights."
Effective Time. The Merger will become effective on the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with applicable law or on such later date as the Certificate may
specify (the "Effective Time"). The Certificate will be filed (i) on the fifth
day after the last required regulatory approval is received and all applicable
waiting periods are expired, (ii) if elected by Webster, the last business day
of the month in which the date set forth in (i) above occurs, or (iii) such
other time as the parties may agree. Shelton and Webster expect that the Merger
will be consummated on November 1, 1995, or as soon as possible after the
receipt of all regulatory and shareholder approvals, and the expiration of all
regulatory waiting periods. If the Merger is not consummated by March 31, 1996,
the Merger Agreement will be terminated unless Shelton and Webster mutually
consent to an extension.
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time by the mutual consent of Shelton and Webster and by either
of them individually under certain specified circumstances, including if the
Merger is not consummated by March 31, 1996. See "THE MERGER -- Termination and
Amendment of Merger Agreement."
Exchange of Shelton Stock Certificates. Upon the Effective Time, each
holder of a certificate representing Shelton Stock issued and outstanding
immediately prior to the Merger will, upon the surrender thereof (duly endorsed,
if required) to Webster's transfer agent, Chemical Bank (the "Exchange Agent"),
be entitled to receive a certificate representing the number of whole shares
9
of Webster Stock into which such Shelton Stock will have been automatically
converted as part of the Merger. The Exchange Agent will mail a letter of
transmittal with instructions to all holders of record of Shelton Stock as of
the Effective Time for use in surrendering their certificates for Shelton Stock
in exchange for new certificates representing Webster Stock. Certificates should
not be surrendered by Shelton shareholders until the letter of transmittal and
instructions are received. See "THE MERGER -- Exchange Ratio."
Option Agreement. In consideration of Webster's entering into the
Merger Agreement (without other consideration or monetary payment), Webster and
Shelton entered into an option agreement, dated June 20, 1995 (the "Option
Agreement"), immediately after their execution of the Merger Agreement. The
Option Agreement may have the effect of discouraging the making of alternative
acquisition-related proposals, even if such proposal is for a higher price per
share for Shelton Stock than the price per share represented by the Exchange
Ratio, and increasing the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement.
If the Option becomes exercisable, Webster may purchase at a price of
$17.00 per share up to 267,324 shares of newly issued Shelton Stock, which is
equal to 19.9% of the currently outstanding Shelton Stock. The Option would
become exercisable primarily upon the occurrence of certain events that create
the potential for a third party to acquire Shelton. To the knowledge of Shelton,
no event that would permit exercise of the Option has occurred as of the date
hereof. If the Option becomes exercisable, Webster or any permitted transferee
of Webster may, under certain circumstances, require Shelton to repurchase the
Option (in lieu of its exercise) for a formula price or any shares of Shelton
Stock purchased upon exercise of the Option. See "THE MERGER -- Option
Agreement."
Arrangements with and Payments to Shelton Directors and Executive
Officers. The Merger Agreement provides for one Shelton director (jointly
selected by the Boards of Directors of Webster and Shelton) to be elected as a
director of the Surviving Bank upon the consummation of the Merger, with such
director to serve until the Surviving Bank's 1999 annual meeting. All directors
of Shelton will be invited to serve on an advisory board to the Surviving Bank
for a period of 40 months from the consummation of the Merger, with compensation
for such service of $650 as a monthly retainer and $600 per monthly advisory
board meeting attended. Such compensation will not be paid to the advisory
director also serving as a director of the Surviving Bank, or to an advisory
director also serving as an officer or consultant to the Surviving Bank or to J.
Allen Kosowsky. See "THE MERGER -- Interests of Certain Persons in the Merger."
Severance payments will be made upon the consummation of the Merger to
Kenneth E. Schaible of $450,978, to William C. Nimons of $336,176, and to Ralph
J. Rodriguez of $209,953 pursuant to their existing employment agreements, as
modified and limited by the Merger Agreement. These payments are based on three
times their respective average annual compensation that was paid by Shelton and
includible in their gross income for federal tax purposes for the calendar years
1990 through 1994, reduced by $1.00. Messrs. Schaible, Nimons and Rodriguez have
agreed to have their severance payments limited by Section 280G of the Internal
Revenue Code (the "Code"), whereas their existing employment agreements were not
so limited and would have resulted in their receiving larger severance benefits
than the severance payment amounts shown above. Upon consummation of the Merger,
the Surviving Bank has agreed to enter into an employment and consulting
agreement with Mr. Schaible, providing for his employment for a six month period
as a senior vice president to assist in the transition at a salary of $10,000
per month and for his service as a part-time consultant for three years
thereafter, with annual consulting fees at the rate of $50,000, $40,000 and
$30,000, respectively, for the first, second and third years. Upon such
consummation, the Surviving Bank also has agreed to enter into consulting
agreements with Messrs. Nimons and Rodriguez for an eighth-month period on a
part-time basis to assist in the transition, with fees at $7,500 per month to
Mr. Nimons and $5,000 per month to Mr. Rodriguez. See "THE MERGER -- Interests
of Certain Persons in the Merger."
10
Comparison of Shareholder Rights
If the Merger is consummated, the holders of Shelton Stock will become
holders of Webster Stock. There are certain differences between the rights of
Webster shareholders and Shelton shareholders. See "DESCRIPTION OF CAPITAL STOCK
AND COMPARISON OF SHAREHOLDER RIGHTS" for a summary of the differences between
the rights of holders of Shelton Stock and Webster Stock.
Market Prices of Common Stock
Both Webster Stock and Shelton Stock are traded on the Nasdaq National
Market. The symbol for Webster Stock is "WBST." The symbol for Shelton Stock is
"SSBC."
The following table sets forth per share closing prices of the Webster
Stock and the Shelton Stock on the Nasdaq National Market as of the dates
specified and the pro forma equivalent market value of the Webster Stock to be
issued for the Shelton Stock in the Merger. See "MARKET PRICES AND DIVIDENDS."
Shelton Stock
Pro Forma
Last Reported Sale Price Equivalent Market
------------------------------------------
Date Webster Stock Shelton Stock Value (a)
- ----- ------------- ------------- -----------------
December 31, 1992....................... $ 17.25 $ 11.43 $ 15.87
December 31, 1993....................... 22.875 15.50 21.05
December 30, 1994....................... 18.50 15.25 17.02
March 31, 1995.......................... 21.625 15.00 19.90
June 20, 1995 (b)....................... 24.125 17.50 22.20
September 14, 1995...................... 28.50 25.25 26.22
____________________
<FN>
(a) Calculated by multiplying the respective closing prices of the Webster Stock
by the .92 Exchange Ratio.
(b) Last trading date prior to announcement of the execution of the Merger
Agreement.
(c) The most recent practicable date prior to the printing of
this Joint Proxy Statement/Prospectus.
</FN>
Shareholders are advised to obtain current market quotations for
Webster Stock. It is expected that the market price of Webster Stock will
fluctuate between the date of this Joint Proxy Statement/Prospectus and the date
on which the Merger is consummated. Because the number of shares of Webster
Stock to be received by Shelton shareholders in the Merger is fixed, the value
of the shares of Webster Stock that the holders of Shelton Stock will receive in
the Merger may increase or decrease prior to or after consummation of the
Merger.
Comparative Per Share Data
Following are certain comparative historical per share data of Webster
and of Shelton, pro forma combined per share data of Webster and Shelton, and
equivalent pro forma per share data of Shelton. All historical and pro forma
data exclude Bristol prior to its acquisition by Webster on March 3, 1994 in a
transaction accounted for as a purchase. The financial data is based on, and
should be read in conjunction with, the historical consolidated financial
statements and the notes thereto of Webster and of Shelton and the pro forma
combined financial statements and the notes thereto appearing or incorporated by
reference elsewhere in this Joint Proxy Statement/Prospectus. All per share data
of Webster, Shelton and pro forma are presented on a fully diluted basis and
have been adjusted retroactively to give effect to stock dividends. Since
Webster's fiscal year ends December 31 and Shelton's fiscal year ends June 30,
the results for each of Shelton's fiscal years have been restated for comparison
purposes on a calendar year basis to correspond to Webster's fiscal year. The
pro forma data is not necessarily indicative of results which will be obtained
on a
11
combined basis. The pro forma data has not been adjusted to reflect any of
the improvements in operating efficiencies that Webster anticipates may occur in
the future due to the Merger.
At or for the Six
Months Ended
June 30, 1995 At or for the Year Ended December 31,
------------- -------------------------------------
1994 1993 1992
---- ---- ----
Net Income per fully diluted Common Share:
Webster -- historical $ 1.41 $ 2.60 $ 2.18(a) $ 1.07
Shelton -- historical .81 1.61 1.32(a) 1.29
Pro Forma Combined (b) 1.34 2.44 2.04 1.16
Shelton Equivalent Pro Forma (c) 1.23 2.24 1.88 1.07
Cash Dividends per Common Stock:
Webster -- historical .32 .52 .50 .48
Shelton -- historical .32 .55 .45 .42
Pro Forma Combined .32 .52 .50 .48
Shelton Equivalent Pro Forma (c) .29 .48 .46 .44
Book Value per Common Share:
Webster -- historical 24.08 22.02 21.69 18.47
Shelton -- historical 14.92 14.39 13.50 12.49
Pro Forma Combined (b) 22.33 20.59 19.90 21.29
Shelton Equivalent Pro Forma (c) 20.54 18.94 18.30 19.59
- ---------------------
<FN>
(a) Before cumulative effect of change in method of accounting for income taxes
adopted by Webster in January 1993 and by Shelton in July 1993 in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 109 ("FASB 109"), which resulted in an increase of
$.79 per share in Webster's net income for 1993 and an increase of $.21 per
share in Shelton's net income for 1993.
(b) Pro forma combined amounts shown above reflect the proposed acquisition of
Shelton on a pooling of interests basis for each period shown as if the
Merger had occurred at the beginning of such period.
(c) Shelton equivalent pro forma per share amounts are calculated by
multiplying the pro forma combined amounts by the .92 Exchange Ratio.
</FN>
12
Summary Financial and Other Data
The following tables present summary historical financial and other
data for Webster and Shelton as of the dates and for the periods indicated. This
summary data is based upon, and should be read in conjunction with, the
historical and pro forma consolidated financial statements and notes thereto of
Webster and Shelton and notes thereto appearing or incorporated by reference
elsewhere herein. As to historical information, see "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "SHELTON BANCORP, INC." appearing elsewhere herein
and "SHELTON CONSOLIDATED FINANCIAL STATEMENTS" in Appendix B, attached hereto.
For pro forma information, see "-- Comparative Per Share Data" above and "PRO
FORMA COMBINED FINANCIAL STATEMENTS" appearing elsewhere herein. The pro forma
amounts are not necessarily indicative of results which will be obtained on a
combined basis. All adjustments necessary for a fair presentation of financial
position and results of operations of interim periods have been included.
Selected Consolidated Financial Data - Webster Financial Condition
and Other Data - Webster
(Dollars in Thousands) At June 30, At December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------------- ---------- --------- --------- ---------- --------
Total assets.......................... $2,891,449 $2,761,464 $2,220,020 $2,114,757 $ 941,332 $ 758,063
Loans receivable, net................. 1,650,074 1,656,022 1,283,509 1,348,572 556,865 536,849
Mortgage-backed securities............ 823,462 617,031 505,657 346,719 222,034 112,581
Securities............................ 127,858 129,111 107,359 32,559 43,953 39,426
Segregated Assets, net................ 124,319 137,096 176,998 223,907 -- --
Core deposit intangible............... 5,095 5,457 11,829 15,463 1,402 --
Deposits.............................. 2,198,628 2,163,467 1,724,061 1,761,381 778,323 582,964
FHL Bank advances and other
borrowings......................... 459,307 410,675 308,952 190,664 68,072 88,591
Shareholders' equity.................. 149,574 137,941 108,873 113,444(a) 68,412 67,372
Number of full service offices........ 39 39 33 33 17 12
Operating Data - Webster At or for the Six Months
(Dollars in Thousands) Ended June 30, At or for the Year Ended December 31,
------------------------ ---------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- --------- --------- --------- --------- --------- ------
Interest income.................. $ 95,503 $ 80,774 $ 173,250 $ 137,807 $ 92,402 $ 72,927 $ 71,484
Interest expense................. 55,968 40,842 89,513 71,992 50,700 48,123 50,528
-------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 39,535 39,932 83,737 65,815 41,702 24,804 20,956
Provision for loan losses........ 630 1,545 2,900 4,447 4,336 3,665 10,189
Noninterest income............... 8,971 6,827 12,367 8,774 6,238 4,179 3,400
Noninterest expenses:
Core deposit intangible
writedown -- -- 5,000 -- -- -- --
OREO expenses and provisions,
net 2,380 3,173 6,852 4,556 5,661 4,777 386
Other noninterest expenses.... 32,056 28,981 61,210 43,889 27,710 16,329 14,756
-------- --------- --------- --------- --------- --------- ---------
Total noninterest expenses.. 34,436 32,154 73,062 48,445 33,371 21,106 15,142
-------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 13,440 13,060 20,142 21,697 10,233 4,212 (975)
Income taxes..................... 4,079 4,926 3,657 9,160 5,446 1,867 1,646
-------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative
change (b).................... 9,361 8,134 16,485 12,537 4,787 2,345 (2,621)
Cumulative change (b)............ -- -- -- 4,300 -- -- --
-------- --------- --------- --------- --------- --------- --------
Net income (loss)................ 9,361 8,134 16,485 16,837 4,787 2,345 (2,621)
Preferred stock dividends........ 648 937 1,716 2,653 581 -- --
-------- --------- --------- --------- --------- --------- --------
Net income (loss) available to
common stockholders.......... $ 8,713 $ 7,197 $ 14,769 $ 14,184 $ 4,206 $ 2,345 $ (2,621)
======== ========= ========= ========= ========= ========= ==========
Loan originations during period.. $152,612 $ 470,841 $ 678,624 $ 319,646 $ 207,055 $ 89,529 $ 88,040
Net increase (decrease) in deposits 35,161 478,185 439,406 (37,320) 983,058 95,359 42,043
Loans serviced for others........ 868,993 850,740 864,649 268,637 308,200 152,400 169,200
Mortgage loan servicing asset.... 3,838 4,575 4,180 992 1,305 20 --
See footnotes on the following page
13
Significant Statistical Data - Webster
At or for the Six Months
Ended June 30, At or for the Year Ended December 31,
---------------------- --------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- -------- -------- -------- -------- -------- ------
For The Period:
Interest rate spread............. 2.93% 3.20% 3.30% 3.10% 3.26% 2.71% 2.20%
Net yield on average earning assets 3.02% 3.29% 3.37% 3.22% 3.49% 3.13% 2.89%
Return on average assets before
cumulative change (b).......... 0.68% 0.63% 0.61% 0.59% 0.39% 0.28% (0.35)%
Return on average shareholders'
equity before cumulative change(b). 12.93% 13.03% 12.62% 11.18% 6.13% 3.44% (3.62)%
Return on average shareholders'
equity after cumulative change(b. 12.93% 13.03% 12.62% 15.02% 6.13% 3.44% (3.62)%
Average shareholders' equity
to average assets.............. 5.25% 4.82% 4.85% 5.27% 6.32% 8.22% 9.66%
Net income (loss) per common share
before cumulative change (b) (c):
Primary....................... $1.56 $1.53 $2.95 $2.50 $1.09 $0.62 $(0.64)
Fully Diluted................. $1.41 $1.32 $2.60 $2.18 $1.07 $0.62 $(0.64)
Net income (loss) per common share
after cumulative change (b) (c):
Primary....................... $1.56 $1.53 $2.95 $3.59 $1.09 $0.62 $(0.64)
Fully Diluted................. $1.41 $1.32 $2.60 $2.97 $1.07 $0.62 $(0.64)
Cash dividends paid per common
share (c)...................... $0.32 $0.26 $0.52 $0.50 $0.48 $0.48 $0.48
Dividend payout ratio on common
shares before cumulative change (b) 22.70% 19.70% 20.00% 16.84% 44.86% 77.42% --
Noninterest expenses to average assets 2.50% 2.48% 2.72% 2.28% 2.70% 2.55% 2.02%
Noninterest expenses (excluding OREO
expenses and provisions) to average
assets......................... 2.32% 2.24% 2.46% 2.06% 2.24% 1.97% 1.97%
Net interest income to noninterest
expenses....................... 1.15x 1.24x 1.15x 1.36x 1.25x 1.18x 1.38x
Ratio of earnings to fixed charges 1.96x 2.48x 1.80x 2.31x 2.48x 1.69x .89x
At End of Period:
Book value per common share (c).. $24.08 $21.57 $22.02 $21.69 $18.47 $18.19 $17.93
Tangible book value per common
share $23.15 $19.35 $21.03 $18.63 $14.40 $17.82 $17.93
Common shares outstanding
(000's) (c).................... 5,498 5,026 5,482 3,866 3,801 3,760 3,758
Shareholders' equity to total
assets 5.17% 4.78% 5.00% 4.90% 5.36% 7.26% 8.89%
Nonaccrual loans and OREO to total
assets......................... 1.92% 2.92% 2.14% 2.54% 2.96% 2.87% 2.84%
Allowance for loan losses to nonaccrual
loans.......................... 120.37% 123.71% 135.39% 137.39% 106.73% 94.53% 102.02%
Allowance for loan and OREO losses
to nonaccrual loans and OREO... 76.10% 67.09% 77.69% 79.14% 79.67% 40.86% 36.56%
<FN>
(a) Includes $18.25 million of Cumulative Perpetual Preferred Stock, Series A
(the "Series A Stock") of Webster outstanding at December 31, 1992, which
was redeemed on June 29, 1993 with a portion of the net proceeds from an
offering of its Senior Notes (as defined). Webster redeemed $11.75 million
of Series A Stock on December 30, 1992 with a portion of the net proceeds
from the sale of its Cumulative Convertible Preferred Stock, Series B (the
"Series B Stock"). The Series A Stock was issued by Webster in its assisted
acquisition of certain assets and liabilities of First Constitution Bank
(the "First Constitution Acquisition") from the FDIC.
(b) Refers to a cumulative change in the method of accounting for income taxes
adopted by Webster in January 1993 in accordance with FASB 109.
(c) All per share data of Webster and the number of its outstanding common
shares have been adjusted retroactively to give effect to a 10% stock
dividend in June 1993.
</FN>
14
Selected Consolidated Financial Data - Shelton
Financial Condition
and Other Data - Shelton
(Dollars in Thousands) At June 30,
-----------------------------------------------------------------
1995 1994 1993 1992 1991 90
--------- --------- --------- --------- --------- ---------
Total assets................................... $ 298,959 $ 276,003 $ 259,868 $ 248,611 $ 186,933 $ 170,955
Loans Receivable, Net.......................... 223,301 189,228 171,892 167,687 146,594 142,891
Mortgage-backed Securities..................... 13,905 15,991 10,177 7,916 581 656
Securities..................................... 40,725 50,608 57,727 52,900 24,358 14,745
Deposits....................................... 266,663 252,046 239,504 227,665 166,731 138,615
FHL Bank advances and other
borrowings.................................. 11,601 5,200 3,200 4,700 5,700 17,223
Shareholders' equity........................... 20,036 18,262 16,425 14,970 14,052 14,020
Number of full service offices................. 6 6 6 6 5 5
Operating Data - Shelton
(Dollars in Thousands) At or for the Year Ended June 30,
----------------------------------------------------------------
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- ------
Interest income................................ $ 18,896 $ 16,739 $ 17,616 $ 19,032 $ 16,999 $ 16,373
Interest expense............................... 10,061 8,476 9,519 11,807 11,514 11,673
------------------------------------------------------ ---------
Net interest income............................ 8,835 8,263 8,097 7,225 5,485 4,700
Provision for loan losses...................... 375 150 793 875 380 140
Noninterest income............................. 1,517 1,633 2,467 1,437 389 866
Noninterest expenses:
OREO expenses and provisions, net........... 58 257 579 413 472 27
Other noninterest expenses.................. 6,319 6,214 5,681 4,866 3,698 3,536
--------- --------- --------- --------- --------- ---------
Total noninterest expenses................ 6,377 6,471 6,260 5,279 4,170 3,563
--------- --------- --------- --------- --------- ---------
Income before income taxes
and cumulative change (a)................... 3,600 3,275 3,511 2,508 1,324 1,863
Income taxes................................... 1,384 1,300 1,591 1,297 554 797
--------- --------- --------- --------- --------- ---------
Net income before
cumulative change (a)....................... 2,216 1,975 1,920 1,211 770 1,066
Cumulative change (a).......................... -- 275 -- -- -- --
--------- --------- --------- --------- --------- --------
Net income available to common shareholders $ 2,216 $ 2,250 $ 1,920 $ 1,211 $ 770 $ 1,066
--------- --------- --------- --------- --------- --------
Loan originations during period................ $ 62,989 $ 74,529 $ 53,900 $ 73,674 $ 33,452 $ 32,759
Net increase in deposits............ 14,617 12,542 11,839 60,934 28,116 19,132
Loans serviced for others...................... 77,421 83,538 100,846 32,591 21,451 18,842
Mortgage loan servicing asset.................. 228 287 453 800 -- --
See footnotes on the following page
15
Significant Statistical Data - Shelton
At or for the Year Ended June 30,
-------------------------------------------------------
1995 1994 1993 1992 1991 1990
------ ------ ----- ----- ---- -----
For The Period:
Interest rate spread............................. 2.95% 3.15% 3.31% 3.19% 3.09% 2.56%
Net yield on average earning assets.............. 3.23% 3.33% 3.46% 3.36% 3.34% 3.01%
Return on average assets before cumulative
change (a) 0.76% 0.74% 0.76% 0.52% 0.44% 0.65%
Return on average shareholders' equity before
cumulative change (a).......................... 11.64% 11.36% 12.14% 8.29% 5.63% 7.57%
Return on average shareholders' equity
after cumulative change (a).................... 11.64% 12.94% 12.14% 8.29% 5.63% 7.57%
Average shareholders' equity to average assets... 6.57% 6.55% 6.26% 6.29% 7.76% 8.56%
Net income per common share before cumulative
change (a) (b):
Primary....................................... $1.63 $1.53 $1.52 $0.96 $0.60 $0.77
Fully Diluted................................. $1.62 $1.50 $1.52 $0.96 $0.60 $0.77
Net income per common share after cumulative
change (a) (b):
Primary....................................... $1.63 $1.74 $1.52 $0.96 $0.60 $0.77
Fully Diluted................................. $1.62 $1.71 $1.52 $0.96 $0.60 $0.77
Cash dividends paid per common share (b)......... $0.62 $0.49 $0.43 $0.40 $0.37 $0.33
Dividend payout ratio on common shares before
cumulative change (a).......................... 36.82% 31.95% 28.13% 41.54% 60.39% 40.99%
Noninterest expenses to average assets........... 2.20% 2.44% 2.48% 2.27% 2.37% 2.16%
Noninterest expenses (excluding OREO expenses and
provisions) to average assets.................. 2.18% 2.34% 2.25% 2.10% 2.10% 2.15%
Net interest income to noninterest expenses...... 1.39x 1.28x 1.29x 1.37x 1.32x 1.32x
Ratio of earnings to fixed charges............... 11.68x 11.43x 11.39x 5.65x 2.19x 1.95x
At End of Period:
Book value per common share (b).................. $14.92 $14.00 $12.89 $11.87 $11.14 $10.45
Common shares outstanding (000's) (b)............ 1,343 1,304 1,274 1,261 1,261 1,341
Shareholders' equity to total assets............. 6.70% 6.62% 6.32% 6.02% 7.52% 8.20%
Nonaccrual loans and OREO to total assets........ 1.02% 0.77% 1.31% 1.99% 2.55% 2.66%
Allowance for loan losses to nonaccrual loans.... 73.63% 116.36% 147.53% 37.98% 16.64% 29.96%
Allowance for loan and OREO losses to nonaccrual
loans and OREO................................. 48.17% 60.93% 44.00% 24.42% 10.87% 8.28%
______________
<FN>
(a) Refers to a cumulative change in the method of accounting for income taxes adopted by Shelton in July 1993 in
accordance with FASB 109.
(b) All per share data of Shelton and the number of its outstanding common
shares have been adjusted retroactively to give effect to stock dividends.
</FN>
16
Pro Forma Combined Financial Data
Financial Condition
and Other Data - Pro Forma
(Dollars in Thousands) At June 30, At December 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------------- ---------- --------- --------- ---------- ---------
Total assets.......................... $3,190,408 $3,053,851 $2,483,403 $2,367,722 $1,173,489 $ 934,823
Loans receivable, net................. 1,873,375 1,869,216 1,467,935 1,522,168 701,478 682,417
Mortgage-backed securities............ 837,367 631,718 518,435 346,719 235,114 113,204
Securities............................ 168,583 174,130 151,329 91,604 97,326 55,551
Segregated Assets, net................ 124,319 137,096 176,998 223,907 -- --
Core deposit intangible............... 5,095 5,457 11,829 15,463 1,402 --
Deposits.............................. 2,465,291 2,432,984 1,966,574 1,995,079 990,054 732,511
FHL Bank advances and other
borrowings......................... 470,908 414,375 312,152 193,864 73,772 101,791
Shareholders' equity.................. 167,550 156,807 126,273 129,195 83,067 81,021
Number of full service offices........ 45 45 39 39 22 17
Operating Data - Pro Forma At or for the Six Months
(Dollars in Thousands) Ended June 30, At or for the Year Ended December 31,
---------------------- ---------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- --------- --------- --------- --------- --------- ------
Interest income.................. $ 105,242 $ 89,187 $ 190,820 $ 154,589 $ 111,021 $ 90,901 $ 88,319
Interest expense................. 61,287 45,051 98,464 80,803 61,205 60,015 62,264
---------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 43,955 44,136 92,356 73,786 49,816 30,886 26,055
Provision for loan losses........ 840 1,635 3,155 4,597 5,574 4,285 10,379
Noninterest income............... 9,784 7,385 13,629 10,703 8,407 5,150 4,027
Noninterest expenses:
Core deposit intangible writedown -- -- 5,000 -- -- -- --
OREO expenses and provisions, net 2,399 3,231 6,949 5,085 6,135 5,089 734
Other noninterest expenses.... 35,322 32,064 67,346 49,912 33,018 20,550 18,340
---------- --------- --------- --------- --------- --------- ---------
Total noninterest expenses.. 37,721 35,295 79,295 54,997 39,153 25,639 19,074
---------- --------- --------- --------- --------- --------- ---------
Income before income taxes....... 15,178 14,591 23,535 24,895 13,496 6,112 629
Income taxes..................... 4,721 5,377 4,850 10,595 7,083 2,774 2,341
---------- --------- --------- --------- --------- --------- ---------
Net income (loss) before cumulative
change ....................... 10,457 9,214 18,685 14,300 6,413 3,338 (1,712)
Cumulative change................ -- -- -- 4,575 -- -- --
---------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ 10,457 9,214 18,685 18,875 6,413 3,338 (1,712)
Preferred stock dividends........ 648 937 1,716 2,653 581 -- --
---------- --------- --------- --------- --------- --------- ---------
Net income (loss) available to
common stockholders.......... $ 9,809 $ 8,277 $ 16,969 $ 16,222 $ 5,832 $ 3,338 $ (1,712)
========== ========= ========= ========= ========= ========= =========
Loan originations during period.. $ 178,629 $ 500,471 $ 745,618 $ 390,337 $ 283,926 $ 133,418 $ 118,301
Net increase (decrease) in deposits 51,446 491,687 466,410 (28,505) 1,005,025 157,543 59,485
Loans serviced for others........ 946,414 934,278 949,337 357,699 409,190 183,273 188,565
Mortgage loan servicing asset.... 4,066 4,889 4,427 1,337 2,008 20 --
17
Significant Statistical Data - Pro Forma
At or for the Six Months
Ended June 30, At or for the Year Ended December 31,
--------------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
For The Period:
Interest rate spread............. 2.93% 3.22% 3.29% 3.13% 3.32% 2.81% 2.35%
Net yield on average earning assets 3.01% 3.28% 3.34% 3.23% 3.50% 3.14% 2.94%
Return on average assets before
cumulative change.............. 0.68% 0.64% 0.67% 0.60% 0.43% 0.32% (0.19%)
Return on average shareholders'
equity before cumulative change 12.73% 12.90% 12.55% 11.11% 6.87% 4.06% (1.98%)
Return on average shareholders'
equity after cumulative change. 12.73% 12.90% 12.55% 14.66% 6.87% 4.06% (1.98%)
Average shareholders' equity to
average assets................. 5.38% 4.99% 5.37% 5.39% 6.29% 7.94% 9.38%
Net income (loss) per common share
before cumulative change:
Primary....................... $1.44 $1.40 $2.69 $2.25 $1.18 $0.68 ($0.33)
Fully Diluted................. $1.34 $1.25 $2.44 $2.04 $1.16 $0.68 ($0.33)
Net income (loss) per common share
after cumulative change:
Primary....................... $1.44 $1.40 $2.69 $3.13 $1.18 $0.68 ($0.33)
Fully Diluted................. $1.34 $1.25 $2.44 $2.73 $1.16 $0.68 ($0.33)
Cash dividends paid per common
share.......................... $0.32 $0.26 $0.52 $0.50 $0.48 $0.48 $0.48
Dividend payout ratio on common
shares before cumulative change 23.88% 17.60% 18.44% 16.85% 37.07% 63.24% --
Noninterest expenses to average
assets 2.47% 2.47% 2.86% 2.30% 2.64% 2.45% 2.03%
Noninterest expenses (excluding OREO
expenses and provisions) to average
assets......................... 2.31% 2.24% 2.61% 2.09% 2.23% 1.95% 1.95%
Net interest income to noninterest
expenses....................... 1.17x 1.25x 1.16x 1.34x 1.27x 1.22x 1.39x
Ratio of earnings to fixed charges 2.07x 2.61x 1.93x 2.50x 2.85x 1.90x 1.06x
At End of Period:
Book value per common share ..... $22.33 $20.34 $20.59 $19.90 $21.29 $16.88 $16.47
Tangible book value per common share $21.57 $18.55 $19.78 $17.58 $18.13 $16.60 $16.47
Common shares outstanding
(000's)........................ 6,734 6,225 6,780 5,088 4,895 3,760 3,758
Shareholders' equity to total
assets 5.25% 4.94% 5.13% 5.08% 5.46% 7.08% 8.67%
Nonaccrual loans and OREO to total
assets......................... 1.87% 2.85% 2.10% 2.41% 2.83% 2.83% 2.75%
Allowance for loan losses to nonaccrual
loans.......................... 118.22% 123.53% 134.04% 135.79% 108.71% 77.15% 79.20%
Allowance for loan and OREO losses
to nonaccrual loans and OREO... 74.82% 66.94% 77.01% 77.32% 76.95% 36.07% 32.18%
______
18
RISK FACTORS
Shelton shareholders should consider, among other matters, the
following factors in voting upon the Merger Agreement, consummation of which
will result in holders of Shelton Stock receiving shares of Webster Stock. These
factors should also be considered by Webster shareholders in voting on the
proposal to approve the issuance of Webster Stock to the Shelton shareholders as
part of the Merger.
Issuance of Webster Stock
Under the Merger Agreement, the consideration payable to the holders of
Shelton Stock consists of .92 of a share of Webster Stock for each outstanding
share of Shelton Stock, plus cash in lieu of a fractional share. See "THE MERGER
- -- Exchange Ratio" and "DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF
SHAREHOLDER RIGHTS." As of the Webster Record Date, there were 5,514,142
outstanding shares of Webster Stock held by approximately 2,108 holders of
record and 171,869 outstanding shares of Series B Stock of Webster, convertible
into 986,062 shares of Webster Stock, held by three holders of record. Based on
the Exchange Ratio, an aggregate of 1,285,469 additional shares of Webster Stock
would be issued to the Shelton shareholders as part of the Merger for the
1,397,249 shares of Shelton Stock outstanding as of the Shelton Record Date. As
of the Webster Record Date, such additional shares of Webster Stock to be issued
in the Merger would constitute 18.9% of the shares of Webster Stock to be
outstanding following consummation of the Merger or 16.5% if the Series B Stock
of Webster is converted into Webster Stock.
Legislative and General Regulatory Developments
General. Webster and Shelton are both subject to various regulatory
restrictions as savings and loan holding companies, primarily by the OTS and the
Connecticut Commissioner. First Federal is, and the Surviving Bank will be,
subject to extensive regulation by the OTS as their primary federal regulator
and to regulation as to certain matters by the FDIC. Shelton and Bristol, as
state-chartered savings banks, are subject to extensive regulation by the
Connecticut Commissioner and the FDIC. The OTS and FDIC have adopted numerous
regulations and undertaken other regulatory initiatives, and further regulations
and initiatives may occur. Future legislation or regulatory developments could
have an adverse effect on Webster or Shelton or the Surviving Bank.
Regulatory Capital. Regulatory capital requirements have increased
significantly in recent years and additional proposed increases are now pending.
Further increases are possible in future periods. Current regulatory capital
requirements for FDIC insured savings institutions include a Tier 1 leverage or
core capital to adjusted total assets ratio and a risk-based capital ratio in
which assets are weighted based upon their inherent risk. As of June 30, 1995,
First Federal, Bristol and Shelton Bank exceeded all currently applicable
regulatory capital requirements.
The OTS issued new regulations, effective September 1994, which added
an interest-rate risk component to the risk-based capital requirement. Under the
new OTS regulation, an institution is considered to have excess interest-rate
risk if, based upon a 200 basis point change in market interest rates, the
market value of an institution's capital changes by more than 2%. This new
requirement is not expected to have a material effect on the Surviving Bank's
ability to meet the risk-based capital requirement. The FDIC has issued new
regulations, effective September 1, 1995, pursuant to which the FDIC will
include, in their evaluation of a bank's capital adequacy, an assessment of the
exposure to declines in the economic value of a bank's capital due to changes in
interest rates.
At June 30, 1995, First Federal had a total risk-based capital ratio of
13.09%, a Tier 1 risk-based capital ratio of 11.85% and a Tier 1 leverage
capital ratio of 5.40%, thereby meeting the applicable regulatory capital ratios
required for classification as a well-capitalized bank for federal deposit
insurance assessment rate purposes. At June 30, 1995, Bristol had a total
risk-based capital ratio of 13.95%, a Tier 1 risk-based ratio of 12.67% and a
Tier 1 leverage capital
19
ratio of 8.22%, which ratios met the applicable regulatory capital ratios
required for classification as a well capitalized bank for such rate purposes.
At June 30, 1995, Shelton had a total risk-based capital ratio of 12.55%, a Tier
1 risk-based capital ratio of 11.63% and a Tier 1 leveraged capital ratio of
6.20%, which ratios met the applicable regulatory capital ratios required for
classification as a well capitalized bank for such rate purposes. On a combined
basis, the Surviving Bank at June 30, 1995, would have had a total risk-based
capital ratio of 13.20%, a Tier 1 risk-based capital ratio of 11.99% and a Tier
1 leveraged capital ratio of 5.88%, which ratios would have met the applicable
regulatory capital ratios required for classification as a well capitalized bank
for such rate purposes. There can be no assurance that applicable regulatory
capital requirements will be met in the future.
Deposit Insurance Premiums. Deposits at First Federal, Bristol and
Shelton are, and the Surviving Bank will be, insured by the SAIF and/or the BIF
of the FDIC, subject to applicable limitations. Deposit insurance premiums to
both the BIF and the SAIF have been identical since both funds were created in
August 1989, with an eight cent differential between the premiums paid by
well-capitalized institutions and the premiums paid by under-capitalized
institutions (23 cents to 31 cents per $100 of assessable deposits). Such
premiums have been set to facilitate each fund achieving its designated reserve
ratios. However, as each fund achieves its designated reserve ratio, the FDIC
has the authority to lower the premium assessments for that fund to a rate that
would be sufficient to maintain the designated reserve ratio.
On August 8, 1995, the Board of Directors of the FDIC determined that
the BIF had achieved its designated reserve ratio and approved lower BIF-premium
rates for deposit insurance by the BIF for all but the riskiest institutions.
Under the new BIF deposit insurance premium schedule, deposit insurance premiums
will range from a low of four cents for well capitalized institutions to 31
cents per $100 of assessable deposits for under-capitalized institutions.
Because the SAIF remains significantly below its designated reserve ratio,
insurance premiums for SAIF-deposits were not affected by the recent FDIC
action.
The current financial condition of the SAIF has caused the FDIC and the
United States Department of the Treasury to propose a recapitalization plan for
the SAIF fund. Under the FDIC/Treasury proposal, SAIF members would be subject
to a special one-time assessment of approximately 85 cents to 90 cents per $100
of assessable SAIF deposits. After the special assessment, it is anticipated
that the assessment schedule for the recapitalized-SAIF would be similar to the
assessment schedule for BIF (four cents to 31 cents per $100 of assessable
deposits). Implementation of the SAIF recapitalization plan requires enactment
of legislation.
The Surviving Bank will be a FDIC/BIF insured federally chartered
savings bank, with approximately 63% of its deposit premiums assessed at
BIF-rates and approximately 37% assessed at SAIF rates. As a well-capitalized
institution, it is anticipated that the Surviving Bank will pay insurance
premiums to the BIF of four cents per $100 of assessable BIF deposits. The
Surviving Bank also will pay insurance premiums to the SAIF of 23 cents per $100
of assessable SAIF deposits. If the SAIF recapitalization plan is enacted, the
Surviving Bank also would pay a special assessment on its assessable SAIF
deposits.
Sources of Funds for Cash Dividends; Stock Repurchases
The principal sources of funds for Webster's payments of cash dividends
on the Webster Stock and its Series B Stock, as well as for the payment of
principal and interest on its $40 million principal amount of 8 3/4% Senior
Notes due 2000 (the "Senior Notes"), are dividends from First Federal and
Bristol. The principal source of funds for Shelton's payment of cash dividends
on the Shelton Stock are dividends from Shelton Bank. In addition, at June 30,
1995 at the holding company level, Webster had liquid investments of $21.3
million and Shelton had cash on hand of $1.1 million. The Surviving Bank will be
subject to certain regulatory requirements that affect its ability to pay cash
dividends to Webster. The Series B Stock ranks prior to the Webster Stock as to
payment of cash dividends. In addition, the Senior Notes contain certain
covenants that affect
20
Webster's ability to pay cash dividends on the Webster Stock. See "DESCRIPTION
OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS." See "MARKET PRICES AND
DIVIDENDS."
On July 24, 1995, Webster announced a stock repurchase program for up
to 10% of its currently outstanding shares of Webster Stock, which program will
reduce Webster's liquid investments. Such program is being suspended during the
solicitation of proxies for the Shareholders' Meetings.
Effect of Interest Rate Fluctuations
Both Webster's and Shelton's consolidated results of operations depend
to a large extent on the level of their 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 their cost of
funds to increase faster than the yield on their interest-bearing assets, net
interest income will be reduced. Webster and Shelton measure interest-rate risk
using gap and duration, and in the case of Webster only simulation analyses. The
differences between an institution's interest-rate sensitive assets and its
interest-rate sensitive liabilities at a point in time is its gap position. A
negative gap indicates that cumulative interest-rate sensitive liabilities
exceed cumulative interest-rate sensitive assets for that period. A positive gap
indicates that cumulative interest-rate sensitive assets exceed cumulative
interest-rate sensitive liabilities. Based on Webster's and Shelton's
asset-liability mix at June 30, 1995, the managements of Webster and Shelton
both believe their one year gap positions of positive 7% and positive 15%,
respectively, represent a reasonable amount of interest-rate risk at this point
in time. As a result of the merger, the Surviving Bank's one year gap position
is expected to represent a reasonable amount of interest-rate risk. Based on
Webster's asset/liability mix at June 30, 1995, management's simulation analysis
of the effects of changing interest rates projects that an instantaneous +/-200
basis point fluctuation in interest rates would decrease the market value of
portfolio equity by approximately 20% at June 30, 1995. Based on the Surviving
Bank's expected asset/liability mix, it is not anticipated that an instantaneous
+/-200 basis point fluctuation in interest rates would decrease the market value
of portfolio equity by more than approximately 20%.
While Webster and Shelton use various monitors of interest rate risk,
they are unable to predict future fluctuations in interest rates or the specific
impact thereof. The market values of most of their financial assets are
sensitive to fluctuations in market interest rates. Fixed-rate investments,
mortgage-backed securities and mortgage loans decline in value as interest rates
rise. Although Webster's investment and mortgage-backed securities portfolios
have grown in recent quarters, most of the growth has been in adjustable-rate
securities or short-term securities with maturities of less than two years.
Changes in interest rates also can affect the amount of loans originated by
Webster and Shelton, as well as the value of their loans and other
interest-earning assets and their ability to realize gains on the sale of such
assets and liabilities. The extent to which borrowers prepay loans also is
affected by prevailing interest rates. When interest rates increase, borrowers
are less likely to prepay their loans; whereas, when interest rates decrease,
borrowers are more likely to prepay loans. Funds generated by prepayments may be
invested at a lower rate. Prepayments may adversely affect the value of mortgage
loans, the levels of such assets that are retained in their portfolio, net
interest income and loan servicing income. Similarly, prepayments on
mortgage-backed securities also may affect adversely the value of these
securities and interest income. Increases in interest rates may 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
deposits. If the cost of deposits increase at a rate that is greater than the
increase in yields on interest-earning assets the interest-rate spread is
negatively affected. Changes in the asset and liability mix also affects the
interest-rate spread.
21
SHELTON MEETING
Matters to be Considered at the Shelton Meeting
This Joint Proxy Statement/Prospectus is first being mailed to the
holders of Shelton Stock on or about September 18, 1995 and is accompanied by a
proxy card furnished in connection with the solicitation of proxies by the
Shelton Board of Directors for use at the Shelton Meeting. The Shelton Meeting
is scheduled to be held on October 31, 1995 at 10:00 a.m., at Rapp's Paradise
Inn, 557 Wakelee Terrace, Ansonia, Connecticut. At the Shelton Meeting, the
holders of Shelton Stock will consider and vote upon: (i) the approval of the
Merger Agreement; (ii) the election of three persons to serve as directors of
Shelton for a three-year term and until the election and qualification of their
successors; and (iii) such other matters as may properly be brought before the
Shelton Meeting and at any adjournments or postponements thereof.
Record Date and Voting
The Board of Directors of Shelton has fixed the close of business on
September 15, 1995 as the Shelton Record Date for the determination of the
holders of Shelton Stock entitled to receive notice of and to vote at the
Shelton Meeting. Only holders of record of Shelton Stock at the close of
business on that date will be entitled to vote at the Shelton Meeting or at any
adjournment thereof. At the close of business on the Shelton Record Date, there
were 1,397,249 shares of Shelton Stock outstanding and entitled to vote at the
Shelton Meeting, held by approximately 909 shareholders of record.
Each holder of Shelton Stock on the Shelton Record Date will be
entitled to one vote for each share held of record upon each matter properly
submitted at the Shelton Meeting or at any adjournment thereof. The presence, in
person or by proxy, of at least one-third of the outstanding shares of Shelton
Stock entitled to be voted at the Shelton Meeting is necessary to constitute a
quorum. Abstentions will be included in the calculation of the number of votes
represented at the Shelton Meeting for purposes of determining whether a quorum
has been achieved. Broker non-votes will not be counted for purposes of
determining whether a quorum is present. Since approval of the Merger Agreement
requires the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Shelton Stock entitled to be voted at the Special Meeting,
abstentions and broker non-votes will have the same effect as a vote against the
Merger Agreement. In addition, the affirmative vote of the holders of a
plurality of the outstanding shares of Shelton Stock entitled to vote at the
Shelton Meeting is required to elect each nominee as a director of Shelton.
Abstentions and broker non-votes will have the same effect as a negative vote in
the election of nominees as directors.
If a quorum is not obtained, or if fewer shares of Shelton Stock are
voted in favor of approval of the Merger Agreement than the number required for
approval, it is expected that the Shelton Meeting will be adjourned for the
purpose of allowing additional time for obtaining additional proxies. In such
event, proxies will be voted to approve an adjournment, except for proxies as to
which instructions have been given to vote against the Merger Agreement. The
holders of a majority of the shares represented in person or by proxy at the
Shelton Meeting would be required to approve any adjournment of the Shelton
Meeting.
If the enclosed proxy card is properly executed and received by Shelton
in time to be voted at the Shelton Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval of the
Merger Agreement and the election of the nominees as directors.
The Board of Directors of Shelton is not aware of any matters other
than the proposal to approve the Merger Agreement (or a proposal to adjourn the
Shelton Meeting) and the election of the nominees as directors that may be
properly brought before the Shelton Meeting. If any other matters properly come
before the Shelton Meeting, the persons named in the accompanying proxy
22
will vote the shares represented by all properly executed proxies on such
matters in such manner as shall be determined by the proxies therefor.
SHELTON SHAREHOLDERS SHOULD NOT FORWARD ANY COMMON STOCK CERTIFICATES
WITH THEIR PROXY CARDS. IF THE MERGER IS CONSUMMATED, STOCK CERTIFICATES SHOULD
BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF
TRANSMITTAL WHICH WOULD BE SENT TO SHELTON SHAREHOLDERS BY THE EXCHANGE AGENT
PROMPTLY AFTER THE EFFECTIVE TIME.
Vote Required; Revocability of Proxies
The affirmative vote of at least two-thirds of the outstanding shares
of Shelton Stock entitled to be voted at the Shelton Meeting is required in
order to approve and adopt the Merger Agreement.
THE REQUIRED VOTE OF THE SHELTON SHAREHOLDERS ON THE MERGER AGREEMENT
IS BASED UPON THE TOTAL NUMBER OF OUTSTANDING SHARES OF SHELTON STOCK AND NOT
UPON THE NUMBER OF SHARES WHICH ARE ACTUALLY VOTED. ACCORDINGLY, THE FAILURE TO
SUBMIT A PROXY CARD OR TO VOTE IN PERSON AT THE SHELTON MEETING OR THE
ABSTENTION FROM VOTING BY A SHAREHOLDER WILL HAVE THE SAME EFFECT AS A "NO" VOTE
WITH RESPECT TO THE MERGER AGREEMENT.
The affirmative vote of the holders of a plurality of the outstanding
shares of Shelton Stock entitled to vote at the Shelton Meeting is required to
elect each nominee as a director of Shelton. The failure to submit a proxy card
or to vote in person at the Shelton Meeting or the abstention from voting by a
shareholder will have the same effect as a negative vote in the election of
nominees as directors.
All nine directors and executive officers of Shelton who beneficially
owned an aggregate of 249,385 shares of Shelton Stock, or 18% of the outstanding
shares of Shelton Stock, as of the Shelton Record Date, have entered into an
agreement with Webster pursuant to which they have each agreed, among other
things, to vote their shares of Shelton Stock in favor of the approval and
adoption of the Merger Agreement. No consideration was paid to any of the
directors for entering into the Stockholder Agreement. Webster required that the
Stockholder Agreement with the directors and executive officers of Shelton be
executed as a condition to Webster entering into the Merger Agreement. A similar
agreement was executed subsequently by family members of one of the directors in
connection with a gift of up to 2,500 shares by such director.
The presence of a shareholder at the Shelton Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder may revoke
a proxy at any time prior to its exercise by (i) delivering to William C.
Nimons, Executive Vice President and Secretary, Shelton Bancorp, Inc., 375
Bridgeport Avenue, Shelton, Connecticut 06484, a written notice of revocation
prior to the Shelton Meeting, (ii) delivering to Shelton prior to the Shelton
Meeting a duly executed proxy bearing a later date, or (iii) attending the
Shelton Meeting and voting in person.
The obligations of Shelton and Webster to consummate the Merger
Agreement are subject, among other things, to the condition that the
shareholders of Shelton approve and adopt the Merger Agreement. Approval of
Webster's shareholders for the issuance of the Webster Stock as part of the
Merger is also required. See "THE MERGER -- Conditions to the Merger."
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of Shelton may solicit proxies for the Shelton Meeting from shareholders
personally or by telephone or telegram without additional remuneration therefor.
In addition, Shelton has retained Morrow and Company, a
23
proxy soliciting firm, to assist in such solicitation. The fee to be paid to
such firm is not expected to exceed $6,000 plus reasonable out-of-pocket
expenses. Shelton will also make arrangements with brokerage firms and other
custodians, nominees and fiduciaries to send proxy materials to their principals
and will reimburse such parties for their expenses in doing so. The cost of
soliciting proxies will be paid by Shelton.
WEBSTER MEETING
Matters to be Considered at the Webster Meeting
This Joint Proxy Statement/Prospectus is first being mailed to the
holders of Webster Stock on or about September 18, 1995 and is accompanied by a
proxy card furnished in connection with the solicitation of proxies by the
Webster Board of Directors for use at the Webster Meeting. The Webster Meeting
is scheduled to be held on October 31, 1995 at 4:00 p.m., at the Waterbury Club,
30 Holmes Avenue, Waterbury, Connecticut 06710. At the Webster Meeting, the
holders of Webster Stock will consider and vote upon a proposal to approve the
issuance of up to 1,337,618 shares of Webster Stock to the Shelton shareholders
as part of the Merger.
Record Date and Voting
The Board of Directors of Webster has fixed the close of business on
September 14, 1995 as the Webster Record Date for the determination of the
holders of Webster Stock entitled to receive notice of and to vote at the
Webster Meeting. Only holders of record of Webster Stock at the close of
business on that date will be entitled to vote at the Webster Meeting or at any
adjournment thereof. At the close of business on the Webster Record Date, there
were 5,514,142 shares of Webster Stock outstanding and entitled to vote at the
Webster Meeting, held by approximately 2,108 shareholders of record.
Each holder of Webster Stock on the Webster Record Date will be
entitled to one vote for each share held of record upon each matter properly
submitted at the Webster Meeting or at any adjournment thereof. The presence, in
person or by proxy, of at least one-third of the outstanding shares of Webster
Stock entitled to be voted at the Webster Meeting is necessary to constitute a
quorum. Abstentions will be included in the calculation of the number of votes
represented at the Webster Meeting for purposes of determining whether a quorum
has been achieved. Broker non-votes will not be counted for purposes of
determining whether a quorum is present.
The Merger is conditioned on the approval by the Webster shareholders
of the issuance of up to 1,337,618 shares of Webster Stock to the Shelton
shareholders as part of the Merger, which approval requires an affirmative vote
of a majority of the votes cast by the Webster shareholders entitled to vote at
the Webster Meeting, and that a majority of the outstanding Webster Stock be
represented in person or by proxy thereat. Approval by the Webster shareholders
for the issuance of the additional shares is necessary under the rules of the
Nasdaq National Market. Of the 1,337,618 shares of Webster Stock proposed to be
issued as part of the Merger, 1,285,469 shares of Webster Stock would be issued
to the holders of the 1,397,249 currently outstanding shares of Shelton Stock
and 52,148 shares of Webster Stock with respect to the exercise of the 56,683
currently outstanding options to purchase Shelton Stock held by directors,
officers and employees of Shelton.
If a quorum is not obtained, or if fewer shares of Webster Stock are
voted in favor of approval of the proposal authorizing the issuance of the
additional Webster Stock to the Shelton shareholders as part of the Merger than
the number required for approval, it is expected that the Webster Meeting will
be adjourned for the purpose of allowing additional time for obtaining
additional proxies. In such event, proxies will be voted to approve an
adjournment, except for proxies as to which instructions have been given to vote
against the proposal authorizing the issuance of the additional Webster Stock as
part of the Merger. The holders of a majority of the shares represented in
person or by proxy at the Webster Meeting would be required to approve any
adjournment of the Webster Meeting.
24
If the enclosed proxy card is properly executed and received by Webster
in time to be voted at the Webster Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval of the
proposal authorizing the issuance of the additional Webster Stock to the Shelton
shareholders as part of the Merger.
The Board of Directors of Webster is not aware of any matters other
than the proposal to approve the issuance of the additional shares of Webster
Stock to the Shelton shareholders as part of the Merger (or a proposal to
adjourn the Webster Meeting) that may be properly brought before the Webster
Meeting. If any other matters properly come before the Webster Meeting, the
persons named in the accompanying proxy will vote the shares represented by all
properly executed proxies on such matters in such manner as shall be determined
by a majority of the Board of Directors of Webster.
Vote Required; Revocability of Proxies
The affirmative vote of a majority of the votes cast by the Webster
shareholders at the Webster Meeting is required to approve the issuance of the
additional shares of Webster Stock to the Shelton shareholders as part of the
Merger, provided that a majority of the outstanding Webster Stock is represented
in person or by proxy at the Webster Meeting.
The presence of a shareholder at the Webster Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder may revoke
a proxy at any time prior to its exercise by (i) delivering to Lee A. Gagnon,
Executive Vice President and Secretary, Webster Financial Corporation, First
Federal Plaza, Waterbury, Connecticut 06702, a written notice of revocation
prior to the Webster Meeting, (ii) delivering to Webster prior to the Webster
Meeting a duly executed proxy bearing a later date, or (iii) attending the
Webster Meeting and voting in person.
The obligations of Webster and Shelton to consummate the Merger are
subject, among other things, to the condition that the shareholders of Webster
approve the issuance of additional shares of Webster Stock to the Shelton
shareholders as part of the Merger Agreement. Approval by Shelton's shareholders
of the Merger Agreement by at least two-thirds of the outstanding Shelton Stock
entitled to vote at the Shelton Meeting is also required. See "THE MERGER --
Conditions to the Merger."
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of Webster may solicit proxies for the Webster Meeting from shareholders
personally or by telephone or telegram without additional remuneration therefor.
In addition, Webster has retained Morrow & Co., Inc., a proxy soliciting firm,
to assist in such solicitation. The fee to be paid to such firm is not expected
to exceed $4,500 plus reasonable out-of-pocket expenses. Webster will also make
arrangements with brokerage firms and other custodians, nominees and fiduciaries
to send proxy materials to their principals and will reimburse such parties for
their expenses in doing so. The cost of soliciting proxies will be paid by
Webster.
ITEM 1 - THE MERGER
The information under this Section is qualified in its entirety by
reference to the full text of the Merger Agreement, including each of the
exhibits thereto, the material features of which are described in this Joint
Proxy Statement/Prospectus, and copies of which will be provided promptly
without charge upon written or oral request addressed to Lee A. Gagnon,
Executive Vice President, Chief Operating Officer and Secretary, Webster
Financial Corporation, First Federal Plaza, Waterbury, CT 06702, telephone (203)
753-2921.
25
The Parties
The Merger Agreement was entered into among Webster, Merger Sub and
Shelton. The Merger Agreement provides for a merger of Merger Sub, a
wholly-owned subsidiary of Webster, into Shelton (the "Merger").
Webster. Webster is a Delaware corporation and the holding company of
First Federal and Bristol, which are Webster's wholly-owned savings bank
subsidiaries and are respectively headquartered in Waterbury and Bristol,
Connecticut. Prior to the Merger with Shelton, Webster will cause (i) Bristol to
be converted from a state to a federal charter under the name "Webster Bank" and
(ii) First Federal to be merged into Webster Bank, which will be headquartered
in Waterbury, Connecticut. Webster Bank's deposits will be insured by the
FDIC/BIF, with approximately 63% of such deposits assessed at BIF premium rates
and approximately 37% of such deposits assessed at SAIF premium rates. Webster,
as a holding company, is regulated primarily by the OTS at the federal level and
by the Connecticut Commissioner.
Through First Federal and Bristol, Webster currently serves customers
from 39 banking offices located in New Haven, Fairfield, Litchfield and Hartford
Counties in Connecticut. At June 30, 1995, Webster had total consolidated assets
of $2.9 billion, deposits of $2.2 billion, and shareholders' equity of $149.6
million. At June 30, 1995, Webster had gross loans receivable (excluding
Segregated Assets) of $1.7 billion, which included $1.38 billion in residential
mortgage loans, $112.2 million in commercial real estate loans, $54.1 million in
commercial and industrial loans and $143.3 million in consumer loans (consisting
primarily of home equity loans). At June 30, 1995, nonaccrual loans and other
real estate owned ("OREO") were $55.6 million. At that date, Webster's allowance
for loan losses was $42.0 million, or 120.4% of nonaccrual loans, and its total
allowance for loan and OREO losses was $43.2 million, or 76.1% of nonaccrual
loans and OREO. Additional information regarding Webster is incorporated herein
by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Webster is continuing to evaluate additional acquisition opportunities
as to other banking institutions and banking offices within Connecticut. Such
acquisitions, if any, may result in the issuance of additional shares of Webster
Stock and could be dilutive on a net income or book value per share basis. No
agreement or letter of intent has been executed by Webster as to any additional
acquisition.
Merger Sub. Merger Sub, a Delaware corporation, is a wholly-owned
subsidiary of Webster formed to facilitate the Merger. The separate corporate
existence of Merger Sub will terminate upon its merger into Shelton.
Shelton. Shelton, a Delaware corporation, is the holding company of
Shelton Bank, a state-chartered savings bank headquartered in Shelton,
Connecticut. Deposits at Shelton Bank are FDIC/BIF insured. Shelton, as a
holding company, is regulated primarily by the OTS at the federal level and by
the Connecticut Commissioner.
Shelton Bank is regulated by the Connecticut Commissioner and by the FDIC.
Shelton through Shelton Bank currently serves customers from six
banking offices located in Ansonia, Bethany, Oxford and Shelton. Its general
market area is eastern Fairfield and southwestern New Haven County. At June 30,
1995, Shelton had total consolidated assets of $299.0 million, deposits of
$266.7 million, and shareholders' equity of $20.0 million. At June 30, 1995,
Shelton had gross loans receivable of $224.8 million, which included $192.8
million in residential mortgage loans, $6.5 million in commercial real estate
loans and $25.6 million in home equity credit lines and consumer installment
loans. At June 30, 1995, nonaccrual loans and OREO were $3.0 million. At that
date, Shelton's allowance for loan losses was $1.5 million, or 74% of nonaccrual
loans, and its total allowance for loan losses and OREO was $1.5 million, or 48%
of nonaccrual loans and OREO. Through its Trust Department, Shelton Bank also
currently provides investment advisory and management services to retail and
corporate
26
customers. At June 30, 1995, assets managed by its Trust Department totaled
$15.3 million. See "SHELTON BANCORP, INC."
Shelton and Webster expect that the Merger will be consummated on
November 1, 1995, or as soon as possible after the receipt of all regulatory and
shareholder approvals, and the expiration of all regulatory waiting periods. If
the Merger is not consummated by March 31, 1996, the Merger Agreement will be
terminated unless Shelton and Webster mutually consent to an extension.
Background of the Merger
In October 1993, Shelton engaged Alex. Brown as its financial adviser
in order to provide it with general strategic and business planning
consultation.
In July 1994, Shelton entered into a further agreement with Alex. Brown
pursuant to which it engaged Alex. Brown (i) to conduct a thorough due diligence
review of Shelton in order to render a preliminary valuation of Shelton, (ii) to
identify potential candidates for an acquisition transaction of Shelton, and
(iii) to prepare information packages with respect to Shelton for distribution,
after approval of its Board of Directors, to certain potential acquirors of
Shelton in order to obtain indications of interest from such parties as to a
potential acquisition of Shelton.
In August 1994, after review of the preliminary valuation report of
Alex. Brown, Shelton's Board of Directors authorized Alex. Brown to prepare
information packages and distribute the packages to certain national banks based
in New York, super-regional banks based in New England and large and medium
sized savings banks based in Connecticut identified by Alex. Brown as
potentially interested in engaging in an acquisition transaction of Shelton.
After a series of discussions with a number of financial institutions, two
preliminary acquisition proposals were received from potential acquirors, one
from Webster and one from another Connecticut based savings bank. At a Board
meeting held on October 31, 1994, the Board authorized Shelton's senior
management and Alex. Brown to proceed with preliminary discussions with such
institutions.
As a result of further preliminary discussions and deliberations of the
Board, it was determined that Shelton should proceed to negotiate with Webster
rather than the other institution due to a number of relative factors including:
pricing, as the consideration in both proposals was stock, past and projected
future financial performance of the institutions and the compatibility of the
market, operations and management of the institutions. Further discussions with
Webster resulted in draft acquisition documents, substantially on the same terms
as the Merger and Option Agreements being prepared, which were considered by
Shelton's Board of Directors at a meeting on November 17, 1994. At its meeting
on November 21, 1994, Shelton's Board determined on the basis of a number of
considerations, primarily the then-declining market price of the Webster Stock,
not to accept Webster's acquisition proposal. At that time, Shelton's Board also
concluded to discontinue all acquisition negotiations.
Subsequent to November 21, 1994, informal discussions were held
periodically by the senior managements of Shelton and Webster. Additional
proposals by Webster, substantially upon the same terms as the initial proposal,
were considered by Shelton's Board of Directors on several occasions, but were
not then approved primarily due to the market price of Webster Stock. At its
June 20, 1995 meeting, the Shelton Board unanimously approved a further
acquisition proposal from Webster and authorized the execution of the Merger
Agreement. The market price of Webster Stock had increased from $18.25 per share
on November 21, 1994 to $24.125 per share on June 20, 1995.
Recommendation of the Shelton Board of Directors and Reasons for the Merger
The Shelton Board of Directors has unanimously approved the Merger
Agreement and has determined that the Merger is fair to, and in the best
interests of, Shelton and its shareholders. The Shelton Board therefore
unanimously recommends that holders of Shelton Stock vote to approve and
27
adopt the Merger Agreement. The Shelton Board believes that the Merger will
enable holders of Shelton Stock to realize increased value due to the premium
over market price, net income per share of Shelton Stock and book value per
share of Shelton Stock, as provided by the Exchange Ratio. The Board also
believes that the Merger may enable Shelton's shareholders to participate in
opportunities for appreciation of Webster Stock. See " - Background of the
Merger" above and " - Opinion of Financial Adviser" below. In reaching its
decision to approve the Merger Agreement, the Shelton Board consulted with its
legal advisor, Schatz & Schatz, Ribicoff & Kotkin, regarding the legal terms of
the Merger and the Shelton Board's fiduciary obligations in its consideration of
the proposed Merger, its financial advisor, Alex. Brown, regarding the financial
aspects and fairness of the proposed Merger, as well as with management of
Shelton, and, without assigning any relative or specific weight, considered the
following material factors, both from a short-term and long-term prospective.
(i) The Shelton Board's familiarity with, and review of,
Shelton's business, financial condition, results of
operations and prospects, including, but not limited
to, its potential growth, development, productivity
and profitability and the business risks associated
therewith;
(ii) The current and prospective environment in which
Shelton operates, including national and local
economic conditions, the highly competitive
environment for financial institutions generally, the
increased regulatory burden on financial
institutions, and the trend toward consolidation in
the financial services industry;
(iii) The potential appreciation in market and book value
of Shelton Stock on both the short- and long-term
basis, as a stand alone entity;
(iv) Information concerning the business, financial
condition, results of operations, asset quality and
prospects of Webster, including the long-term growth
potential of Webster Stock, the future growth
prospects of Webster, combined with Shelton,
following the proposed Merger and the potential
synergies expected from the Merger and the business
risks associated therewith;
(v) The potential for appreciation and growth for the
market and book value of Webster Stock, following the
proposed Merger;
(vi) The oral presentation and opinion of Alex. Brown that
the Exchange Ratio is fair to the holders of helton
Stock from a financial point of view (see
" - Opinion of Financial Adviser" below);
(vii) The financial and other significant terms of the
proposed Merger including the terms and conditions of
the Merger Agreement and the Option Agreement;
(viii) The benefits of the business combination with a
larger bank holding company, such as Webster, with a
significant presence in southwestern Connecticut;
(ix) The expectation that Webster will continue to provide
quality service to the communities and customers
served by Shelton and Webster's capacity, as a larger
institution with a larger capital base, to provide a
wider range of services, enhanced access to credit,
and greater convenience to such customers and
communities;
28
(x) The compatibility with respect to businesses and
management philosophies of Shelton and Webster and
Webster's strong commitment to the Connecticut com-
munities it serves;
(xi) The fact that Shelton had conducted an extensive
solicitation of interest from other likely potential
acquirors of Shelton; and
(xii) Shelton's belief that further delay in approving the
Merger might result in Webster's withdrawing its
acquisition proposal.
Purpose and Effects of the Merger
The purpose of the Merger Agreement is to enable Webster to acquire the
assets and business of Shelton and Shelton Bank. After the Merger, Shelton
Bank's banking offices will be operated as banking offices of Webster Bank.
The Merger will result in an expansion of Webster's primary market area
to include Shelton Bank's six banking offices in Ansonia, Bethany, Oxford and
Shelton, Connecticut. These towns are contiguous to Webster's current market
area. These six banking offices will broaden Webster's existing operations in
Fairfield and New Haven Counties in Connecticut where Webster currently has 26
banking offices. Webster expects to achieve reductions in the current operating
expenses of Shelton upon the consolidation of Shelton Bank's operations into
Webster Bank, which would cause certain reductions in administrative and support
personnel. Upon consummation of the Merger, all of the issued and outstanding
shares of Shelton Stock will automatically be converted into Webster Stock based
on the .92 Exchange Ratio.
Structure
The Merger will be effected by merging Merger Sub, a wholly-owned
subsidiary of Webster formed to facilitate the Merger, into Shelton, as the
surviving corporation. Immediately after the consummation of the Merger, Shelton
(which will then be a wholly-owned subsidiary of Webster) will be merged into
Webster, as the surviving corporation (the "Holding Company Merger").
Immediately after the Holding Company Merger, Shelton Bank (which will then be a
wholly-owned subsidiary of Webster) will be merged into Webster Bank (the
"Shelton Bank Merger"). Webster Bank will be the renamed federal savings bank
resulting from the conversion of Bristol from a state to a federal charter
followed by a merger of First Federal into such converted federal savings bank.
Notwithstanding any provision of the Merger Agreement to the contrary,
Webster may elect to modify the structure of the transactions described above so
long as (i) there are no material adverse federal income tax consequences to
Shelton and its shareholders as a result of such modification; (ii) the
consideration to be paid to holders of Shelton Stock under the Merger Agreement
is not thereby changed or reduced in amount; and (iii) such modification will
not be reasonably likely to delay materially or jeopardize receipt of any
required regulatory approvals.
In addition, if it appears reasonably likely that regulatory approvals
for the conversion of Bristol to federal charter will not be received on a
timely basis, Webster and Shelton will make appropriate modifications to the
structure of the Bank Merger in order to obtain required regulatory approvals.
Exchange Ratio
As provided in the Merger Agreement, upon consummation of the Merger
each outstanding share of Shelton Stock will be automatically converted into .92
of a share of Webster Stock, plus cash in lieu of fractional shares. The
Exchange Ratio is fixed and not subject to market price adjustment. The Exchange
Ratio was negotiated by the respective managements of Webster and Shelton in
consultation with their financial advisors and Boards of Directors.
29
Based on the last sale price of Webster Stock of $28.50 per share on
September 14, 1995 (the most recent practicable date prior to the printing of
this Joint Proxy Statement/Prospectus), as reported on the Nasdaq National
Market, and the Exchange Ratio, Shelton shareholders would receive $26.22 in
market price of Webster Stock per Shelton share (i.e., $28.50 times .92). The
market price of the Webster Stock at the time the Merger is consummated may vary
materially from the $28.50 per share market price on September 14, 1995, and
such variance would not alter the Exchange Ratio or Webster's or Shelton's
obligation to consummate the Merger. Based on the 1,397,249 currently
outstanding shares of Shelton Stock, Webster would issue up to 1,285,469 shares
of Webster Stock to the Shelton shareholders in the Merger, plus cash in lieu of
fractional shares. These numbers do not reflect additional shares of Webster
Stock to be issued in the event of the exercise prior to the Merger of the
56,683 existing stock options held by directors, officers and employees of
Shelton.
Certificates for fractions of shares of Webster Stock will not be
issued. Under the Merger Agreement, in lieu of a fractional share of Webster
Stock, each holder of Shelton Stock will be entitled to receive an amount of
cash equal to the fraction of a share of Webster Stock to which such holder
would otherwise be entitled, multiplied by the average of the high and low sales
prices of the Webster Stock, as reported on the Nasdaq National Market, during
the five trading days immediately preceding the first trading day before the
Effective Time. Following consummation of the Merger, no holder of Shelton Stock
would be entitled to any dividends or other rights in respect of any such
fraction. The aggregate number of shares of Webster Stock, along with any cash
to be paid in lieu of a fraction of a share of Webster Stock, payable to each
holder of Shelton Stock, is hereinafter referred to as the "Purchase Price."
The conversion of Shelton Stock held by shareholders of Shelton into
shares of Webster Stock at the Exchange Ratio will occur automatically upon the
Merger. Pursuant to the Merger Agreement, on or after the Effective Time,
Webster will cause the Exchange Agent to make payment of the Purchase Price to
each holder of shares of Shelton Stock who surrenders the certificate or
certificates representing such shares to the Exchange Agent, together with a
duly executed letter of transmittal.
The Exchange Agent will mail a letter of transmittal as soon as
practicable after the Effective Time to each holder of record of Shelton Stock
immediately prior to the Effective Time. Webster will cause to be deposited with
the Exchange Agent a certificate representing the aggregate number of shares of
Webster Stock to be issued to Shelton shareholders, along with the cash to be
paid in lieu of fractions of shares. The Exchange Agent shall not be obligated,
however, to deliver or cause to be delivered the Purchase Price to which any
holder of Shelton Stock would otherwise be entitled as a result of the Merger
until such holder surrenders the certificate or certificates representing the
shares of Shelton Stock for exchange, or, if not available, an appropriate
affidavit of loss and indemnity agreement and/or a bond as may be required by
Webster. Likewise, no dividends or distributions with respect to Webster Stock
payable to any such holder will be paid until such holder surrenders the
certificate or certificates representing the shares of Shelton Stock for
exchange. No interest will be paid or accrued to Shelton's shareholders on
amounts received by the Exchange Agent from Webster.
If any payment for shares of Shelton Stock is to be made in a name
other than that in which the certificate for such shares surrendered in exchange
is registered, it shall be a condition of such payment that the certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall either (i) pay to the
Exchange Agent any transfer or other taxes required by reason of the payment to
a person other than the registered holder of the certificate surrendered or (ii)
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable. After the close of business on the business day immediately
preceding the Effective Time, there shall be no transfers on the stock transfer
books of Shelton of the shares of Shelton Stock outstanding immediately prior to
the Effective Time and any such shares presented to the Exchange Agent after the
Effective Time shall be canceled and exchanged for the Purchase Price.
30
Any portion of the Purchase Price made available to the Exchange Agent
that remains unclaimed by Shelton's shareholders one year after the Effective
Time will be returned to Webster, upon demand, and any shareholder of Shelton
who has not exchanged shares of Shelton Stock for the Purchase Price in
accordance with the Merger Agreement prior to that time shall thereafter look
only to Webster for payment of the Purchase Price in respect of such shares,
subject to applicable escheat laws. Notwithstanding the foregoing, Webster will
not be liable to any shareholder of Shelton for any amount paid to a public
official pursuant to applicable abandoned property laws.
STOCK CERTIFICATES FOR SHARES OF SHELTON STOCK SHOULD NOT BE RETURNED
TO SHELTON WITH THE PROXY CARD AND SHOULD ONLY BE FORWARDED TO THE EXCHANGE
AGENT AFTER RECEIPT OF THE LETTER OF TRANSMITTAL.
Regulatory Approvals
Consummation of the Merger is conditioned upon the receipt of required
regulatory approvals of the OTS and the Connecticut Commissioner for the
transactions contemplated thereby, including the holding company application to
approve the acquisition of Shelton by Webster through the Merger and the merger
application for the Merger of Shelton Bank into Webster Bank.
Prior to the Merger with Shelton, Webster currently intends to convert
Bristol from a state to a federal charter, rename Bristol as "Webster Bank" as
part of the charter conversion, and merge First Federal into Webster Bank.
Approval of the OTS and the Connecticut Commissioner would be required for the
charter conversion of Bristol to a federal savings bank charter under the
Webster Bank name. Approval of the OTS would be required for the merger of First
Federal into Webster Bank following such charter conversion. The Merger is also
conditioned upon the receipt of such regulatory approvals.
Alternatively, under the Merger Agreement, Webster could elect to merge
Shelton Bank into First Federal or to convert Shelton Bank to federal charter
and then merge First Federal into Shelton, as a federal savings bank which then
would be renamed either "First Federal Bank" or "Webster Bank" or such other
name as Webster selects. Webster currently anticipates retaining the structure
described in the previous paragraph. However, if either of the alternatives
described in this paragraph are elected, various regulatory approvals of the OTS
and the Connecticut Commissioner would be required. However, no additional
approvals of the shareholders of Shelton or Webster would be required for these
alternatives.
No other regulatory approvals are required to effect the Merger
pursuant to the Merger Agreement. Applications for the required regulatory
approvals are pending. Neither Shelton nor Webster is aware of any reasons why
all required regulatory approvals should not be obtained. See "-- Conditions to
the Merger."
Conditions to the Merger
The respective obligations of the parties under the Merger Agreement to
consummate the Merger are subject to the satisfaction of the following
conditions: (i) the Merger Agreement shall not have been terminated on or before
the Effective Time; (ii) all required regulatory approvals shall have been
obtained and no such regulatory approvals shall contain any condition that
Webster reasonably deems to be burdensome; (iii) all regulatory approvals shall
remain in full force and effect and all conditions and requirements set forth in
any regulatory approvals that are required to be satisfied on or before the
Effective Time, including the expiration of any waiting periods, shall have been
satisfied or properly waived; (iv) the Merger Agreement shall have been approved
by an affirmative vote of not less than two-thirds of the votes entitled to vote
by the Shelton shareholders at the Shelton Meeting; (v) approval by a majority
vote of the votes cast by the Webster shareholders at the Webster Meeting for
the issuance of the additional shares of Webster Stock to the Shelton
31
shareholders as part of the Merger, with a majority of the outstanding Webster
Stock being represented thereat; (vi) the Registration Statement shall remain
effective and shall not be subject to a stop order or any threatened stop order;
(vii) the Webster Stock (including the shares to be issued in the Merger) shall
continue to be approved for quotation on the Nasdaq National Market; (viii) no
injunction preventing consummation of the Merger shall be in effect and such
consummation continues to be legal; and (ix) a favorable tax opinion from
Webster's counsel shall have been received by Webster and Shelton (which opinion
was received).
The obligations of Webster under the Merger Agreement to consummate the
Merger are subject further to the satisfaction of certain conditions, including
the following: (i) the representations and warranties of Shelton contained in
the Merger Agreement shall be true, correct and complete in all material
respects when made on the date of the Merger Agreement and as of the Effective
Time, except where such failure or failures would not have a material adverse
effect on Shelton; (ii) Shelton shall have obtained the consent or approval of
other persons required under any lease or other agreement to consummate the
Merger; (iii) Webster shall have received a favorable accounting opinion from
KPMG Peat Marwick LLP as to the Merger being accounted for as a pooling of
interests, and such opinion shall not have been withdrawn (such opinion was
received); (iv) a specified legal opinion of Shelton's counsel and comfort
letter of Shelton's independent public accountants shall have been received by
Webster; (v) no proceeding initiated by any governmental entity seeking an
injunction shall be pending; and (vi) Shelton shall have in all material
respects performed all covenants and agreements contained in the Merger
Agreement to be performed by Shelton on or prior to the Effective Time.
The obligations of Shelton under the Merger Agreement to consummate the
Merger are subject further to the satisfaction of certain conditions, including
the following: (i) the representations and warranties of Webster contained in
the Merger Agreement shall be true, correct and complete in all material
respects when made on the date of the Merger Agreement and on the Effective
Time, except where such failure or failures would not have a material adverse
effect on Webster; (ii) Webster shall have obtained the consent or approval of
other persons required under any lease or other agreement to consummate the
Merger; (iii) no proceeding initiated by any governmental entity seeking an
injunction shall be pending; (iv) a specified legal opinion of Webster's counsel
shall have been received by Shelton; and (v) Webster shall have in all material
respects performed all covenants and agreements contained in the Merger
Agreement to be performed by Webster on or prior to the Effective Time.
Conduct of Business Pending the Merger
The Merger Agreement contains various restrictions on the operations of
Shelton while the Merger is pending. In general, the Merger Agreement obligates
Shelton to continue to carry on its business in the ordinary course consistent
with past practices and consistent with prudent banking practices, with certain
specific limitations on Shelton's lending activities and restrictions on
additional branching without Webster's consent. Shelton also is prohibited by
the Merger Agreement from increasing the dividends on the Shelton Stock,
splitting or combining any Shelton Stock, repurchasing any Shelton Stock, or
issuing any equity securities, other than the issuance of additional shares of
Shelton Stock upon exercise of existing stock options held by directors,
officers and employees of Shelton or the Option held by Webster. Also, under the
terms of the Merger Agreement, Shelton may not amend its certificate of
incorporation or by-laws, nor may it change its method of accounting in effect
at June 30, 1994, except as required by changes in regulatory or generally
accepted accounting principles. In addition, the Merger Agreement restricts
Shelton from increasing employee or director benefit arrangements or
compensation other than annual increases for employees in the ordinary course
consistent with past practices, granting any stock options, entering into any
new employment or severance agreements, or after December 31, 1994, paying any
bonuses above specified amounts and consistent with past practices to Messrs.
Schaible, Nimons or Rodriguez.
32
Third Party Proposals
The Merger Agreement provides generally that Shelton shall not, nor
shall Shelton authorize or permit any of its directors, officers, employees or
agents, to solicit, initiate or encourage any inquiries relating to, or the
making of, any third party takeover proposal. There is a similar prohibition as
to any negotiation, discussion, recommendation or endorsement of any third party
takeover proposal, or providing third parties with any nonpublic information
relating to such inquiry or proposal, except to the extent legally required
based on a written opinion of Shelton's counsel. The Merger Agreement does not
preclude the Board of Directors of Shelton from communicating information about
any such takeover proposal to shareholders of Shelton based on a written opinion
of Shelton's counsel that such communication is required by applicable law.
Expenses; Breakup Fee
The Merger Agreement generally provides for Webster and Shelton to pay
their own expenses relating to the Merger, with an equal sharing of the costs of
printing and mailing this Joint Proxy Statement/Prospectus and Webster paying
the SEC filing fees for registering the Webster Stock to be issued in the
Merger. However, if the Merger Agreement is terminated by Webster or Shelton as
a result of a material breach of a representation, warranty, covenant or other
agreement contained therein by the other party, or if Webster terminates the
Merger Agreement by reason of Shelton failing to hold the Shelton Meeting on a
timely basis, or failing to recommend to its shareholders approval of the Merger
Agreement, or to oppose any third party takeover proposal, or as a result of
Shelton violating the restrictions on third party takeover proposals (without
regard to the fiduciary duty exception), the Merger Agreement provides for the
non-terminating party to pay all expenses of the terminating party up to
$250,000, plus a breakup fee of $500,000, unless the material breach is not
willful or intentional, in which case the breakup fee would be $250,000. If the
Merger Agreement is terminated by either Webster or Shelton as a result of the
non-terminating party failing to obtain the approval of its shareholders
necessary to consummate the Merger, the terminating party is entitled to have
all of its expenses up to $250,000 paid by the non-terminating party. In the
event of a failure by the Shelton shareholders to approve the Merger Agreement,
Shelton would also be obligated to pay a breakup fee of $250,000 (which would be
a credit against any other breakup fee owed by Shelton) to Webster, if prior to
the Shelton Meeting any third party takeover proposal has become publicly known
or if Shelton agrees to any third party takeover proposal within six months of
the termination of the Merger Agreement. The events described above that would
permit Webster to terminate the Merger Agreement would also constitute
preliminary purchase events under the Option. See "THE MERGER -- Option
Agreement."
Opinion of Financial Advisor
Pursuant to a letter agreement dated July 27, 1994 (the "Alex. Brown
Agreement"), Shelton retained Alex. Brown as its financial advisor in connection
with the proposed sale of Shelton. Alex. Brown is a recognized investment
banking firm and as a customary part of its investment banking business is
engaged in the valuation of securities of financial institutions in connection
with acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for various other
purposes. As specialists in the securities of bank and savings bank entities,
Alex. Brown has experience in, and knowledge of, the valuation of financial
institutions. Shelton selected Alex. Brown on the basis of its abilities to
evaluate the fairness of the transaction from a financial point of view, its
qualifications, its previous experience, and its reputation in the banking and
investment communities. Alex. Brown has acted exclusively for Shelton in
rendering its fairness opinion and will receive a fee from Shelton for its
services.
On June 20, 1995, Alex. Brown delivered its written opinion to the
Board of Directors of Shelton that, as of the date of such opinion, the terms of
the Merger Agreement were fair from a financial point of view to Shelton and its
shareholders. Receipt of such opinion was a condition to Shelton's obligation to
proceed with the Merger. On June 20, 1995, the date that Alex. Brown delivered
its opinion, Webster Stock closed at $24.125 per share. No updating of such
opinion is
33
provided for under the Merger Agreement. Shelton's Board of Directors did not
provide Alex. Brown with instructions or limitations for the purpose of
preparing such opinion. The full text of Alex. Brown's fairness opinion is
attached to this Joint Proxy Statement/Prospectus as Appendix A and is
incorporated herein by reference. Shelton shareholders are urged to read Alex.
Brown's fairness opinion in its entirety for a description of the procedures
followed, assumptions made, matters considered, and qualifications and
limitations on the review undertaken by Alex. Brown in connection therewith. The
following summary of Alex. Brown's fairness opinion is qualified in its entirety
by reference to the full text. The per share Exchange Ratio was determined by
negotiation between Webster and Shelton and was not determined by Alex. Brown.
In rendering its opinion, Alex. Brown (a) reviewed the Merger
Agreement, certain publicly available business and financial information
concerning Shelton and Webster, and certain internal financial analyses and
forecasts for Shelton prepared by Shelton's management; (b) held discussions
with members of Shelton senior management regarding the past and current
business operations, financial conditions, and future prospects of Shelton; (c)
reviewed the reported price and trading activity information for Shelton and
Webster and similar information for certain other companies the securities of
which are publicly traded; (d) reviewed the financial terms of certain recent
business combinations which Alex. Brown deemed comparable in whole or in part;
and (e) performed such other studies and analyses as Alex. Brown deemed
appropriate.
Alex. Brown relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its fairness opinion. With respect to the
financial forecasts reviewed by Alex. Brown in rendering its fairness opinion,
Alex. Brown assumed that such financial forecasts were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of Shelton as to the future financial performance of Shelton. Alex.
Brown did not make an independent evaluation or appraisals of the assets or
liabilities of Shelton nor was it furnished with any such appraisals.
The summary set forth below does not purport to be a complete
description of the analyses performed by Alex. Brown in this regard. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors discussed below, Alex. Brown believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. Not
one of the analyses performed by Alex. Brown was assigned a greater significance
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond Shelton or Webster's control. The analyses
performed by Alex. Brown are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
or to reflect the prices at which businesses actually may be sold.
Analysis of Selected Publicly Traded Companies. In preparing the Alex.
Brown's fairness opinion, Alex. Brown using publicly available information,
compared selected financial information, including stated book value, tangible
book value, recent earnings, capital ratios and profitability levels, for
Shelton and a group of selected thrift institutions.
The group was comprised of 13 thrift institutions located in the New
England region of the United States (i.e., Connecticut, Vermont, New Hampshire
and Massachusetts) that (i) possessed an asset base between $150 million and
$550 million, and (ii) were judged to have similar business characteristics and
financial performance as Shelton (the "Selected Group"). The Selected Group
included (in alphabetical order) Abington Savings Bank, Central Co-Operative
Bank, Community Bankshares, Inc., Grove Bank, Home Port Bancorp, Inc., Lawrence
Savings Bank, Marble Financial Corp., MidConn Bank, New Hampshire Thrift
Bancshares, NewMil Bancorp, Inc., People's Savings
34
Financial Corporation, Portsmouth Bank Shares, and Sandwich Co-Operative Bank.
As of June 16, 1995, the relative multiples of the market price of Shelton and
the mean market price of the Selected Group was: to stated book value, 119.6%
for Shelton and 91.1% for the Selected Group; to tangible book value, 119.6% for
Shelton and 95.8% for the Selected Group; to "latest 12 months" earnings, 10.4%
for Shelton and 11.1% for the Selected Group; and to total assets, 7.92% for
Shelton and 9.01% for the Selected Group. It should be noted that Shelton's
equity-to-assets ratio of 6.6% and first quarter 1995 annualized return on
average assets ("ROAA") of 0.78% were each below the 9.5% mean equity level and
the 0.91% first quarter 1995 annualized ROAA of the Selected Group. Alex. Brown
concluded that the market price of Shelton Stock relative to certain financial
performance indicators was within the range for the Selected Group.
Relative Contribution. Alex. Brown analyzed the balance sheet and
income statement contribution of Shelton to the combined company on a pro forma
basis for the quarter ended March 31, 1995. Of the combined company, Shelton
would have represented between 9.6% and 13.6% in the balance sheet categories of
assets, loans, deposits and stated equity as of March 31, 1995. On a pro forma
basis, Shelton would have contributed 10.4% and 14.5% of the combined company's
net interest income and net income available to common shareholders,
respectively, for the quarter ended March 31, 1995. Based on the Exchange Ratio,
Shelton shareholders would own 19.3% of the combined company on a fully diluted
basis. Alex. Brown concluded that the pro forma ownership position of Shelton
shareholders was fair given the range of Shelton's balance sheet and income
statement contribution to the combined company.
Analysis of Comparable Acquisition Transactions. In preparing the Alex.
Brown fairness opinion, Alex. Brown analyzed certain comparable merger and
acquisition transactions for thrift institutions based upon the acquisition
price relative to stated book value, latest 12 months earnings per share, total
assets, premium to core deposits, and premium to common stock price (one month
prior to the acquisition announcement). The analysis included a review and
comparison of the mean multiples represented by a sample of recently effected or
pending thrift acquisitions nationwide having a transaction value between $15
million and $75 million, which were announced since January 1, 1994 ("National
Transactions" - a total of 57 transactions), as segmented into: (a) recently
announced thrift acquisitions in New England - four transactions ("Regional
Transactions"); (b) transactions in which the selling thrift institution
generated a return on average assets between 0.50% and 1.00% in the year of the
announced acquisition - 21 transactions ("Profitability-Segmented
Transactions"); and (c) transactions in which the selling thrift institution had
a ratio of non-performing assets-to-total assets between 0.50% and 1.20% in the
year of the announced transaction ("Asset Quality-Segmented Transactions").
Based on the closing stock price of Webster Stock on June 20, 1995
($24.125), the value to be issued in Webster Stock pursuant to the Merger
Agreement was $22.20 per Shelton share (the "Comparison Value"). The relative
multiples implied by the Comparison Value and each of the comparable acquisition
transaction segmentations are provided in the following table:
LTM
Earnings Total Core Deposit Market
Transaction Group Book Value Per Share Assets Premiums Premium
- -----------------
COMPARISON VALUE 151.7% 13.2x 10.7% 4.6% 38.7%
Comparable Acquisition Transactions:
Nationwide Transactions - Mean 153.8% 16.4x 15.1% 9.0% 31.9%
Nationwide Transactions - High 254.4% 34.9x 30.6% 13.7% 92.3%
Nationwide Transactions - Low 100.5% 3.7x 6.2% 0.0% 2.1%
Regional Transactions 149.1% 18.2x 18.3% 7.4% 53.7%
Profitability-Segmented
Transactions 151.8% 15.8% 15.3% 6.9% 31.2%
Asset Quality-Segmented
Transactions 149.1% 14.1% 12.1% 4.8% 26.9%
35
Alex. Brown concluded from its review of comparable acquisition transactions, as
segmented, that the relative multiples implied by the Comparison Value was in
the range of such segmentations.
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Alex. Brown estimated the present value of the future dividend streams that
Shelton could produce over a five year period if Shelton performed in accordance
with management's forecasts and certain variants thereof. Alex. Brown also
estimated the terminal value for Shelton's common equity after the five year
period by applying book value (145-160%) acquisition multiples currently being
received by thrift institutions deemed comparable to Shelton. The range of
multiples used reflected a variety of scenarios regarding the growth and
profitability prospects of Shelton. The dividend streams and terminal values
were then discounted to present values using discount rates ranging from 14.0%
to 16.0% which reflect different assumptions regarding the required rates of
returns of holders or prospective buyers of Shelton Stock. Alex. Brown concluded
from its discounted cash flow analysis that the consideration indicated by the
Exchange Ratio on the date that the Merger Agreement was executed compared
favorably to the present value of the future cash streams that Shelton could
produce over a five-year period.
Analysis Factors and Assumptions. No company or transaction used in the
above analysis as a comparison is identical to Shelton, Webster or the
contemplated transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which they are compared. The result from any particular
analysis described should not be taken to be Alex. Brown's view of the actual
value of Shelton or Webster. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given more weight than any other analysis.
In performing its analyses, Alex. Brown made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Shelton and Webster. The
analyses performed by Alex. Brown are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, Alex. Brown's fairness opinion
and associated presentation to the Shelton's Board of Directors are just one of
many factors taken into consideration by the Shelton Board.
Compensation of Financial Advisor. Pursuant to the Alex. Brown
Agreement, Shelton agreed to pay Alex. Brown a fee of 1.375% of the aggregate
consideration to be paid in a transaction with per share merger consideration
less than $24 and 1.500% of the aggregate consideration to be paid in a
transaction with per share merger consideration between $24.000 and $24.999. A
credit of $50,000 (representing previous retainer fees paid by Shelton to Alex.
Brown) will be applied to the transaction fee. Assuming the consummation of the
Merger as of June 20, 1995 and based upon the value of the Merger at such time,
additional fees equal to approximately $400,000 would have been payable to Alex.
Brown. Shelton has also agreed to reimburse Alex. Brown for its reasonable
out-of-pocket expenses, including legal fees, incurred in connection with its
engagement and to indemnify Alex. Brown and its affiliates and their respective
directors, officers, employees, agents and controlling persons against certain
expenses and liabilities.
Certain Provisions of the Merger Agreement
Under the Merger Agreement, Shelton has made certain representations
and warranties to Webster. The material representations and warranties of
Shelton are those with regard to (i) the due organization and good standing of
Shelton; (ii) capitalization; (iii) the corporate power and
36
authority of Shelton; (iv) the execution and delivery of the Merger Agreement
and the Option Agreement; (v) consents and approvals required for the Merger;
(vi) loan portfolio and reserves of Shelton; (vii) financial statements and
books and records of Shelton; (viii) brokers' fees; (ix) absence of any material
adverse change in Shelton; (x) legal proceedings; (xi) tax matters; (xii)
employee benefit plans; (xiii) certain contracts; (xiv) certain regulatory
matters and reports; (xv) state takeover laws; (xvi) environmental matters;
(xvii) loan reserves; (xviii) properties and assets of Shelton; (xix) insurance
matters; (xx) liquidation account of Shelton Bank; (xxi) compliance with
applicable laws; (xxii) loan information; and (xxiii) agreements with directors
and executive officers.
Under the Merger Agreement, Webster has made certain representations
and warranties to Shelton. The material representations and warranties of
Webster are those with regard to (i) the due organization and good standing of
Webster; (ii) capitalization; (iii) the corporate power and authority of
Webster; (iv) the execution and delivery of the Merger Agreement and the Option
Agreement; (v) certain regulatory matters and reports; (vi) financial statements
of Webster; (vii) the absence of any material adverse change in Webster; (viii)
compliance with applicable laws; (ix) ownership of Shelton Stock; (x) employee
benefit matters; (xi) loan reserves; and (xii) legal proceedings.
Termination and Amendment of the Merger Agreement
The Merger Agreement may be terminated by Webster or Shelton (provided
the terminating party is not in violation of the Merger Agreement) as summarized
below:
(i) by mutual written consent of Webster and Shelton;
(ii) by Webster or Shelton if (a) the Closing has not
occurred on or before March 31, 1996; (b) Shelton's shareholders fail to approve
the Merger Agreement or Webster's shareholders fail to approve the issuance of
the additional shares of Webster Stock to the Shelton shareholders as part of
the Merger; or (c) 30 days after any required regulatory approval is denied or
regulatory application withdrawn at regulatory request, unless action is timely
taken for a rehearing or to file an amended application;
(iii) by Webster, in the event of a breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement by Shelton, if such breach or breaches would have a material adverse
effect on Shelton;
(iv) by Shelton, in the event of a breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement by Webster, if such breach or breaches would have a material adverse
effect on Webster;
(v) by Webster, if Shelton or its Board of Directors
fails to hold the Shelton Meeting on a timely basis, fails to recommend to
Shelton's shareholders the approval of the Merger Agreement, fails to oppose any
third party takeover proposals, or violates the covenant relating to third party
proposals (without regard to the fiduciary duty exception).
The Merger Agreement also provides that subject to applicable law the
Board of Directors of Webster and Shelton may (i) amend the Merger Agreement
except as provided below, (ii) extend the time for the performance of any of the
obligations or other acts of the other party thereto, (iii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto, or (iv) waive
compliance with any of the agreements and conditions contained in the Merger
Agreement. After approval of the Merger Agreement by Shelton's shareholders, no
amendment of the Merger Agreement may be made without further shareholder
approval, if the amendment would reduce the amount or change the form of the
consideration to be delivered to the Shelton shareholders in the Merger. After
approval by Webster's shareholders of the issuance of the shares of Webster
Stock to the Shelton shareholders as part of the Merger, no amendment of the
Merger Agreement may be made without further shareholder
37
approval, if the amendment would increase the number of shares of Webster Stock
to be issued in the Merger.
Certain Federal Income Tax Consequences
The Merger is structured as a tax-free exchange for federal income tax
purposes. If the Merger so qualifies, generally (i) no gain or loss will be
recognized by the Shelton shareholders upon the receipt of Webster Stock in
exchange for Shelton Stock (except as discussed below with respect to cash
received in lieu of a fractional share of Webster Stock), (ii) the basis of the
Webster Stock received by the Shelton shareholders will be the same as the basis
of the Shelton Stock surrendered in exchange therefor (reduced by any amount
allocable to a fractional share for which cash is received) and (iii) the
holding period of Webster Stock received by the Shelton shareholders will
include the holding period of the Shelton Stock surrendered in exchange
therefor, provided the shares of Shelton Stock are held as a capital asset as of
the Effective Time. A Shelton shareholder who is entitled to receive cash in
lieu of a fractional share of Webster Stock in connection with the Merger will
recognize gain (or loss) equal to the difference between such cash amount and
the shareholder's basis in the fractional share, and any gain or loss recognized
will be capital gain (or loss) if the Shelton Stock held by such shareholder is
a capital asset at the Effective Time.
Consummation of the Merger is subject to prior receipt by Webster and
Shelton of an opinion of Webster's counsel, Hogan & Hartson L.L.P., to the
effect that the Merger will constitute a tax-free exchange for federal income
tax purposes. Such opinion of counsel will be subject to certain assumptions and
qualifications, including an assumption as to the accuracy of representations to
the effect that there is no plan or intention on the part of the Shelton
shareholders to sell Webster Stock to be received in the Merger in an amount
that would result in the Merger failing to satisfy the "continuity of
proprietary interest" requirement that is a prerequisite to tax-free treatment
for the Merger. The Merger will not be consummated unless such opinion of
counsel is received.
The foregoing is a summary of the anticipated federal income tax
consequences of the Merger and is for general information only. It does not
include consequences of foreign, state, local or other tax laws or special
consequences to particular Shelton shareholders having special situations.
Shelton shareholders should consult their own tax advisors regarding specific
tax consequences of the Merger to them, including the application and effect of
federal, foreign, state and local tax laws and tax consequences of subsequent
sales of Webster Stock.
Accounting Treatment
The Merger is intended to qualify as a pooling of interests for
accounting and financial reporting purposes. Under the pooling of interests
method of accounting, the recorded assets and liabilities of Shelton will be
carried forward to Webster at their recorded amounts. Revenues and expenses of
Webster will include revenues and expenses of Shelton for the entire fiscal year
of Webster in which the Merger occurs, and the reported revenues and expenses of
Shelton for prior periods will be combined with those of Webster, whose
financial statements will then be restated.
Webster has received an opinion of its independent accountants, KPMG
Peat Marwick LLP, to the effect that the Merger will be accounted for as a
pooling of interests. Webster's obligation to consummate the Merger is
conditioned upon such opinion not being withdrawn.
Resales of Webster Stock Received in the Merger
The shares of Webster Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under such
Act, except for shares issued to any Shelton shareholder who may be deemed to be
an "affiliate" of Shelton for purposes of Rule 145 under the Securities Act.
Affiliates may not sell their shares of Webster Stock acquired in connection
with the Merger, except pursuant to an effective registration statement under
the Securities Act covering such shares, in compliance with Rule 145 or another
applicable exemption from the registration
38
requirements of the Securities Act. This Joint Proxy Statement/Prospectus does
not cover any resales of Webster Stock received by persons who may be deemed to
be affiliates of Shelton. Persons who may be deemed to be affiliates of Shelton
generally include individuals or entities who control, are controlled by or are
under common control with Shelton, and may include certain officers or directors
as well as principal shareholders of Shelton.
No Appraisal Rights
Pursuant to Section 262(b) of the Delaware General Corporation Law, the
shareholders of a constituent corporation in a merger generally are not entitled
to appraisal rights if the shares of stock they own are, as of the record date
fixed to determine shareholders entitled to notice of and to vote at the meeting
to act upon the agreement providing for such merger, either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held of record by more than 2,000 shareholders.
Since the Webster Stock is traded on the Nasdaq National Market, there
will be no dissenters' appraisal rights for the Shelton shareholders with
respect to the Merger. There are also no dissenters' appraisal rights for the
Webster shareholders with respect to the Merger.
Interests of Certain Persons in the Merger
Under the Merger Agreement, any employee of Shelton who is terminated
other than for cause within six months after the consummation of the Merger will
receive severance benefits, in the case of exempt employees, equal to two weeks
base salary for each full year of service with Shelton or, in the case of
nonexempt employees, one week of average weekly hourly wages as to hourly
employees and one week of base salary as to salaried employees, for each full
year of employment with Shelton. Shelton employees receiving employment at
Webster Bank will be given credit for service at Shelton for eligibility
purposes under the employee benefit plans of Webster.
The Merger Agreement provides for one Shelton director, who will be
jointly selected by the Boards of Directors of Webster and Shelton, to be
elected to serve as a director of Webster Bank upon consummation of the Merger,
with such director to have an initial term expiring at Webster Bank's 1996
annual meeting and an intention by Webster to cause such director to be elected
to an additional three year term that would expire at Webster Bank's 1999 annual
meeting. All directors of Shelton will be invited to serve on an advisory board
to Webster Bank upon consummation of the Merger for a period of 40 months, with
their compensation as advisory directors to be based on a monthly retainer of
$650 and a monthly meeting attendance fee of $600, with such advisory directors
to be included in Webster's nonqualified deferred compensation plan. Such fees
will not be payable to the advisory director who also will serve as a Webster
Bank director, or to any advisory director serving as an officer or consultant
to Webster Bank, or to J. Allen Kosowsky who agreed to serve without fees. While
serving as consultants to Webster Bank, Messrs. Nimons and Rodriguez will also
serve as advisory directors.
Mr. Schaible has agreed to enter into an employment and consulting
agreement with Webster Bank upon consummation of the Merger (the "Schaible
Agreement"). The Schaible Agreement provides for Mr. Schaible to serve as a
senior vice president of Webster Bank for a period of six months to assist in an
efficient and orderly transition and integration of Shelton's assets, business,
operations, customers and employees with those of Webster Bank, including the
maintenance and expansion of existing depositor and borrowing relationships
especially in the areas previously served by Shelton. During this six-month
period, Mr. Schaible's compensation will be $10,000 per month. Thereafter, Mr.
Schaible has agreed to serve as a consultant on a part-time basis to Webster
Bank for three years, with compensation at the annual rate of $50,000 for the
first year, $40,000 for the second year and $30,000 for the third year. While
serving as a consultant, Mr. Schaible may accept other employment or engagements
that do not interfere with his ability to perform services for Webster Bank,
except with a significant competitor. Under the Schaible
39
Agreement, Mr. Schaible will also serve as chairman of the advisory board to
Webster Bank, without additional compensation. Mr. Schaible may terminate the
Schaible Agreement upon 30 days notice.
Mr. Nimons has agreed to enter into a consulting agreement with Webster
Bank upon consummation of the Merger (the "Nimons Agreement"). The Nimons
Agreement provides for Mr. Nimons to serve as a part-time consultant to Webster
Bank for a period of eight months following the termination of his employment
upon consummation of the Merger, with a consulting fee of $7,500 per month. As a
consultant, Mr. Nimons' services will include assisting Webster Bank in
accomplishing an efficient and orderly transition and integration of Shelton's
assets, business, operations, customers and employees with those of Webster
Bank, with particular emphasis on credit and loan administration matters. While
serving as a consultant, Mr. Nimons may also accept other employment or
engagements, with certain specified limitations. Mr. Nimons may terminate the
Nimons Agreement upon 15 days notice. While serving as a consultant, Mr. Nimons
will also be an advisory director of Webster Bank, without additional
compensation.
Mr. Rodriguez has agreed to enter into a consulting agreement with
Webster Bank upon consummation of the Merger (the "Rodriguez Agreement"). The
Rodriguez Agreement is the same as the Nimons Agreement, except that Mr.
Rodriguez's consulting fee will be $5,000 per month and the particular emphasis
of his consulting will be financial reporting matters.
The Schaible, Nimons and Rodriguez Agreements will replace and
supersede their existing employment agreements with Shelton and Shelton Bank,
and will provide for them to receive upon consummation of the Merger a severance
payment equal to three times their respective average annual compensation that
was paid by Shelton and includible in their gross income for federal income tax
payments for the calendar years 1990 through 1994, reduced by $1.00, which
payments would equal $450,978 for Mr. Schaible, $336,176 for Mr. Nimons and
$209,953 for Mr. Rodriguez. These severance payments are less than the amounts
which Messrs. Schaible, Nimons and Rodriguez would have been entitled to receive
under their existing employment agreements upon termination of their employment
following a change in control of Shelton. Messrs. Schaible, Nimons and Rodriguez
have agreed to have their severance payments limited by Section 280G of the
Code, whereas their existing employment agreements do not contain a Section 280G
limitation.
There are outstanding options to purchase 56,683 shares of Shelton
Stock at an average exercise price of $12.17 per share. These options are held
as follows: 14,503 options by non-employee directors; 16,515 options by Mr.
Schaible; 13,759 options by Mr. Nimons; 8,247 options by Mr. Rodriguez; and
3,659 options by other officers and employees. All options to purchase Shelton
Stock will become options to purchase Webster Stock, with adjustment in number
of shares and exercise price to reflect the Exchange Ratio. The duration and
other terms of these options will otherwise be unchanged, except that options
held by the non-employee directors of Shelton will be modified to expire at the
earlier of their original terms or three months after they cease to serve as
advisory directors of Webster Bank (or in the case of the Shelton director who
will be elected to the Board of Directors of Webster Bank, three months after
such director ceases to serve as director of Webster Bank or as an advisory
director of Webster Bank, whichever is later). Otherwise, such options would
have expired three months after the non-employee directors of Shelton ceased to
serve as directors of Shelton and Shelton Bank upon consummation of the Merger.
In the case of Mr. Schaible, his options will expire three months after he
ceases to serve as a senior vice president of Webster Bank, which would be nine
months after the consummation of the Merger. The options held by Messrs. Nimons
and Rodriguez will expire three months after the termination of their employment
upon consummation of the Merger. Service as a consultant by Messrs. Schaible,
Nimons and Rodriguez will not constitute continued service for purpose of
exercise of their options. Options held by other officers and employees of
Shelton will continue in effect for their original terms as long as they are
employees of Webster Bank or, if earlier, three months after termination of such
employment.
40
Option Agreement
In consideration of Webster's entering into the Merger Agreement,
Webster and Shelton entered into the Option Agreement immediately after the
execution of the Merger Agreement. Pursuant to the Option Agreement, Shelton
granted Webster the Option, which entitles Webster to purchase up to 267,324
fully paid and nonassessable shares of Shelton Stock, or approximately 19.9% of
the shares of Shelton Stock then outstanding, under the circumstances described
below at a price of $17.00 per share, subject to adjustment in certain
circumstances. The Option Agreement is intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement, and is likely to discourage third parties from proposing a competing
offer to acquire Shelton, even if such offer involves a higher price per share
for the Shelton Stock than the per share consideration to be paid pursuant to
the Merger Agreement. The existence of the Option would significantly increase
the cost to a potential third party of acquiring Shelton compared to its cost
had Shelton not entered into the Option Agreement.
The following brief summary of certain provisions of the Option
Agreement is qualified in its entirety by reference to the Option Agreement,
which was filed as an exhibit to Webster's report on Form 8-K/A, dated July 27,
1995, with the SEC and is incorporated herein by reference. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
Subject to applicable law and regulatory restrictions, Webster may
exercise the Option, in whole or in part, if, but only if, a "Purchase Event"
(as defined below) occurs prior to the occurrence of an "Exercise Termination
Event" (as defined below). "Purchase Event" means, in substance, either (i) the
acquisition by any third party of beneficial ownership of 25% or more of the
outstanding Shelton Stock or (ii) the entry by Shelton into a letter of intent
or definitive agreement to engage in an Acquisition Transaction (as defined
below) with any third party, or the recommendation by the Board of Directors of
Shelton that its shareholders approve or accept any Acquisition Transaction with
any third party.
For purposes of the Option Agreement, "Acquisition Transaction" means
(x) a merger, consolidation or other business combination, involving Shelton,
(y) a purchase, lease or other acquisition of all or substantially all of the
assets of Shelton, or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of beneficial ownership of
25% or more of the voting power of Shelton as to a Purchase Event or 11% as to a
Preliminary Purchase Event.
The Option Agreement defines an "Exercise Termination Event" to mean
the earliest to occur of the following: (i) the time immediately preceding the
consummation of the Merger, (ii) 12 months after the first occurrence of a
Purchase Event, (iii) 12 months after the termination of the Merger Agreement
following the occurrence of a Preliminary Purchase Event, (iv) upon the
termination of the Merger Agreement, prior to the occurrence of a Purchase Event
or Preliminary Purchase Event, (A) by both parties, if the Merger Agreement is
terminated by mutual consent, (B) by either Webster or Shelton, if the Merger
has not have occurred by March 31, 1996, or if the Merger Agreement has been
terminated as a result of regulatory denial or requested withdrawal of a
regulatory approval application, or if the Merger Agreement is terminated as a
result of Webster's shareholders failing to approve the issuance of the shares
of Webster Stock to the Shelton shareholders as part of the Merger, or (C) by
Shelton, if the Merger Agreement is terminated by Shelton as a result of a
material breach or breaches of any representation, warranty, covenant or other
agreement by Webster, (v) six months after the termination of the Merger
Agreement, if the Shelton shareholders have failed to approve the Merger
Agreement and no Purchase Event or Preliminary Purchase Event has occurred prior
to the Shelton Meeting, (vi) nine months after the termination of the Merger
Agreement by Webster as a result of a material breach or breaches of any
representation, warranty, covenant or other agreement by Shelton, if such breach
or breaches were not willful or intentional by Shelton, or (vii) 18 months after
the termination of the Merger Agreement by Webster (A) as a result of a willful
or intentional material breach or breaches of any representation, warranty,
covenant or agreement by Shelton, or (B) as a result of a failure of Shelton or
its Board of Directors to hold the
41
Shelton Meeting on a timely basis, to recommend to Shelton's shareholders that
they approve the Merger Agreement, or to oppose any third party takeover
proposal, or based on a violation by Shelton of the covenant on third party
takeover proposals (without regard to the fiduciary duty exception).
"Preliminary Purchase Event", as defined in the Option Agreement,
includes (i) an acquisition by any third party of beneficial ownership of 11% or
more of the outstanding Shelton Stock; (ii) the entry by Shelton into a letter
of intent or definitive agreement to engage in an Acquisition Transaction with
any third party, or the recommendation by the Board of Directors of Shelton that
its shareholders approve or accept any Acquisition Transaction with any third
party; (iii) the making of a bona fide proposal for an Acquisition Transaction
by any third party to Shelton, or a public announcement or written communication
that is publicly disclosed to Shelton's shareholders as to a third party
engaging in an Acquisition Transaction; (iv) a willful or intentional material
breach or breaches by Shelton of any representation, warranty, covenant or
agreement that would entitle Webster to terminate the Merger Agreement; (v) a
failure by Shelton's shareholders to approve the Merger Agreement; (vi) a
withdrawal or modification in any manner adverse to Webster by Shelton's Board
of Directors of its approval recommendation as to the Merger Agreement, or a
failure by Shelton or its Board of Directors to oppose any third party takeover
proposal; or (vii) a filing by any third party of an application or notice with
any regulatory authority for approval to engage in an Acquisition Transaction.
The Option may not be assigned by Webster to any other person without
the express written consent of Shelton, except that Webster may assign its
rights under the Option Agreement in whole or in part after the occurrence of a
Preliminary Purchase Event. Shelton also has agreed to prepare and file a
registration statement with respect to the shares to be issued upon exercise of
the Option under applicable federal and state securities laws. Upon the
occurrence of a Purchase Event prior to an Exercise Termination Event, at the
request of Webster, Shelton will be obligated to repurchase the Option, and any
shares of Shelton Stock theretofore purchased pursuant to the Option, at prices
determined as set forth in the Option Agreement, except to the extent prohibited
by applicable law, regulation or administrative policy or to the extent that the
repurchase would cause Shelton Bank's capital to fall below the minimum level
required by the FDIC for Shelton Bank to be deemed a "well-capitalized
institution", or if such repurchase would preclude an Acquisition Transaction
from being accounted for as a pooling of interests.
In the event that prior to an Exercise Termination Event, Shelton
enters into an agreement (i) to consolidate or merge with any third party, and
Shelton is not the continuing or surviving corporation in such consolidation or
merger, (ii) to permit any third party to merge into Shelton and Shelton is the
continuing or surviving corporation, but, in connection with such merger, the
then outstanding shares of Shelton Stock are changed into or exchanged for stock
or other securities of any third party or cash or any other property or the then
outstanding shares of Shelton Stock will after such merger represent less than
50% of the outstanding shares and share equivalents of the merged company or
(iii) to sell or otherwise transfer all or substantially all of its assets to
any third party, then, and in each such case, the agreement governing such
transaction must make proper provision so that the Option shall, upon the
consummation of such transaction, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of Webster, of either (x) the
acquiring corporation or (y) any person that controls the acquiring corporation.
The Substitute Option will be exercisable for shares of the issuer's common
stock in such number and at such exercise price as is set forth in the Option
Agreement and will otherwise have the same terms as the Option, except that the
number of shares subject to the Substitute Option may not exceed 19.9% of the
issuer's outstanding shares of common stock.
42
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Pro Forma Combined Statement of Financial Condition as of
June 30, 1995 combines the historical consolidated statements of financial
condition of Webster and Shelton as if the Merger had occurred on June 30, 1995,
after giving effect to pro forma adjustments described in the accompanying
notes. The Pro Forma Combined Statements of Income for the six months ended June
30, 1995 and for the years ended December 31, 1994, 1993 and 1992 are presented
as if the Merger had been consummated at the beginning of each period presented.
Webster's fiscal year ends December 31 and Shelton's fiscal year ends
June 30. In the Pro Forma Combined Statements of Income, Shelton's results of
operations are presented consistent with the fiscal year of Webster, so that the
Pro Forma Combined Statements of Income for the years ended December 31, 1994,
1993 and 1992 are for Webster's 1994, 1993 and 1992 fiscal years and a
restatement of Shelton's results for each of such years on a 12-month ended
December 31 basis.
The pro forma combined financial statements should be read in
conjunction with the separate historical consolidated financial statements and
notes of Webster and of Shelton incorporated by reference or appearing elsewhere
herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" as to Webster and
"SHELTON CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30 YEAR END" attached hereto
as Appendix B. The pro forma combined financial statements are not necessarily
indicative of the consolidated financial position or results of future
operations of the combined entity or of the actual results that would have been
achieved had the Merger been consummated prior to the periods indicated.
43
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF CONDITION
JUNE 30, 1995
(Unaudited)
Webster Shelton Pro Forma Pro Forma
(historical) (historical) Adjustments Combined
----------- ---------- ------ -----------
(In Thousands)
ASSETS
Cash and Due from Depository Institutions........... $ 23,828 $ 10,132 $ --- $ 33,960
Interest-bearing Deposits........................... 42,672 --- --- 42,672
Securities.......................................... 127,858 40,725 --- 168,583
Mortgage-backed Securities.......................... 823,462 13,905 --- 837,367
Loans Receivable, Net............................... 1,650,074 223,301 --- 1,873,375
Accrued Interest Receivable......................... 17,732 1,802 --- 19,534
Premises and Equipment, Net......................... 30,416 5,719 --- 36,135
Segregated Assets, Net.............................. 124,319 --- --- 124,319
Other Real Estate Acquired Through
Foreclosure and In-Substance Foreclosure, Net..... 20,664 1,055 --- 21,719
Prepaid Expenses and Other Assets................... 30,424 2,320 --- 32,744
----------- ---------- ------ -----------
TOTAL ASSETS.................................... $ 2,891,449 $ 298,959 $ --- $ 3,190,408
=========== ========== ====== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................ $ 2,198,628 $ 266,663 --- $ 2,465,291
Federal Home Loan Bank Advances..................... 402,000 9,505 --- 411,505
Other Borrowings.................................... 43,130 --- --- 43,130
Advance Payments by Borrowers for Taxes
and Insurance..................................... 14,177 2,096 --- 16,273
Accrued Expenses and Other Liabilities.............. 83,940 659 2,060 (a) 86,659
----------- --------- ----- -----------
Total Liabilities............................... 2,741,875 278,923 2,060 3,022,858
----------- --------- ----- -----------
SHAREHOLDERS' EQUITY
Common Stock...................................... 62 1,447 (1,434)(b) 75
Paid in Capital................................... 97,009 8,000 684 (b) 105,693
Retained Earnings................................. 59,290 11,339 (2,060)(b) 68,569
Less Treasury Stock at Cost....................... (3,580) (750) 750 (b) (3,580)
Less Employee Stock Ownership Plan
Shares Purchased with Debt....................... (3,207) --- --- (3,207)
----------- --------- ------ -----------
Total Shareholders' Equity....................... 149,574 20,036 (2,060) 167,550
----------- --------- ------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........................... $ 2,891,449 $ 298,959 $ --- $ 3,190,408
=========== ========= ====== ===========
________
The pro forma combined statement of condition has not been adjusted to
reflect any of the improvements in operating efficiencies that Webster
anticipates may occur in the future due to the Merger with Shelton.
44
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(Unaudited)
Webster Shelton Pro Forma
(historical) (historical) Combined
------------ ----------- ---------
(In Thousands)
Interest Income:
Loans and Segregated Assets....................... $ 68,279 $ 8,004 $ 76,283
Mortgage-backed Securities........................ 22,461 374 22,835
Securities and Interest-bearing Deposits.......... 4,763 1,361 6,124
--------- --------- ---------
Total Interest Income........................... 95,503 9,739 105,242
Interest Expense:
Interest on Deposits.............................. 42,002 5,162 47,164
Interest on Borrowings............................ 13,966 157 14,123
--------- --------- ---------
Total Interest Expense.......................... 55,968 5,319 61,287
--------- --------- ---------
Net Interest Expense.............................. 39,535 4,420 43,955
Provision for Loan Losses........................... 630 210 840
--------- --------- --------
Net Interest Income After Provision for
Loan Losses...................................... 38,905 4,210 43,115
Noninterest Income:
Fees and Service Charges.......................... 6,515 520 7,035
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 997 18 1,015
Other Noninterest Income.......................... 1,459 275 1,734
--------- --------- ---------
Total Noninterest Income........................ 8,971 813 9,784
--------- --------- ---------
Noninterest Expenses:
Salaries and Employee Benefits.................... 17,005 1,531 18,536
Occupancy Expense of Premises..................... 2,845 101 2,946
Furniture and Equipment Expenses.................. 2,761 187 2,948
Federal Insurance Premiums........................ 2,525 303 2,828
Other Real Estate Owned Expenses and
Provisions, Net.................................. 2,380 19 2,399
Other Operating Expenses.......................... 6,920 1,144 8,064
--------- --------- ---------
Total Noninterest Expenses...................... 34,436 3,285 37,721
--------- --------- ---------
Income Before Income Taxes.......................... 13,440 1,738 15,178
Income Taxes Expense................................ 4,079 642 4,721
--------- --------- ---------
Net Income ......................................... 9,361 1,096 10,457
Preferred Stock Dividends........................... 648 --- 648
--------- --------- ---------
Net Income Available to Common
Shareholders...................................... $ 8,713 $ 1,096 $ 9,809
========= ========= =========
Net Income Per Common Share (c):
Primary........................................... $ 1.56 $ .82 $ 1.44
========= ===== ==========
Fully Diluted..................................... $ 1.41 $ .82 $ 1.34
========= ===== ==========
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(unaudited)
Webster Shelton Pro Forma
(historical) (historical) Combined
--------- --------- ---------
(In Thousands)
Interest Income:
Loans and Segregated Assets....................... $ 125,760 $ 13,888 $ 139,648
Mortgage-backed Securities........................ 37,984 802 38,786
Securities and Interest-bearing Deposits.......... 9,506 2,880 12,386
--------- --------- ---------
Total Interest Income........................... 173,250 17,570 190,820
Interest Expense:
Interest on Deposits.............................. 68,229 8,606 76,835
Interest on Borrowings............................ 21,284 345 21,629
--------- --------- ---------
Total Interest Expense.......................... 89,513 8,951 98,464
--------- --------- ---------
Net Interest Income............................. 83,737 8,619 92,356
Provision for Loan Losses........................... 2,900 255 3,155
--------- --------- ---------
Net Interest Income After Provision for
Loan Losses..................................... 80,837 8,364 89,201
Noninterest Income:
Fees and Service Charges.......................... 11,233 955 12,188
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. (1,073) (109) (1,182)
Other Noninterest Income.......................... 2,207 416 2,623
--------- --------- ---------
Total Noninterest Income........................ 12,367 1,262 13,629
--------- --------- ---------
Noninterest Expenses:
Salaries and Employee Benefits.................... 31,995 2,948 34,943
Occupancy Expense of Premises..................... 5,517 179 5,696
Furniture and Equipment Expenses.................. 5,582 394 5,976
Federal Deposit Insurance Premiums................ 5,185 557 5,742
Other Real Estate Owned Expenses
and Provisions, Net.............................. 6,852 97 6,949
Other Operating Expenses.......................... 17,931 2,058 19,989
--------- --------- ---------
Total Noninterest Expenses...................... 73,062 6,233 79,295
--------- --------- ---------
Income Before Income Taxes ......................... 20,142 3,393 23,535
Income Taxes Expense................................ 3,657 1,193 4,850
--------- --------- ---------
Net Income ......................................... 16,485 2,200 18,685
Preferred Stock Dividends........................... 1,716 --- 1,716
--------- --------- ---------
Net Income Available to Common
Shareholders...................................... $ 14,769 $ 2,200 $ 16,969
========= ========= =========
Net Income Per Common Share (c):
Primary........................................... $ 2 95 $ 1.61 $ 2.69
========= ======== =========
Fully Diluted..................................... $ 2.60 $ 1.61 $ 2.44
========= ======== =========
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
45
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(unaudited)
Webster Shelton Pro Forma
(historical) (historical) Combined
--------- --------- ---------
(In Thousands)
Interest Income:
Loans and Segregated Assets....................... $ 108,084 $ 13,288 $ 121,372
Mortgage-backed Securities........................ 24,448 329 24,777
Securities and Interest-bearing Deposits.......... 5,275 3,165 8,440
--------- --------- ---------
Total Interest Income........................... 137,807 16,782 154,589
Interest Expense:
Interest on Deposits.............................. 60,156 8,531 68,687
Interest on Borrowings............................ 11,836 280 12,116
--------- --------- ---------
Total Interest Expense.......................... 71,992 8,811 80,803
--------- --------- ---------
Net Interest Income............................. 65,815 7,971 73,786
Provision for Loan Losses........................... 4,447 150 4,597
--------- --------- ---------
Net Interest Income After Provision for
Loan Losses..................................... 61,368 7,821 69,189
Noninterest Income:
Fees and Service Charges.......................... 7,055 857 7,912
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 937 943 1,880
Other Noninterest Income.......................... 782 129 911
--------- --------- ---------
Total Noninterest Income........................ 8,774 1,929 10,703
--------- --------- ---------
Noninterest Expenses:
Salaries and Employee Benefits.................... 19,603 2,733 22,336
Occupancy Expense of Premises..................... 4,455 302 4,757
Furniture and Equipment Expenses.................. 3,634 432 4,066
Federal Deposit Insurance Premiums................ 3,354 567 3,921
Other Real Estate Owned Expenses
and Provisions, Net.............................. 4,556 529 5,085
Other Operating Expenses.......................... 12,843 1,989 14,832
--------- --------- ---------
Total Noninterest Expenses...................... 48,445 6,552 54,997
--------- --------- ---------
Income Before Income Taxes ......................... 21,697 3,198 24,895
Income Taxes Expense................................ 9,160 1,435 10,595
--------- --------- ---------
Income Before Cumulative Effect of Change
in Method of Accounting for Income Taxes.......... 12,537 1,763 14,300
Cumulative Effect of Change in Method of
Accounting for Income Taxes....................... 4,300 275 4,575
--------- --------- ---------
Net Income.......................................... 16,837 2,038 18,875
Preferred Stock Dividends........................... 2,653 --- 2,653
--------- --------- ---------
Net Income Available to Common
Shareholders...................................... $ 14,184 $ 2,038 $ 16,222
========= ========= =========
Net Income Per Common Share Before Cumulative Effect of Change in Method of
Accounting for Income Taxes (c):
Primary........................................... $ 2.50 $ 1.34 $ 2.25
========= ======== =========
Fully Diluted..................................... $ 2.18 $ 1.32 $ 2.04
========= ======== ========
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
47
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992
(unaudited)
Webster Shelton Pro Forma
(historical) (historical) Combined
--------- --------- ---------
(In Thousands)
Interest Income:
Loans and Segregated Assets....................... $ 68,918 $ 14,731 $ 83,649
Mortgage-backed Securities........................ 19,202 537 19,739
Securities and Interest-bearing Deposits.......... 4,282 3,351 7,633
--------- --------- ---------
Total Interest Income........................... 92,402 18,619 111,021
Interest Expense:
Interest on Deposits.............................. 44,803 10,075 54,878
Interest on Borrowings............................ 5,897 430 6,327
--------- --------- ---------
Total Interest Expense.......................... 50,700 10,505 61,205
--------- --------- ---------
Net Interest Income............................. 41,702 8,114 49,816
Provision for Loan Losses........................... 4,336 1,238 5,574
--------- --------- ---------
Net Interest Income After Provision for
Loan Losses..................................... 37,366 6,876 44,242
Noninterest Income:
Fees and Service Charges.......................... 4,857 820 5,677
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 952 1,010 1,962
Other Noninterest Income.......................... 429 339 768
--------- --------- ---------
Total Noninterest Income........................ 6,238 2,169 8,407
--------- --------- ---------
Noninterest Expenses:
Salaries and Employee Benefits.................... 12,064 2,482 14,546
Occupancy Expense of Premises..................... 2,466 269 2,735
Furniture and Equipment Expenses.................. 2,367 375 2,742
Federal Deposit Insurance Premiums................ 1,775 491 2,266
Other Real Estate Owned Expenses
and Provisions, Net.............................. 5,661 474 6,135
Other Operating Expenses.......................... 9,038 1,691 10,729
--------- --------- ---------
Total Noninterest Expenses...................... 33,371 5,782 39,153
--------- --------- ---------
Income Before Income Taxes.......................... 10,233 3,263 13,496
Income Taxes Expense ............................... 5,446 1,637 7,083
--------- --------- ---------
Net Income ......................................... 4,787 1,626 6,413
Preferred Stock Dividends........................... 581 --- 581
--------- --------- ---------
Net Income Available to Common
Shareholders...................................... $ 4,206 $ 1,626 $ 5,832
========= ========= =========
Net Income Per Common Share (c):
Primary........................................... $ 1.09 $ 1.29 $ 1.18
========= ======== =========
Fully Diluted..................................... $ 1.07 $ 1.29 $ 1.16
========= ======== =========
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
48
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Represents the estimated merger costs that will be incurred by Webster and
Shelton. These costs are not reflected in the Pro Forma Combined Statements of
Income since these items do not have a continuing impact upon Webster. The
following table summarizes the financial impact of the additional accruals as
reflected in the Pro Forma Combined Statement of Financial Condition (in
thousands):
Compensation (severance and related costs) $ 1,500
Transaction costs (including investment bankers,
attorneys and accountants) 650
Computer conversion costs (including consultants and the
transfer of customer records) 350
Redundant data processing hardware and software 125
Miscellaneous expenses 375
--------
Total pre-tax adjustments $ 3,000
Income tax effect (940)
---------
Net after tax adjustments $ 2,060
========
All of the accrual adjustments noted above are deemed to be period costs
and will be charged to the statement of income in the quarter in which the
Merger is consummated.
(b) Represents the elimination of Shelton's historical aggregate $1.00 per share
par value of $1.4 million, the issuance of Webster Stock at aggregate $0.01 per
share par value of $13,000, the elimination of Shelton's Treasury Stock and the
net effect on Paid in Capital.
(c) Pro Forma Combined Webster and Shelton Net Income per Common Share data have
been determined based upon (i) the combined historical net income of Webster and
Shelton and (ii) the combined historical weighted average common equivalent
shares of Webster and Shelton. For purposes of this determination, Shelton's
historical weighted average common shares outstanding were multiplied by the .92
Exchange Ratio.
49
SHELTON BANCORP, INC.
General
Shelton, headquartered in Shelton, Connecticut, is a unitary savings and
loan holding company incorporated in Delaware. In 1989, Shelton became the
holding company of Shelton Bank, which is Shelton's sole subsidiary. Shelton's
principal business activity is the holding of Shelton Bank's outstanding common
stock. All of Shelton's income is derived from Shelton Bank.
Shelton Bank was founded in 1919, as a Connecticut-chartered mutual savings
and loan association. In 1986, Shelton Bank converted to stock ownership. In
1988, Shelton Bank converted from a capital stock savings and loan association
to a capital stock savings bank, and adopted its current name. Shelton Bank is
headquartered in Shelton, and has branch offices in the towns of Ansonia,
Bethany, Oxford and Shelton. Shelton Bank's general market area is in eastern
Fairfield and southwestern New Haven Counties. Through its six full-service
offices, Shelton Bank provides a wide range of retail deposit and credit
services, with special emphasis on residential real estate lending. Through its
Trust Department, Shelton Bank currently provides investment advisory and
management services to retail and corporate customers. The Trust Department's
operations have not had a material effect on Shelton's results of operations. It
is expected that the Trust Department will be sold prior to or in connection
with the Merger. Shelton Bank also engages in the development and sale of
residential real estate. As required by Section 24(c)(4) of the Federal Deposit
Insurance Act, Shelton Bank must divest all of its real estate investments by
December 19, 1996. Shelton Bank has approximately 80 full-time equivalent
employees, none of whom is represented by a collective bargaining agreement.
Management considers its relations with its employees to be excellent.
Competition
Shelton Bank operates in a highly competitive market area with
competitors that include savings bank, savings and loan associations, commercial
banks, mortgage companies, credit unions, consumer finance companies, insurance
companies, brokerage firms and mutual fund companies. Most of these competitors
have financial resources that are far greater than Shelton Bank's. Shelton
anticipates further increases in competition as the result of growing interstate
banking activity. Changes in the financial services industry resulting from
fluctuating interest rates, technological changes, and deregulation have
resulted in an increase in competition, cost of funds, merger activity and
customer awareness of product and service differences among competitors.
During the three years ended December 31, 1993, approximately 40
Connecticut-based banking institutions failed. Several of these institutions
operated in Shelton's market area and such failures have resulted in, through
resolution transactions with the FDIC, the entrance of at least two substantial
out-of-state financial institutions into Connecticut. The number of bank
failures has reflected both the difficult economic conditions that Shelton
currently faces in its market area and the competition experienced by such
institutions in an industry which state and federal bank may have substantial
over capacity. The consolidation of financial institutions will likely continue
and particularly affect banks.
Regulation
Both Shelton and Shelton Bank are subject to extensive supervision and
regulation, which focus on the protection of depositors' funds.
As a savings and loan holding company, Shelton is subject to regulation
by the OTS, a department of the U.S. Treasury. As a unitary savings and loan
holding company, Shelton is currently permitted to engage in a broad range of
activities, including direct investments in real estate. Bank holding companies
registered with the Federal Reserve Board (the "FRB") are, among other things,
restricted from making direct investments in real estate. If Shelton Bank fails
to keep at least 70% of its total assets invested in residential real estate and
other specified assets, Shelton would lose its status as a savings and loan
holding company, and would be required to register with
50
the FRB as a bank holding company. In management's opinion, Shelton Bank will
have no difficulty in maintaining a level of qualified investments in excess of
70% of total assets in the foreseeable future.
As a Connecticut-chartered savings bank, Shelton Bank is governed by
Connecticut banking law and to regulation by the Connecticut Commissioner.
Deposits at Shelton Bank are insured by the BIF of the FDIC, making Shelton Bank
subject to FDIC regulations. On August 8, 1995, the Board of Directors of the
FDIC determined that the BIF had achieved its designated reserve ratio and
approved lower BIF-premium rates for deposit insurance by the BIF for all but
the riskiest institutions. BIF deposit insurance premiums now will range from a
low of 4 cents for well capitalized institutions to 31 cents per $100 of
assessable deposits for under-capitalized institutions. It is anticipated that
Shelton Bank's cost of deposit insurance will decrease as a result of the change
in deposit insurance premiums. As a member of the Federal Home Loan Bank
("FHLB") System, Shelton Bank is required to maintain a specified level of
liquid assets, and to own shares of stock in its regional FHLB equal to the
greater of 1% of outstanding residential mortgage loans, or 5% of outstanding
borrowings from its regional FHLB. Shelton Bank is also required by the Board of
Governors of the Federal Reserve System to maintain cash reserves against its
deposits. After exhausting all other sources of funds, Shelton Bank may borrow
from the Federal Reserve.
Economic Conditions and Governmental Policy
The profitability of Shelton is affected by general economic conditions
and governmental policies. Similar to all of New England, the recovery from the
1990-1991 recession has been slow. Despite the region's recent job turnaround,
traditional economic drivers are in disarray, and the industries that are now
growing seem less predictable. No local engine of growth has yet surfaced to get
the region moving, so expansion is dependent on the pace of the national
recovery. Ongoing cuts in defense contracts will be a drag on Connecticut's
economy throughout the 1990s because private jobs in the region are more
defense-dependent than in most other regions on the country. However, over the
past few years a favorable interest rate environment and moderate improvements
in Connecticut's economy, including stability in the region's real estate
market, have led Shelton to record earnings and appreciated shareholder value.
Shelton has also experienced a sharp decline in non-performing assets, loan loss
provision, loan charge-offs and expenses related to non-performing assets. It is
anticipated that as the general economic environment of Connecticut improves
that it will be reflected in Shelton's operations.
Taxation
Shelton and Shelton Bank file a consolidated Federal and State of
Connecticut tax returns. Taxation of savings institutions is essentially the
same as that of other corporations, except that Shelton Bank can compute its
deduction for bad debts utilizing the percentage of taxable income method,
subject to its ability to meet certain requirements. Shelton is also subject to
Delaware state franchise taxes. Shelton's tax returns have been audited, or
closed without audit, by the Internal Revenue Service through the year ended
June 30, 1990.
51
MARKET PRICES AND DIVIDENDS
Webster Stock
The following sets forth the range of high and low sale prices of
Webster Stock as reported on the Nasdaq National Market, as well as cash
dividends paid during the periods indicated:
Market Price Cash
High Low Dividends Paid
------- ------- ------
Quarter Ended:
March 31, 1992 $12 3/4 $10 1/2 $0.12
June 30, 1992 12 7/8 10 1/2 0.12
September 30, 1992 14 1/2 11 7/8 0.12
December 31, 1992 17 1/4 12 3/4 0.12
March 31, 1993 19 1/8 16 3/8 0.12
June 30, 1993 18 1/2 15 3/8 0.12
September 30, 1993 21 17 3/4 0.13
December 31, 1993 25 20 1/4 0.13
March 31, 1994 22 1/4 18 1/2 0.13
June 30, 1994 24 3/4 18 3/8 0.13
September 30, 1994 25 1/2 22 1/2 0.13
December 31, 1994 23 1/2 17 1/4 0.13
March 31, 1995 22 1/4 18 1/2 0.16
June 30, 1995 25 3/4 21 1/2 0.16
(September 14, 1995) 31 23
On June 20, 1995, the last trading day prior to the public announcement
of the Merger, the closing price of Webster Stock on the Nasdaq National Market
was $24 1/8. On September 14, 1995 (the most recent practical date prior to the
printing of this Joint Proxy Statement/Prospectus), the closing price of Webster
Stock on the Nasdaq National Market was $28 1/2.
Webster paid a 10% stock dividend on June 4, 1993. The per share data
shown above and elsewhere in this Joint Proxy Statement/Prospectus have been
adjusted to reflect such 10% stock dividend.
52
Shelton Stock
Market Price Cash
High Low Dividends Paid
------- ------- ------
Quarter Ended:
March 31, 1992 $ 9.46 $ 6.58 $0.12
June 30, 1992 9.98 9.05 0.12
September 30, 1992 11.45 9.26 0.11
December 31, 1992 10.80 9.50 0.12
March 31, 1993 11.88 9.93 0.11
June 30, 1993 14.04 9.75 0.11
September 30, 1993 14.06 10.43 0.12
December 31, 1993 15.875 12.93 0.12
March 31, 1994 15.875 14.29 0.12
June 30, 1994 20.25 14.05 0.13
September 30, 1994 19.75 17.50 0.15
December 31, 1994 18.875 15.00 0.15
March 31, 1995 16.00 14.00 0.16
June 30, 1995 20.75 14.00 0.16
(through September 14) 26.50 25.25
On June 20, 1995, the last trading day prior to the public announcement
of the Merger, the closing price of Shelton Stock on the Nasdaq National Market
was $17.50. On September 14, 1995 (the most recent practical date prior to the
printing of this Joint Proxy Statement/Prospectus) the closing price of Shelton
Stock on the Nasdaq National Market was $25.25.
Shelton paid 5% stock dividends on each of August 3, 1992, April 30,
1993, October 27, 1993 and April 27, 1994. The per share data shown above and
elsewhere in this Joint Proxy Statement/Prospectus have been adjusted to reflect
such 5% stock dividends.
Shareholders are advised to obtain current market quotations for
Webster Stock. It is expected that the market price of Webster Stock will
fluctuate between the date of this Joint Proxy Statement/Prospectus and the date
on which the Merger is consummated. Because the number of shares of Webster
Stock to be received by Shelton shareholders in the Merger is fixed, the value
of the shares of Webster Stock that the holders of Shelton Stock would receive
in the Merger may increase or decrease prior to or after the Merger.
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS
Set forth below is a description of Webster's capital stock, as well as
a summary of the material differences between the rights of holders of Shelton
Stock and their prospective rights as holders of Webster Stock. If the Merger
Agreement is approved and adopted and the Merger consummated, the holders of
Shelton Stock will become holders of Webster Stock. As a result, Webster's
certificate of incorporation and bylaws, and the applicable provisions of
Delaware law, will govern the rights of current shareholders of Shelton Stock.
The rights of those shareholders are currently governed by the certificate of
incorporation and bylaws of Shelton, and the applicable provisions of Delaware
law.
53
The following comparison is based on the current terms of the governing
documents of Webster and Shelton and on the provisions of Delaware law, which is
applicable to both Webster and Shelton. The discussion is intended to highlight
important similarities and differences between the rights of holders of Webster
Stock and Shelton Stock.
Webster Stock
Webster is authorized to issue 14,000,000 shares of Webster Stock, of
which 5,514,142 are currently issued and outstanding. After giving effect to the
conversion of the outstanding Series B Stock of Webster described below, there
would then be 986,062 additional shares of Webster Stock, or a total of
6,500,204 shares of the Webster Stock then outstanding. Webster has outstanding
stock options granted to directors, officers and other employees for 534,298
shares of Webster Stock. Each share of Webster Stock has the same relative
rights and is identical in all respects to each other share of Webster Stock.
The Webster Stock is non-withdrawable capital, is not of an insurable type and
is not insured by the FDIC or any other governmental entity.
Holders of Webster Stock are entitled to one vote per share on each
matter properly submitted to shareholders for their vote, including the election
of directors. Holders of Webster Stock do not have the right to cumulate their
votes for the election of directors, and they have no pre-emptive or conversion
rights with respect to any shares that may be issued. Webster Stock is not
subject to additional calls or assessments by Webster, and all shares of Webster
Stock currently outstanding are fully paid and nonassessable.
Holders of Webster Stock are entitled to receive dividends when and as
declared by the Board of Directors of Webster out of funds legally available for
distribution. No dividends or other distributions may be declared or paid on
Webster Stock, however, unless all accumulated dividends have been paid
concurrently on the Series B Stock. In addition, as described below, the
indenture for the Senior Notes places certain restrictions on Webster's ability
to pay dividends on Webster Stock. See "-- Senior Notes."
In the unlikely event of any liquidation or dissolution of Webster, the
holders of Webster Stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Webster and after payment
of the liquidation preferences of all outstanding shares of preferred stock, all
remaining assets of Webster available for distribution, in cash or in kind.
Series B Stock
Webster's certificate of incorporation authorizes its Board of
Directors, without further shareholder approval, to issue up to 3,000,000 shares
of serial preferred stock for any proper corporate purpose. In approving any
issuance of serial preferred stock, the Board of Directors has broad authority
to determine the rights and preferences of the serial preferred stock, which may
be issued in one or more series. These rights and preferences may include
voting, dividend, conversion and liquidation rights that may be senior to the
Webster Stock.
Of the 3,000,000 authorized shares of serial preferred stock, 171,869
shares of Series B 7 1/2% Cumulative Convertible Preferred Stock (the "Series B
Stock") are outstanding. The Series B Stock ranks prior to the Webster Stock
with respect to dividends and amounts distributable upon liquidation. The Series
B Stock is entitled to receive, when declared by the Board of Directors out of
funds of Webster legally available therefor, cumulative quarterly cash dividends
at an annual rate of 7 1/2%. Unless full cumulative dividends on the Series B
Stock have been paid, dividends (other than in Webster Stock) may not be paid or
declared upon the Webster Stock. Upon any liquidation of Webster, the holders of
the Series B Stock will be entitled to receive out of the assets of Webster
available for distribution to its shareholders before any distribution is made
to holders of the Webster Stock an amount equal to $100 per share, plus an
amount equal to all dividends accumulated and unpaid on the Series B Stock to
the date of final distribution.
54
Except as indicated below or as required by law, holders of the Series
B Stock have no voting rights. If at any time six quarterly dividends payable on
the Series B Stock are accrued and unpaid, the number of directors of Webster is
required to be increased by two and the holders of all the Series B Stock,
voting as a single class, will be entitled to elect the additional two directors
until all dividends accumulated on the Series B Stock have been paid in full. In
addition, without the vote or consent of the holders of at least two-thirds of
the Series B Stock then outstanding, Webster may not (i) amend, alter or repeal
any of the provisions of its certificate of incorporation or certificate of
designation so as to affect adversely the preference or power of the Series B
Stock, (ii) authorize any reclassification of the Series B Stock, or (iii) issue
any shares of any class or series of stock of Webster ranking prior to the
shares of the Series B Stock as to dividends or upon liquidation, or reclassify
any authorized stock of Webster into any such prior shares or issue any
obligation or security convertible into or evidencing the right to purchase any
such prior shares. Accordingly, the voting rights of the holders of Series B
Stock could under certain circumstances operate to restrict the flexibility
which Webster would otherwise have in connection with any future issuances of
equity securities or changes to its capital structure.
The Series B Stock is not subject to any mandatory redemption at the
election of the holder or sinking fund provision. The Series B Stock may be
redeemed for cash at the option of Webster, in whole or in part, at any time on
or after January 15, 1997, at the applicable redemption price, plus accumulated
and unpaid dividends. The redemption price initially will be $104.50 per share
effective as of January 15, 1997 and will decline to $100.00 after January 15,
2003. Holders of Series B Stock have the right, at their option, at any time to
convert the Series B Stock into a number of fully paid and nonassessable shares
of Webster Stock equal to $100.00 for each share surrendered for conversion
divided by the conversion price, subject to certain exceptions following a
notice of redemption by Webster.
Senior Notes
The 8 3/4% Senior Notes due 2000 (the "Senior Notes") were issued by
Webster in an aggregate principal amount of $40,000,000 pursuant to an Indenture
(the "Indenture"), dated as of June 15, 1993, between Webster and Chemical Bank,
as trustee (the "Trustee"). Certain provisions of the Indenture are summarized
below because of their impact on the Webster Stock. The Senior Notes bear
interest at 8 3/4% payable semi-annually on each June 30 and December 30 until
maturity on June 30, 2000. The Senior Notes are unsecured general obligations
only of Webster and not of its subsidiaries. The Senior Notes may not be
redeemed by Webster prior to maturity. This provision is not expected to have an
anti-takeover effect, since the Notes would be assumed by any acquirer of
Webster. The Indenture contains covenants that limit Webster's ability at the
holding company level to incur additional Funded Indebtedness (as defined
below), to make Restricted Distributions (as defined below), to engage in
certain dispositions affecting First Federal or its voting stock, to create
certain liens upon Webster's assets at the holding company level (including a
negative pledge clause), and to engage in mergers, consolidations, or sale of
substantially all of Webster's assets unless certain conditions are satisfied.
The Indenture also requires that Webster maintain a specified level of liquid
assets at the holding company level.
Restrictions on Additional Indebtedness. The Indenture limits the
amount of Funded Indebtedness which Webster may incur or guarantee at the
holding company level. Funded Indebtedness includes any obligation of Webster
with a maturity in excess of one year for borrowed money, for the deferred
purchase price of property or services, for capital lease payments, or related
to the guarantee of such obligations. Webster may not incur or guarantee any
Funded Indebtedness if, immediately after giving effect thereto, the amount of
Funded Indebtedness of Webster at the holding company level, including the
Senior Notes, would be greater than 90% of Webster's consolidated net worth. As
of June 30, 1995, Webster's consolidated net worth was $149.6 million and it had
$43.1 million of Funded Indebtedness.
Restricted Distributions. Under the Indenture, Webster may not,
directly or indirectly, make any Restricted Distribution (as defined below),
except in capital stock of Webster, if, at the
55
time or after giving effect thereto: (a) an event of default shall have occurred
and be continuing under the Indenture; (b) First Federal would fail to meet any
of the applicable minimum capital requirements under OTS regulations; (c)
Webster would fail to maintain sufficient liquid assets to comply with the terms
of the covenant described under "Liquidity Maintenance" below; or (d) the
aggregate amount of all Restricted Distributions subsequent to March 31, 1993
would exceed the sum of (i) $5 million, plus (ii) 75% of Webster's aggregate
consolidated net income (or if such aggregate consolidated net income shall be a
deficit, minus 100% of such deficit) accrued on a cumulative basis in the period
commencing on June 30, 1993 and ending on the last day of the fiscal quarter
immediately preceding the date of the Restricted Distribution, and plus (iii)
100% of the net proceeds received by Webster from any capital stock issued by
Webster (other than to a subsidiary) subsequent to March 31, 1993. As of June
30, 1995, Webster had the ability to pay $53.4 million in Restricted
Distributions.
Restricted Distribution means: (a) any dividend, distribution or other
payment (except for dividends, distributions or payments payable in capital
stock or dividends on the Series B Stock) on the capital stock of Webster or any
subsidiary (other than a wholly owned subsidiary); (b) any payment to purchase,
redeem, acquire or retire any capital stock of Webster (other than the Series A
Stock, which was previously redeemed), the capital stock of any subsidiary
(other than a wholly-owned subsidiary); and (c) any payment by Webster of
principal (whether a prepayment, redemption or at maturity) of, or to acquire,
any indebtedness for borrowed money issued or guaranteed by Webster (other than
the Senior Notes or pursuant to a guarantee by Webster of any borrowing by any
ESOP established by Webster or a wholly owned subsidiary), except that any such
payment of, or to acquire, any such indebtedness for borrowed money that is not
subordinated to the Senior Notes will not constitute a Restricted Distribution,
if such indebtedness was issued or guaranteed by Webster at a time when the
Senior Notes were rated in the same or higher rating category as the rating
assigned to the Senior Notes by Standard & Poor's ("S&P") at the time the Senior
Notes were issued.
Liquidity Maintenance. The Indenture requires that Webster maintain at
all times, on an unconsolidated basis, liquid assets in an amount equal to or
greater than 150% of the aggregate interest expense on the Senior Notes and all
other indebtedness for borrowed money of Webster for 12 full calendar months
immediately following each determination date under the Indenture provided, that
Webster will not be required to maintain such liquid assets once the Senior
Notes have been rated "BBB-" or higher by S&P for six calendar months and remain
rated in such category.
Certificate of Incorporation and Bylaw Provisions
General. Certain provisions included in Webster's certificate of
incorporation and bylaws may serve to entrench current management and to prevent
a change in control of Webster even if desired by a majority of shareholders.
These provisions are designed to encourage potential acquirers to negotiate
directly with the Board of Directors of Webster and to discourage other takeover
attempts. The following discussion is a general summary of certain provisions of
Webster's certificate of incorporation and bylaws, and a comparison of those
provisions to similar types of provisions in Shelton's certificate of
incorporation and bylaws. The discussion is necessarily general and, with
respect to provisions contained in Webster's certificate of incorporation and
bylaws, reference should be made to the document in question, each of which is
an exhibit to Webster's registration statement.
Directors. Certain provisions of Webster's certificate of incorporation
and bylaws will impede changes in majority control of Webster's Board of
Directors. The certificate of incorporation provides that the Board of Directors
will be divided into three classes, with directors in each class elected for
three-year staggered terms. The bylaws provide that the size of the Board of
Directors, within the seven to 15 range specified in the certificate of
incorporation, may be increased or decreased only by a two-thirds vote of the
Board of Directors and by a vote of two-thirds of the shares eligible to be
voted at a duly constituted meeting of shareholders called for such purpose. The
certificate of incorporation provides that a vacancy occurring in the Board of
Directors, including a
56
vacancy created by any increase in the number of directors, may be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. The bylaws also impose certain restrictions on the nomination by
shareholders of candidates for election to the Board of Directors or the
proposal by shareholders of business to be acted upon at an annual meeting of
shareholders.
Webster's certificate of incorporation provides that a director may be
removed only for cause and then only by the affirmative vote of two-thirds of
the total shares eligible to vote at a duly constituted meeting of the
shareholders called expressly for that purpose. The certificate of incorporation
also provides that 30 days' written notice must be provided to any director or
directors whose removal is to be considered at a shareholders' meeting called
for such purpose.
The provisions of Shelton's certificate of incorporation and bylaws
with regard to directors are substantially identical as those of Webster's,
except that the range as to the number of directors is six to 12 in Shelton's
certificate of incorporation.
Call of Special Meetings. Webster's certificate of incorporation contains a
provision which provides that a special meeting of shareholders may be called at
any time but only by the chairman of the board or the president of Webster or by
its Board of Directors. Shareholders are not authorized to call a special
meeting. Shelton's certificate of incorporation is the same as to special
meetings.
Cumulative Voting. The certificate of incorporation of both Webster and
Shelton deny cumulative voting rights in the election of directors.
Authorized and Outstanding Common Stock. See "-- Webster Stock" as to
authorized and currently outstanding shares of common stock of Webster, par
value $.01 per share. Shelton has 5,000,000 authorized shares of common stock,
par value $1.00 per share, of which 1,397,249 shares are currently outstanding.
Shelton has outstanding stock options granted to directors, officers and other
employees for 56,683 shares of Shelton Stock, plus the Option for 267,324 shares
of Shelton Stock granted to Webster in connection with the Merger.
Authorized and Outstanding Serial Preferred Stock. See "---- Series B
Stock" as to authorized and currently outstanding shares of serial preferred
stock of Webster. Shelton's certificate of incorporation authorizes 1,000,000
shares of serial preferred stock, $1.00 par value, of which no shares are
outstanding.
Approvals for Acquisitions of Control. Webster's certificate of
incorporation prohibits any person (whether an individual, company or group
acting in concert) from acquiring beneficial ownership of 10% or more of
Webster's voting stock, unless the acquisition has received the prior approvals
of two-thirds of Webster's outstanding voting shares and of all required federal
regulatory authorities. Furthermore, no person may make an offer to acquire 10%
or more of Webster's voting stock without obtaining prior approval of the offer
by a two-thirds vote of Webster's Board of Directors or, alternatively, before
the offer is made, obtaining approval of the acquisition from the OTS. These
provisions do not apply to the purchase of shares by underwriters in connection
with a public offering, and the provisions remain effective only so long as an
insured institution is a majority-owned subsidiary of Webster. Shares acquired
in excess of these limitations are not entitled to vote or take other
shareholder action or be counted in determining the total number of outstanding
shares of voting stock in connection with any matter involving shareholder
action. These excess shares are also subject to transfer to a trustee, selected
by Webster, for the sale on the open market or otherwise, with the expenses of
the trustee to be paid out of the proceeds of such sale. These limitations on
offers and purchases do not apply to the ESOP or other employee benefits plans
of Webster.
Shelton's certificate of incorporation contains substantially identical
provisions as to approvals for acquisition of control of Shelton, except that
regulatory approvals of both the Connecticut Department of Banking and the OTS
are required.
57
Procedures for Certain Business Combinations. Webster's certificate of
incorporation requires that certain business combinations between Webster (or
any majority-owned subsidiary thereof) and a 10% or more shareholder or its
affiliates (collectively, the "Interested Shareholder") either (i) be approved
by at least 80% of the total number of outstanding voting shares of Webster, or
(ii) either be approved by two-thirds of Webster's continuing Board of Directors
(persons serving prior to the 10% shareholder becoming such) or involve
consideration per share generally equal to that paid by the 10% shareholder when
it acquired its block of stock. The types of business combinations with an
Interested Shareholder covered by this provision include: mergers,
consolidations, stock exchanges; a sale, lease, exchange, mortgage, pledge or
other transfer of assets other than in the usual and regular course of business;
an issuance by Webster of its equity securities having a market value in excess
of 5% of aggregate market value of its outstanding shares; the adoption of any
plan of liquidation of Webster or any subsidiary proposed by an Interested
Shareholder; and any reclassification of securities or recapitalization of
Webster which has the effect of increasing the proportionate equity ownership
interest of the Interested Shareholder. Shelton's certificate of incorporation
contains a substantially identical provision as to business combinations.
Anti-Greenmail. Webster's certificate of incorporation requires
approval by a majority of the outstanding voting stock before Webster may
directly or indirectly purchase or otherwise acquire any voting stock
beneficially owned by a holder of 5% percent or more of Webster's voting stock,
if such holder has owned the shares for less than two years. Any shares
beneficially held by such person would be excluded in calculating majority
shareholder approval. This provision would not apply to a pro rata offer made by
Webster to all of its shareholders in compliance with the Exchange Act and the
rules and regulations thereunder or a purchase of voting stock by Webster if the
Board of Directors has determined that the purchase price per share does not
exceed the fair market value of such voting stock. Shelton's certificate of
incorporation contains no similar provision.
Criteria for Evaluating Offers. Webster's certificate of incorporation
provides that the Board of Directors, when evaluating any acquisition offers,
shall give due consideration to all relevant factors, including, without
limitation, the economic effects of acceptance of the offer on depositors,
borrowers and employees of its insured institution subsidiaries and on the
communities in which such subsidiaries operate or are located, as well as on the
ability of such subsidiaries to fulfill the objectives of insured institutions
under applicable federal statutes and regulations. Shelton's certificate of
incorporation contains a substantially identical provision as to Shelton Bank.
Amendment to Certificate of Incorporation and Bylaws. Amendments to
Webster's certificate of incorporation must be approved by a two-thirds vote of
Webster's Board of Directors and also by a majority of the outstanding shares of
Webster's voting stock, provided, however, that approval by two-thirds of the
outstanding voting stock is generally required for certain provisions. In
addition, the provisions regarding certain business combinations may be amended
only by the same "80 percent" shareholder vote required to approve a business
combination with a 10% shareholder. Webster's bylaws may be amended by a
two-thirds vote of the Board of Directors or a two-thirds vote of the total
shares eligible to be voted at a duly constituted meeting of shareholders.
Amendments to Shelton's certificate of incorporation and by laws are subject to
substantially identical provisions as those of Webster's.
Applicable Law
The following discussion is a general summary of certain provisions of
Delaware, Connecticut and federal statutory and regulatory provisions that may
be deemed to have an "anti-takeover" effect.
Delaware Takeover Statute. Section 203 of the Delaware General
Corporation Law (the "Delaware Takeover Statute") applies to Delaware
corporations with a class of voting stock listed on a national securities
exchange, authorized for quotation on an inter-dealer quotation system, or held
of record by 2,000 or more persons, and restricts transactions which may be
entered into by such a corporation and certain of its shareholders. The Delaware
Takeover Statute provides, in essence,
58
that a shareholder acquiring more than 15 percent of the outstanding voting
shares of a corporation subject to the statute (an "Interested Person") but less
than 85 percent of such shares may not engage in certain "Business Combinations"
(as defined) with the corporation for a period of three years subsequent to the
date on which the shareholder became an Interested Shareholder unless (i) prior
to such date the corporation's board of directors approved either the Business
Combination or the transaction in which the shareholder became an Interested
Person or (ii) the Business Combination is approved by the corporation's board
of directors and authorized by a vote of at least two-thirds of the outstanding
voting stock of the corporation not owned by the Interested Person.
The Delaware Takeover Statute defines the term "Business Combination"
to encompass a wide variety of transactions with or caused by an Interested
Person in which the Interested Person receives or could receive a benefit on
other than a pro rata basis with other shareholders, including mergers, certain
asset sales, certain issuances of additional shares to the Interested Person,
transactions with the corporation which increase the proportionate interest of
the Interested Person or transactions in which the Interested Shareholder
receives certain other benefits.
Connecticut Regulatory Restrictions on Acquisitions of Stock.
Connecticut banking statutes prohibit any person from directly or indirectly
offering to acquire or acquiring voting stock of a Connecticut-chartered bank
(such as Shelton Bank), a federal savings bank having its principal office in
Connecticut (such as Webster Bank) or a holding company of any such entity (such
as Webster or Shelton), that would result in such person becoming, directly or
indirectly, the beneficial owner of more than 10% of any class of voting stock
of such savings bank unless such person had previously filed an acquisition
statement with the Connecticut Commissioner and such offer or acquisition has
not been disapproved by the Connecticut Commissioner.
Federal Law. Federal law provides that, subject to certain exemptions,
no person acting directly or indirectly or through or in concert with one or
more other persons may acquire "control" of an insured institution or holding
company thereof, without giving at least 60 days prior written notice providing
specified information to the appropriate federal banking agency (i.e., the OTS
in the case of Webster and Webster Bank and the FDIC in the case of Shelton and
Shelton Bank). "Control" is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of an insured institution or to
vote 25 percent or more of any class of voting securities of an insured
institution. Control is presumed to exist where the acquiring party has voting
control of at least 10 percent of any class of the institution's voting
securities which is registered under Section 12 of the Exchange Act and is
actively traded. The term "actively traded" is defined in the regulation to mean
securities that are either listed on a securities exchange or quoted on the
Nasdaq National Market. The OTS or FDIC may prohibit the acquisition of control
it finds among other things that (i) the acquisition would result in a monopoly
or substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the institution or
(iii) the competence, experience or integrity of any acquiring person or any of
the proposed management personnel indicates that it would not be in the interest
of the depositors or the public to permit the acquisition of control by such
person.
LEGAL MATTERS
The validity of the Webster Stock to be issued in the Merger will be
passed upon by Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters in
connection with the Merger will be passed upon for Shelton by Schatz & Schatz,
Ribicoff & Kotkin, Hartford, Connecticut.
EXPERTS
The consolidated financial statements of Webster at December 31, 1994
and 1993, and for each of the years in the three year period ended December 31,
1994, incorporated by reference into the Registration Statement, have been so
incorporated in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated herein by reference and upon the
authority of said firm as experts in accounting and auditing. The report refers
to the fact that
59
Webster adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" and No. 115 "Accounting for Certain Debt and Equity Securities" in 1993.
The financial statements of Shelton at June 30, 1995 and 1994, and for
each of the three years in the period ended June 30, 1995, included in this
Joint Proxy Statement/Prospectus, have been included herein in reliance upon the
report of Coopers & Lybrand L.L.P., independent certified public accountants,
given on the authority of that firm as experts in accounting and auditing. The
report refers to the fact that Shelton changed its methods of accounting for
investments and income taxes during the year ended June 30, 1994.
60
ITEM 2 - ELECTION OF SHELTON DIRECTORS
Shelton Stock Owned by Principal Holders, and Directors and Executive Officers
as a Group
The following information is provided with respect to all persons known to
Shelton to own beneficially more than five percent of Shelton Stock, and the
aggregate beneficial ownership of directors and executive officers of Shelton as
a group at June 30, 1995.
- ------------------------------------------- -------------------------------- ---------------------------------------
Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class Owned
- ------------------------------------------- -------------------------------- ---------------------------------------
- ------------------------------------------- -------------------------------- ---------------------------------------
Webster Financial Corporation 267,324 (a) (a)
First Federal Plaza
Waterbury, CT. 06702
Directors and Executive Officers of the 302,659 (b) 20.9%
Company as a Group (9 persons)
- --------------------------------------------------------------------------------------------------------------------
<FN>
(a) On June 20, 1995, Webster and Shelton entered into the Option Agreement
that entitles Webster to purchase up to 267,324 shares of Shelton Stock
upon the occurrence of certain events (primarily events that would
create the potential for a third party to acquire Shelton), at a price
of $17.00 per share, subject to adjustment. In addition to the Option,
Webster owns 120 shares of Shelton Stock.
(b) Includes 87,957 shares subject to options which are immediately exercisable.
- --------------------------------------------------------------------------------------------------------------------
Election of Shelton Directors
The Board of Directors of Shelton is divided into three classes. The
number of directors is currently fixed at seven. The term of office of the
members of one class expires each year and successors are elected for a term of
three years and until their successors are elected and qualified. At the Shelton
Meeting, three directors will be elected for three-year terms expiring in 1998.
However, if the Merger Agreement is approved and adopted and the Merger is
consummated, Shelton's existence will cease. Accordingly, the directors of
Shelton will serve only up to the consummation of the Merger. It is the
intention of the persons named in the proxy to vote for the election of the
nominees hereinafter named. The Board of Directors believes that such nominees
will stand for election and will serve if elected directors. However, if any
person nominated by the Board of Directors fails to stand for election or is
unable to accept election, the proxies will be voted for the election of such
other person or persons as the Board of Directors may recommend. Assuming the
presence of a quorum at the Annual Meeting, directors will be elected by a
plurality vote.
Nominations of persons for election to the Board of Directors of
Shelton may be made only at a meeting of shareholders by or at the direction of
the Board of Directors or by any shareholder of Shelton entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in Shelton's bylaws. Such nominations, other than those made by or at the
direction of the Board of Directors, must be submitted in writing to the
Secretary of Shelton not less than 30 nor more than 90 days prior to the date of
the annual meeting; provided, however, that in the event that less than 45 days
notice or public disclosure of the date of the annual meeting is given or made
to shareholders, notice by the shareholder must be received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or public disclosure was made to
shareholders. Public disclosure of the date of the Shelton Meeting was made by a
press release issued on September 14, 1995; therefore, shareholder nominations
for the Shelton Meeting are required to be received on or before October 1, 1995
in order to be timely.
In accordance with Shelton's bylaws, a shareholder's notice must set
forth (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director (i) the name, age, business and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of Shelton which are beneficially
61
owned by such person, and (iv) any other information relating to such person
that is required to be disclosed in solicitation of proxies for election of
directors, or is otherwise required in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including without
limitation such person's written consent to be named in the proxy statement as a
nominee and to serving as a director if elected); and (b) as to the shareholder
giving the notice (i) the name and address, as they appear on Shelton's books,
of such shareholder and (ii) the class and number of shares of Shelton which are
beneficially owned by such shareholder.
The table below sets forth certain information regarding (i) the Board
of Directors of Shelton's three nominees for re-election as directors, (ii)
directors who will continue to serve as such after the Shelton Meeting, (iii)
the executive officers named in the Summary Compensation Table, and (iv) stock
ownership by each director and executive officer and by all directors and
executive officers as a group. Unless otherwise indicated in the notes to the
table, the individuals listed below had sole voting and investment power with
respect to the shares listed as being beneficially owned by them and shared
voting and dispositive powers with respect to the shares listed as owned by
others.
------------------------------------------------- --------------- --------------- ---------------------------------
Name and Age as of June 30, 1995 Director For Term Beneficial Ownership at
Since (a) to Expire June 30, 1995
------------- -------------------
Shares % of Total
------------------------------------------------- --------------- --------------- ------------- -------------------
NOMINEES FOR A THREE YEAR TERM
LeRoy T. Glover, 74, 1956 1998 21,429 1.53% (b)
Chairman of the Board, Shelton
and Shelton Bank; Retired Owner,
Glover Construction
------------------------------------------------- --------------- --------------- ------------- -------------------
J. Allen Kosowsky, 47, 1988 1998 58,989 4.20% (c)
Vice Chairman of the Board, Shelton
President, J. Allen Kosowsky, CPA, P.C.
------------------------------------------------- --------------- --------------- ------------- -------------------
Kenneth E. Schaible, 53, 1972 1998 62,648 4.43% (d)
President and Treasurer,
Shelton and Shelton Bank
------------------------------------------------- --------------- --------------- ------------- -------------------
CONTINUING DIRECTORS AND EXECUTIVE OFFICERS
Samuel Kreiger, 71, 1973 1997 27,651 1.97% (e)
Managing Partner, Real Estate Group
------------------------------------------------- --------------- --------------- ------------- -------------------
Joseph A. Pagliaro, 54, 1985 1996 40,286 2.88% (f)
President, Riverview Funeral Home (h)
------------------------------------------------- --------------- --------------- ------------- -------------------
Donald W. Smith, 64, 1988 1997 26,771 1.92% (g)
President, D.W. Smith Builders, Inc.
------------------------------------------------- --------------- --------------- ------------- -------------------
Charles H. Sullivan, 52, 1972 1996 1,366 0.1% (h)
Director of Food Services, Connecticut Valley
Hospital
------------------------------------------------- --------------- --------------- ------------- -------------------
William C. Nimons, 48, - - 46,274 3.28% (i)
Executive Vice President & Secretary
Shelton and Shelton Bank
------------------------------------------------- --------------- --------------- ------------- -------------------
All directors and executive officers as a group - - 302,659 20.87% (j)
(9 persons)
------------------------------------------------- --------------- --------------- ------------- -------------------
62
<FN>
(a) Includes years of service as a director of Shelton Bank.
(b) Includes 3,281 shares subject to options which are immediately
exercisable.
(c) Mr. Kosowsky has sole power to vote and sole power to dispose of
10,131 shares, which include 3,115 shares held directly, 4,652 shares
held in retirement plans and 2,364 shares owned as trustee for his
children. Mr. Kosowsky has shared power to vote and shared power to
dispose of 41,167 shares, which include 40,497 shares held jointly
with his spouse, 670 shares held by his spouse in a retirement plan.
Mr. Kosowsky also holds 7,691 shares subject to options which are
immediately exercisable.
(d) Includes 7,998 shares owned by Mr. Schaible's spouse, 453 shares owned
by his son, 6,690 shares held in Shelton Bank's Employee Stock
Ownership Plan and 47,507 shares subject to options which are
immediately exercisable.
(e) Includes 6,744 shares owned by Mr. Kreiger's spouse, 4,921 shares
owned jointly with spouse and 3,281 shares subject to options which
are immediately exercisable.
(f) Includes 1,821 shares owned jointly with spouse, 2,523 shares owned by
spouse, 12,041 shares owned jointly with his daughter and 5,574 shares
owned jointly by Mr. Pagliaro's spouse and son, and 2,000 shares held
in a retirement plan.
(g) Includes 4,439 shares held by spouse's estate, 7,657 shares held in a
retirement plan for the benefit of Mr. Smith. Includes 2,500
transferred to family members that remain subject to the Stockholder
Agreement.
(h) Includes 250 shares subject to options which are immediately
exercisable.
(i) Includes 2,100 shares held in a retirement plan for the benefit of Mr.
Nimons, 2,100 shares held in a retirement plan for the benefit of his
spouse, 5,162 shares held in Shelton Bank's Employee Stock Ownership
Plan, 1,289 shares as custodian for his children and 13,759 shares
subject to options which are immediately exercisable.
(j) Includes 53,024 shares subject to options which are immediately
exercisable.
-------------------------------------------------------------------------------------------------------------------
Committees of Shelton's Board of Directors
The Board of Directors of Shelton has established Audit and Nominating
Committees, the members of which are elected by the Board of Directors.
The Audit Committee is composed of Messrs. Kosowsky, Kreiger and Smith.
The Audit Committee, which is composed solely of outside directors, meets
periodically with Shelton's management, internal auditor and independent
accountants to review matters relating to the quality of financial reporting and
internal accounting controls and the nature, extent and results of the audit
effort. During the year ended June 30, 1995, the Audit Committee met four times.
The Nominating Committee is composed of Messrs. Pagliaro and Sullivan.
The Nominating Committee met once during the year ended June 30, 1995 to
nominate officers and directors of Shelton.
Shelton Director Meeting Attendance and Fee Arrangements
During the year ended June 30, 1995, Shelton's Board of Directors met
seven times. All directors attended 80% or more of the total number of meetings
held by Shelton's Board of Directors and the total number of meetings held by
all committees of Shelton's Board of Directors on which he served. All directors
also attended 80% or more of the 12 meetings held by Shelton Bank's Board of
Directors and the total of the 34 meetings held by all committees of Shelton
Bank's Board of Directors on which he served.
Non-employee directors receive a $7,000 annual retainer, $350 for each
board meeting attended, and $250 for each committee meeting attended. During the
year ended June 30, 1995, Mr. Glover received $5,000 in fees from Shelton Bank
for consulting services and $468 in fees for on-site construction loan
disbursement inspections. Messrs. Pagliaro and Smith received $3,236 and $5,322,
respectively, in fees from Shelton Bank for on-site construction loan
disbursement inspections.
Shelton Personnel Committee Report on Executive Compensation
The executive officers of Shelton receive all of their cash
compensation from Shelton Bank. As such, the Personnel Committee of the Board of
Directors of Shelton Bank ("the Personnel Committee") makes recommendations
regarding the compensation levels of Shelton's executive officers to the full
Board of Directors of Shelton Bank for its consideration in determining
executive compensation.
63
The Personnel Committee's primary objective is to maintain a
competitive compensation program, based on the concept of pay for performance,
that will play a key role in retaining and attracting results oriented
individuals. In addition to the Personnel Committee's own evaluation of the
adequacy of the executive officers' compensation program, the Personnel
Committee periodically has its findings reviewed by outside compensation
specialists to ensure that the program is both competitive and reasonable.
The executive officers' compensation program has three primary
components - base salary, annual incentives and long-term incentives. The
compensation program also provides the executive officers with a relatively
standard employee benefits package that is available, on the same basis, to all
of Shelton Bank's employees.
The executive officers' base salaries reflect their performance in
discharging their specific job responsibilities. Salary adjustments are
primarily based on sustained job performance over time. To maintain executive
salaries within competitive levels, the Personnel Committee also surveys salary
levels for comparable positions at area financial institutions of similar size
that compete in Shelton's primary line of business.
Annual incentive bonuses are primarily based on Shelton's
profitability, as measured by the return on average assets. Annual incentive
bonuses also recognize and reward the achievement of specific strategic goals
and objectives set by the Board of Directors each year. Under Shelton's current
plan, annual incentive bonuses cannot exceed 25% of the officer's base salary.
Long-term incentives are provided through Shelton's Stock Option Plan
and Employee Stock Ownership Plan. These plans provide an earnings opportunity
which is directly linked to the performance of Shelton Stock. The Personnel
Committee believes that these plans focus attention on managing Shelton from the
perspective of a shareholder and facilitate the ability of Shelton to retain
results oriented individuals.
Shelton's net income for the year ended June 30, 1995 was $2,216,000 or
$1.62 per share on a fully diluted basis, an increase of 12% over net income
before accounting change of $1,975,000, or $1.50 per share, during the year
ended June 30, 1994. Shelton's 1994 fiscal year end income, which included
$275,000, or $.21 per share as a result of a change in the method of accounting
for income taxes, was $2,250,000, or $1.71 per share.
Based upon a review of specific job performance in fiscal 1995 and the
prior years, the base salary of Kenneth E. Schaible, President and Treasurer,
was increased by recommendation of the Committee from $150,000 to $160,000, an
increase of 6.7% in fiscal 1995. Based upon Shelton Bank's return on average
assets and achievement of certain strategic objectives in fiscal 1995, Mr.
Schaible was awarded a $37,500 bonus, an amount equal to 23% of his current base
salary, upon the Committee's recommendation. For fiscal 1994, Mr. Schaible's
bonus was $32,136, or 21% of his 1994 base salary. During fiscal 1995, no stock
options were granted to Shelton's executive officers. For fiscal 1994, Mr.
Schaible was granted 13,781 stock options upon the Committee's recommendation.
Submitted by the members of the Personnel Committee:
LeRoy T. Glover Joseph A. Pagliaro Charles H. Sullivan
Shelton Compensation Committee Interlocks and Insider Participation
None
64
Shelton Compensation of Executive Officers
The following table sets forth the compensation paid, earned or
awarded, in the fiscal years indicated, to Shelton's president and to each other
executive officer whose compensation exceeded $100,000 during the year ended
June 30, 1995.
Summary Compensation Table
-------------------- -------------------------------------------- -------------------------------- ----------------
All Other
Name and Principal Annual Compensation Long Term Compensation Compensation
Position (2)
-------------------------------------------- --------------------------------
Fiscal Salary Bonus Other Restrict-ed Securities LTIP
Year Compensation Stock Underlying Pay-
(1) Awards ($) Options/ outs
SARs(#)
-------- --------- --------- --------------- ----------- ------------ -------
-------------------- -------- --------- --------- --------------- ----------- ------------ ------- ----------------
Kenneth E. Schaible 1995 $151,221 $37,500 $2,885 - - - $2,937
Director, 1994 145,369 32,136 2,686 - 13,781 - 639
President & 1993 133,480 9,405 2,466 - - - 2,181
Treasurer
-------------------- -------- --------- --------- --------------- ----------- ------------ ------- ----------------
-------------------- -------- --------- --------- --------------- ----------- ------------ ------- ----------------
William C., Nimons 1995 112,562 27,500 1,269 - - - $2,645
Executive Vice 1994 107,428 23,810 1,492 - 11,025 - 473
President & 1993 101,122 7,135 1,923 - - - 1,616
Secretary
-------------------------------------------------------------------------------------------------------------------
<FN>
(1) All amounts included in this column represent payment for unused sick
leave.
(2) All amounts represent the fair market value of shares allocated to the
named individuals under Shelton Bank's Employee Stock Ownership Plan
for calendar 1995. The value was calculated based on the $15.25 per
share closing price of Shelton Stock on December 31, 1994, the date of
allocation.
-------------------------------------------------------------------------------------------------------------------
Shelton Option Grants During 1994 Fiscal Year
None
Shelton Option Exercises and Year-End Option Value Table
The following table provides information on options exercised by the
executive officers of Shelton named in the Summary Compensation Table, the
number of unexercised options each of them held at June 30, 1995 and the value
of the unexercised in-the-money options each of them held as of that date. The
values shown in the table are based on the $20.75 closing price of Shelton Stock
on June 30, 1995, less the exercise price of the options.
AGGREGATED OPTIONS/SARS EXERCISES IN 1995 FISCAL YEAR AND 1995 FISCAL YEAR-END
OPTIONS/SAR VALUES
--------------------- ------------- ----------- ------------------------------- -----------------------------------
Number of Securities Value of Unexercised In-the-Money
Underlying Unexercised Options at
Options/SARs at June 30, 1995 June 30, 1995
----------------------------- -------------
Shares
Acquired
on Value
-------------- ---------------- -------------- --------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------------- ------------- ----------- -------------- ---------------- -------------- --------------------
Kenneth E. Schaible - - 47,507 - $583,216 -
William C. Nimons - - 13,759 - 113,802 -
--------------------- ------------- ----------- -------------- ---------------- -------------- --------------------
65
Shelton Pension Plan
Shelton Bank is a participant in a multi-company pension plan. The
pension plan is a qualified non contributory defined benefit pension plan.
Employees become eligible for participation on attainment of age 21 and the
accumulation of 1,000 hours of employment in a year. The plan provides for
payments to each covered employee or their beneficiary upon the covered
employee's retirement or death, with provisions for early or postponed
retirement. Upon normal retirement at age 65, annual payments under the pension
plan are not offset by Social Security benefits and total annual payments are
equal to 1.5% of the employee's average annual base salary over the five
consecutive years of highest salary, multiplied by such employee's years of
credited service. Total annual pension payments may not exceed the lesser of
$112,888 or 100% of the employee's average annual base salary over the three
consecutive years of highest salary. The pension plan also provides for reduced
optional early retirement benefits, provided a participant retires within ten
years of his or her normal retirement date. Although no disability benefits are
provided under the pension plan, participants who leave Shelton Bank because of
a disability are entitled to early retirement benefits.
The following table illustrates annual pension benefits at age 65 under
the most advantageous provisions available for various levels of compensation
and years of service.
- --------------------------- ----------------------------------------------------------------------------------------
Five-Year Average Years of Service
Annual Salary
- --------------------------- ---------------------- --------------------- --------------------- ---------------------
10 20 30 40
-- -- -- --
$ 60,000 $ 9,000 $18,000 $27,000 $36,000
80,000 12,000 24,000 36,000 45,000
100,000 15,000 30,000 45,000 54,000
120,000 18,000 36,000 54,000 63,000
140,000 21,000 42,000 63,000 72,000
160,000 24,000 48,000 72,000
- --------------------------- ---------------------- --------------------- --------------------- ---------------------
Covered earnings for the year ended June 30, 1995, for the individuals
named in the Summary Compensation Table were $147,432 for Mr. Schaible and
$118,372 for Mr. Nimons. As of June 30, 1995, Mr. Schaible had 27 years and 11
months of credited service and Mr. Nimons had 23 years and 11 months of credited
service.
Shelton Employment Agreements
Shelton and Shelton Bank have entered into employment contracts with
Kenneth E. Schaible, President and Treasurer, William C. Nimons, Executive Vice
President and Secretary and Ralph J. Rodriguez, Senior Vice President and
Controller. Messrs. Schaible and Nimons' employment contracts have terms of four
years and Mr. Rodriguez's contract has a term of three years. Each contract
automatically renews for one additional year on each anniversary date of the
contract, commencing on August 29, 1995 for Messrs. Schaible and Nimons, and on
October 25, 1995 for Mr. Rodriguez, unless Shelton, Shelton Bank or the employee
gives written notice to the contrary. The current term of the contracts is
through August 29, 1999 for Messrs. Schaible and Nimons and through October 25,
1998 for Mr. Rodriguez. The employment contracts provide for the employees to
receive annual base salaries, increased annually based primarily on personal
performance as determined by the Board of Directors, and to participate in the
employee benefits package that is provided to all of Shelton Bank's employees.
The employment contracts provide for the termination of the employees
with or without "cause", as defined in the contracts. If the employee is
terminated with cause, the employment agreement terminates. In the event that
the employee is terminated without cause, the employee is entitled to: (i)
receive a cash payment equal to his current salary for the remaining term of the
agreement, (ii) continue to participate in all employee benefits and fringe
benefits for the remaining term of the agreement, except that the employee, the
employee's spouse, and the employee's
66
dependents continue to receive life, health, dental, and disability coverage
until the employee becomes eligible for comparative benefits in connection with
full-time employment with another employer, (iii) continue to be covered under
all insurance or other provisions for the indemnification and defense of
officers or directors, and (iv) receive outplacement services and legal,
accounting and financial planning services related to employee's benefits under
the contracts (the benefits described in (ii) through (iv) are referred to
herein as the "Benefits"). Based on their current base salaries, if their
employment were terminated without cause, Messrs. Schaible, Nimons and Rodriguez
would be entitled to receive payments of $640,000, $465,000 and $243,000,
respectively, excluding the Benefits.
The employees have no right to terminate their employment without the
approval of the Board of Directors except in connection with or within one year
following a "change in control", as defined in the employment contracts, of
Shelton or Shelton Bank. If the employee voluntarily terminates his employment,
or if his employment is terminated involuntarily, in connection with or within
one year following a "change in control", he would be entitled to receive a lump
sum cash severance payment. The payment to each of Messrs. Schaible, Nimons and
Rodriguez would be equal to three times their average annual compensation during
the five-year period prior to their termination. Assuming the average annual
compensation, during the five years prior to the termination of employment, of
Messrs. Schaible, Nimons and Rodriguez following a change in control were equal
to their current base salary of $160,000, $116,250 and $81,000, respectively,
Messrs. Schaible, Nimons and Rodriguez would be entitled to receive payments of
$480,000, $348,750 and $243,000, respectively, excluding the Benefits.
In connection with the Merger Agreement, Messrs. Schaible, Nimons and
Rodriguez agreed with Webster and Shelton to limit all payments to them under
their employment contracts, all other agreements and benefit plans, to the
limitations relating to "parachute payments" in Section 280G(b)(2) of the
Internal Revenue Code (the "Code"). See "THE MERGER - Interests of Certain
Persons in the Merger" as to severance payments by Webster Bank and new
employment and consulting agreement with Mr. Schaible and new consulting
agreements with Messrs. Nimons and Rodriguez by Webster Bank upon consummation
of the Merger.
Shelton Comparative Stock Performance
The following graph compares the five year cumulative total return on
Shelton Stock with the NASDAQ Market Value Index ("NASDAQ Index") and the Media
General New England Bank Industry Group ("Peer Group"). The values in the graph
show the relative performance through June 30, 1995 of a $100 investment made on
June 30, 1990 in Shelton Stock, the NASDAQ index and the Peer Group Index, with
reinvestment of dividends.
67
Performance Graph
[GRAPHIC OMITTED]
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Shelton Bancorp, 100 95.06 132.31 154.94 296.20 331.28
Inc.
Industry Index
--Peer Group 100 85.29 134.87 150.69 173.93 214.29
Broad Market 100 94.22 101.52 124.62 136.66 160.27
68
Shelton Transactions with Directors and Management
Directors, executive officers, principal shareholders of Shelton Stock
and certain of their associates, were customers of, and had other transactions
with Shelton Bank in the ordinary course of business. In management's opinion,
loan transactions with these individuals were made on substantially the same
terms as similar loans to others and did not involve more than the normal risk
of collectibility or present other unfavorable features.
SHELTON APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of Shelton has appointed the accounting firm of
Coopers & Lybrand L.L.P. to be Shelton's independent accountants for the year
ending June 30, 1996. A representative of Coopers & Lybrand L.L.P. is expected
to be present at the Shelton Meeting and will be given an opportunity to make a
statement, if he desires to do so, and will be available to respond to
appropriate questions from shareholders.
SHELTON SECTION 16(a) COMPLIANCE
Based on a review of reports submitted to Shelton, Shelton believes
that for the year ended June 30, 1995, all Section 16(a) filing requirements
applicable to Shelton's directors and officers were complied with on a timely
basis.
SHELTON OTHER MATTERS
The Board of Directors of Shelton does not know of any other matters to
be brought before the Shelton Meeting other than those referred to in this Joint
Proxy Statement/Prospectus. If, however, any other matters not now known are
properly brought before the Shelton Meeting, the persons named in the
accompanying proxy will vote such proxy in accordance with the determination of
a majority of the Board of Directors, including, without limitation, a motion to
adjourn or postpone the Shelton Meeting to another time and/or place for the
purpose of soliciting additional proxies in order to approve the Merger or
otherwise.
SHELTON PROPOSALS FOR 1996 ANNUAL MEETING
Shelton's bylaws provide that notice of shareholder proposals and
nominations for directors must be submitted to the Secretary of Shelton not
fewer than 30 days nor more than 90 days prior to an annual meeting, unless
notice or public disclosure of the date of the annual meeting occurs less than
45 days prior to the date of the annual meeting, in which event, shareholders
may deliver such notice not later than the 15th day following the day on which
notice of the annual meeting was mailed or public disclosure thereof was made.
Pursuant to Shelton's bylaws, a shareholder's notice of new business must also
set forth certain information as to the shareholder submitting the proposal and
each matter the shareholder proposes to bring before the annual meeting.
Proposals submitted by shareholders otherwise than in accordance with the
procedures set forth in Shelton's bylaws shall not be acted upon.
If the Merger Agreement is approved and adopted and the Merger is consummated,
there will not be an annual meeting of Shelton's shareholders in 1996. However,
if the Merger is not consummated, Shelton anticipates that its 1996 annual
meeting will be held in November 1996. Therefore, in addition to the above
requirements, any proposal intended to be presented by a shareholder for
inclusion in Shelton's proxy statement for its 1996 Annual Meeting must be
received by Shelton at its principal executive office no later than June 16,
1996.
--------------------
69
APPENDIX A
ALEX. BROWN & SONS
[LOGO] INCORPORATED
ESTABLISHED 1800 AMERICA'S OLDEST INVESTMENT BANKING FIRM
REPLY TO: P.O. BOX 515
MEMBER NEW YORK STOCK EXCHANGE, INC. AND OTHER LEADING EXCHANGES
BALTIMORE, MD 21203
June 20, 1995
The Board of Directors
of Shelton Bancorp, Inc.
375 Bridgeport Avenue
Shelton, CT 06484
Dear Sirs:
You have requested our opinion as to the fairness from a financial of
view to the holders of the outstanding shares of Common Stock, $1.00 par value
per share (the "Shares") of Shelton Bancorp, Inc. (the "Company") of the
Exchange Ratio (as hereinafter defined) to be received by the Company's
shareholders pursuant to the Agreement and Plan of Merger By and Between Webster
Financial Corporation ("Webster") and the Company dated June 20, 1995 (the
"Agreement"). Pursuant to the Agreement, each of the Shares will receive 0.92
shares Webster Common Stock, par value $0.01 per share ("Webster Common Stock")
(the "Exchange Ratio").
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for estate, corporate and other purposes. We have
acted as financial advisor to the Board of Directors of the Company in
connection with the transactions described above and will receive a fee for our
services, a significant portion of which is contingent upon the consummation of
the transaction contemplated by the Agreement. Alex. Brown & Sons Incorporated
regularly publishes research reports regarding the financial services industry
and the businesses and securities of publicly owned companies in that industry.
In connection with this opinion, we have reviewed certain publicly
available financial information concerning the Company and Webster and certain
internal financial analyses and other information furnished to us by the Company
and Webster. We have also held discussions with members of the senior management
of the Company regarding the business and prospects of the Company. In addition,
we have (i) reviewed the reported price and trading activity for the Shares and
Webster Common Stock, (ii) compared certain financial and stock market
information for the Company and Webster, respectively, with similar information
for certain comparable companies whose securities are publicly traded, (iii)
reviewed the Agreement and compared the financial terms of the Agreement with
those of certain recent business combinations of other savings banks which we
deemed comparable in whole or in part and (iv) performed such other studies and
analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of the
Company, we have assumed that such information reflects the best currently
available estimates and judgments of the management of the Company, as to the
likely future financial performance of the Company. In addition, we have not
made an independent evaluation or appraisal of the assets or liabilities of the
Company or Webster, nor have we been
A-1
furnished with any such evaluation or appraisal. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Exchange Ratio is fair, from a financial point of
view, to the holders of Shares.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ J. Adam Hitt
--------------------------
J. Adam Hitt
Principal
A-2
REVIEW OF OPERATIONS
Condensed statements of income
($ In thousands, except per share data) June 30, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Net interest income $8,835 $8,263 $8,097 $7,225 $5,485
Provision for loan losses 375 150 793 875 380
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 8,460 8,113 7,304 6,350 5,105
Income (loss) from real estate investments 67 56 151 (76) (15)
Trading account gains (losses) 30 (22) 40 (18) 19
Gains on sale of loans 13 84 763 648 27
Securities gains (losses) (20) 235 541 (56) (289)
Other non-interest income 1,427 1,280 972 939 647
Other real estate owned expense 58 257 579 413 472
Other non-interest expense 6,319 6,214 5,681 4,866 3,698
- -------------------------------------------------------------------------------------------------------------------
Net income before income taxes
and accounting change 3,600 3,275 3,511 2,508 1,324
Provision for income taxes 1,384 1,300 1,591 1,297 554
- -------------------------------------------------------------------------------------------------------------------
Income before accounting change 2,216 1,975 1,920 1,211 770
Change in accounting for income taxes - 275 - - -
===================================================================================================================
Net Income $2,216 $2,250 $1,920 $1,211 $ 770
===================================================================================================================
Per share data
Book value $14.92 $14.00 $12.89 $11.87 $11.14
Primary net income 1.63 1.74 1.52 0.96 0.60
Fully diluted net income 1.62 1.71 1.52 0.96 0.60
Cash dividends 0.62 0.49 0.43 0.40 0.37
===================================================================================================================
At year-end
Total assets $298,959 $276,003 $259,868 $248,611 $186,933
Net loans 223,301 189,228 171,892 167,687 146,594
Securities 54,630 66,599 67,904 60,816 24,939
Deposits 268,759 252,046 239,504 227,665 166,731
Borrowings 9,505 5,200 3,200 4,700 5,700
Stockholders' equity 20,036 18,262 16,425 14,970 14,052
Outstanding shares 1,343,341 1,304,156 1,274,257 1,260,863 1,260,863
===================================================================================================================
Financial ratios
Yield on interest-bearing assets 6.90% 6.75% 7.54% 8.86% 10.35%
Cost of funds 3.95 3.60 4.23 5.67 7.26
Interest rate spread 2.95 3.15 3.31 3.19 3.09
Net interest margin 3.23 3.33 3.46 3.36 3.34
Return on average assets 0.76 0.85 0.76 0.52 0.44
Return on average equity 11.64 12.94 12.14 8.29 5.63
Average equity to average assets 6.57 6.55 6.26 6.29 7.76
Dividend payout ratio 36.87 28.04 28.13 41.54 60.39
At year-end:
Loans to deposits 83.63 75.58 72.36 74.12 88.21
Non-performing loans to total loans 0.89 0.57 0.55 2.09 2.53
Non-performing assets to total loans
and OREO 1.35 1.11 1.94 3.32 3.78
Allowance for loan losses to
non-performing loans 73.63 116.36 147.53 30.14 12.82
Capital ratios of bank subsidiary
Total risk-based 12.55 12.78 12.57 10.85 11.91
Tier 1 risk-based 11.63 11.90 11.56 10.17 11.51
Tier 1 leverage 6.20 6.25 6.20 5.83 7.30
===================================================================================================================
B-1
Overview
Shelton Bancorp ("Bancorp") is the parent company of Shelton Savings Bank ("the
Bank"), collectively referred to as "the Company." The Bank is headquartered in
Shelton, Connecticut and operates six full service offices within eastern
Fairfield and southwestern New Haven counties. Since its founding in 1919, the
Bank has specialized in retail banking with specific emphasis on residential
mortgage lending. Through its trust department, the Bank provides investment
advisory and management services to both retail and corporate customers.
On June 20, 1995, Shelton Bancorp entered into a definitive merger agreement
pursuant to which Webster Financial Corporation has agreed to acquire Shelton
Bancorp. Under the terms of the agreement, stockholders of Shelton Bancorp will
receive .92 of a share of Webster common stock, in a tax free exchange, for each
of their shares of Shelton Bancorp common stock. The exchange ratio is not
subject to market price adjustment. Subject to shareholder and regulatory
approvals, the acquisition of Shelton Bancorp by Webster Financial is expected
to close during the fourth quarter of 1995.
Net income for the year ended June 30, 1995 was $2,216,000, or $1.62 per share
on a fully diluted basis, an increase of 12% over net income before accounting
change of $1,975,000, or $1.50 per share, during the year ended June 30, 1994.
The Company's 1994 fiscal year net income, which included $275,000, or $0.21 per
share as a result of a change in the method of accounting for income taxes, was
$2,250,000, or $1.71 per share.
The major components of the decrease in net income were as follows:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Year ended June 30, 1995 1994 Amount Change
- -------------------------------------------------------------------------------------------------------------------
Percent
Net interest income $8,835 $8,263 $572 7%
Provision for loan losses 375 150 225 150
Core non-interest income 1,427 1,280 147 11
Core non-interest expense 6,319 6,214 105 2
__________________________________________________________________________________________________________________
Core pre-tax earnings 3,568 3,179 389 12
Gains from asset sales 90 353 (263) (75)
Other real estate owned expense 58 257 (199) (77)
__________________________________________________________________________________________________________________
Income before income taxes and accounting change 3,600 3,275 325 10
Provision for income taxes 1,384 1,300 84 6
Change in accounting for income taxes - 275 (275) 100
===================================================================================================================
Net income $2,216 $2,250 $(34) (2)%
===================================================================================================================
Dividends per share were $0.62 in 1995, up from $0.49 in 1994.
In 1995 the Company's total assets increased by $23.0 million, or 8%. Most of
the growth, which was concentrated in the loan portfolio, was funded by a $16.7
million, or 7%, increase in deposits.
Loans
As part of its interest rate risk management program, the Company's lending for
portfolio centers on adjustable rate first mortgage loans ("ARMs")
collateralized by 1-4 family residential properties. The interest rate charged
on ARMs generally adjusts annually based on the National Monthly Median Cost of
Funds Index, an index that approximates the Company's own cost of funds. The
Company has also placed strong emphasis on the origination of floating rate home
equity credit lines. The rate on these credit lines is subject to monthly
adjustment, based on changes in the prime interest rate.
The Company sells the majority of its fixed rate mortgage loan originations
in the secondary market.
B-2
As the table below shows, 90% of the Company's loan portfolio consists of
adjustable or floating rate loans. By focusing on adjustable rate lending, the
Company can partially mitigate the adverse impact of increases in its cost of
funds, given that the rate charged on the majority of the loan portfolio will
also increase as market interest rates rise.
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Time Remaining to Maturity at June 30, 1995
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Under One to Over Total
- -------------------------------------------------------------------------------------------------------------------
One Year Five Years Five Years
Real estate loans:
First mortgages $11,700 $27,704 $153,352 $192,756
Home equity credit lines 18,668 - - 18,668
Construction and land development 73 362 6,025 6,460
Second mortgages 30 994 - 1,024
Consumer installment 363 4,971 525 5,859
- -------------------------------------------------------------------------------------------------------------------
Total loans $30,834 $34,031 $159,902 $224,767
_____________________________________________________________________________________________________________________
Loans with floating or adjustable
interest rates $30,322 $27,265 $144,512 $202,099
Loans with predetermined interest rates 512 6,766 15,390 22,668
===================================================================================================================
Total loans $30,834 $34,031 $159,902 $224,767
______________________________________________________________________________________________________________________
Since ARMs are the Company's primary lending product for portfolio, demand for
such loans generally drives the Company's overall growth and is one of the
primary determinants of core profitability. Demand for ARMs generally increases
when their opening first year rate is significantly lower than that available on
a comparable fixed rate mortgage.
Loans consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
____________________________________________________________________________________________________________________
Real estate loans:
First mortgages $192,756 85% $159,401 83% $142,002 82% $136,231 81% $117,800 80%
Home equity
credit lines 18,668 8 18,796 10 19,603 11 20,283 12 20,283 14
Construction and
land development 6,460 3 5,139 3 4,830 3 4,282 2 3,621 2
Second mortgages 1,024 1 1,097 1 1,419 1 1,717 1 1,570 1
- -------------------------------------------------------------------------------------------------------------------
Total real estate loans 218,908 97 184,433 97 167,854 97 162,513 96 143,274 97
Consumer installment 5,859 3 6,068 3 5,444 3 6,236 4 3,797 3
- -------------------------------------------------------------------------------------------------------------------
Total loans $224,767 100% $190,501 100% $173,298 100% $168,749 100% $147,071 100%
===================================================================================================================
Average outstanding
loans $212,818 - $181,530 - $170,864 - $152,487 - $145,836 -
Loans to deposits at
year-end 84% - 76% - 72% - 74% - 88% -
===================================================================================================================
B-3
Non-performing assets
The changes in non-performing assets were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Loans OREO Total
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 $ 953 $ 2,451 $ 3,404
Net increase in non-performing loans 1,455 - 1,455
Charge-offs (290) (344) (634)
Transfers to OREO (1,024) 1,024 -
Proceeds from sales of OREO - (2,354) (2,354)
Property improvements and change in allowance
for OREO losses - 253 253
____________________________________________________________________________________________________________________
Balance at June 30, 1994 1,094 1,030 2,124
Net increase in non-performing loans 1,752 - 1,752
Charge-offs (206) (77) (283)
Transfers to OREO (649) 649 -
Proceeds from sale of OREO - (713) (713)
Property improvements and change in allowance
for OREO losses - 166 166
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 $ 1,991 $ 1,055 $ 3,046
- -------------------------------------------------------------------------------------------------------------------
Non-performing assets consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 1994 1993 1992 1991
____________________________________________________________________________________________________________________
Loans past due 90 days or more:
Nonaccrual $1,875 $1,094 $ 953 $2,796 $2,867
Accrual 116 - - 728 854
_____________________________________________________________________________________________________________________
Total loans past due 90 days or more 1,991 1,094 953 3,524 3,721
_____________________________________________________________________________________________________________________
OREO:
Foreclosed properties 442 333 1,261 1,500 882
In-substance foreclosures 615 751 1,354 839 1,070
Allowance for OREO losses (2) (54) (164) (192) (47)
______________________________________________________________________________________________________________________
Total OREO 1,055 1,030 2,451 2,147 1,905
______________________________________________________________________________________________________________________
Non-performing assets $3,046 $2,124 $3,404 $5,671 $5,626
______________________________________________________________________________________________________________________
Restructured loans $ 100 $ 102 $ - $ - $ -
______________________________________________________________________________________________________________________
Non-performing assets to
total loans and OREO 1.35% 1.11% 1.94% 3.32% 3.78%
Allowance for loan losses to total loans
past due 90 days or more 73.63 116.36 147.53 30.14 12.82
As a percentage of total loans:
Loans past due 90 days or more 0.89 0.57 0.55 2.09 2.53
Allowance for loan losses 0.65 0.67 0.81 0.63 0.32
===================================================================================================================
The ratio of loans past due 90 days or more to total loans was 0.89% at June 30,
1995 up from 0.57% at June 30, 1994 when the ratio was at one of its lowest
points in five years. Delinquency levels are highly susceptible to unforeseen
changes in the financial condition of specific borrowers and to changes in the
state of the general economic environment, factors which are beyond the
Company's control. As such, management cannot accurately predict the direction
or magnitude of changes in delinquency levels in future periods.
The provision for loan losses increased from $150,000 during the year ended,
June 30, 1994 to $375,000 during the year ended June 30, 1995. The $225,000
increase was necessary to maintain the allowance for loan losses at a level that
management considers adequate to absorb potential losses, and reflects the $34.3
million increase in total loans during fiscal 1995. As a percentage of total
loans the allowance for loans was 0.65% at June 30, 1995, relatively unchanged
from 0.67% at June 30, 1994.
B-4
Not included in the preceding tables are loans that, in the opinion of
management, warrant monitoring due to varying degrees of documentation
deficiencies supporting the borrowers' current financial position. These
deficiencies have created some uncertainty, but not serious doubt, as to the
borrowers' ability to comply with the loan repayment terms in the future. Such
loans totaled $500,000 at June 30, 1995.
The accrual of interest income is discontinued when a loan is past due 90 days
or more, or earlier when doubt exists as to its ultimate collectibility. When
the accrual of interest income is discontinued, all previously accrued and
uncollected interest is generally reversed against the current period's interest
income. The accrual of interest on loans past due 90 days or more may be
continued when the fair value of the property, net of selling expenses,
collateralizing the loan is sufficient to discharge all principal and accrued
interest income due on the loan. A nonaccrual loan is restored to an accrual
status when it is no longer delinquent and the collectibility of interest and
principal is no longer in doubt.
At June 30, 1995 all loans that had been restructured to provide for a reduction
or deferral of interest or principal, as the result of a weakening in the
financial condition of the borrower, were performing in accordance with the
revised contract terms. The Company has no outstanding commitments to lend
additional funds to borrowers whose loans have been restructured.
The amount of interest income recognized on nonaccrual and restructured loans,
versus the amount that would have been recognized under the original contract
terms was:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Interest income recorded:
Nonaccrual loans $ 12 $ 17 $ 30
Restructured loans 7 1 -
Interest income under original contract terms:
Nonaccrual loans 123 111 131
Restructured loans 9 8 -
===================================================================================================================
Loans past due 90 days or more consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 Balance % of Total
1-4 family residential properties $1,989 100%
Consumer installment 2 -
===================================================================================================================
Total loans past due 90 days or more $1,991 100%
===================================================================================================================
OREO consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 Balance % of Total
- -------------------------------------------------------------------------------------------------------------------
Single-family homes $ 557 53%
Multi-family homes 389 37
Residential land 64 6
Condominiums 47 4
Allowance for OREO losses (2) -
===================================================================================================================
OREO $1,055 100%
===================================================================================================================
B-5
Allowance for loan losses
The allowance for loan losses is established through charges against income and
maintained at a level that management considers adequate to absorb potential
losses in the loan portfolio. Management's estimate of the adequacy of the
allowance for loan losses is based on evaluations of individual loans, estimates
of current collateral values, delinquency trends and the results of regulatory
examinations. Management also evaluates the general risk characteristics
inherent in the loan portfolio, concentrations of credit risk, prevailing and
anticipated economic conditions, and historical loan loss experience. Loans are
charged against the allowance for loan losses when management believes that
collection is unlikely. Any subsequent recoveries are credited to the allowance
for loan losses when received.
The changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $1,273 $1,406 $1,062 $ 477 $346
___________________________________________________________________________________________________________________
Real estate loan charge-offs (168) (267) (369) (351) (159)
Consumer loan charge-offs (38) (23) (92) (92) (95)
Real estate loan recoveries 20 1 - 1 -
Consumer loan recoveries 4 6 12 2 5
- -------------------------------------------------------------------------------------------------------------------
Net loan charge-offs (182) (283) (449) (440) (249)
Provision for loan losses 375 150 793 875 380
Balance related to acquired loans - - - 150 -
===================================================================================================================
Ending balance $1,466 $1,273 $1,406 $1,062 $477
___________________________________________________________________________________________________________________
Net loan charge-offs to average loans
outstanding 0.09% 0.16% 0.26% 0.29% 0.17%
===================================================================================================================
As part of its analysis of the adequacy of the allowance for loan losses,
management allocates the allowance for loan losses to the major segments of the
loan portfolio. Although the allowance for loan losses has been allocated as
presented below, it is available to absorb potential losses from any segment of
the loan portfolio.
The allowance for loan losses was allocated as follows:
(In Thousands) The following percentages represent the percent of loans in each
category to total loans
June 30, 1995 % 1994 % 1993 % 1992 % 1991 %
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
Real estate loans:
First mortgages $ 900 85% $ 761 83% $ 725 82% $ 445 81% $ 40 80%
Home equity
credit lines 101 8% 98 10% 112 11% 106 12% 60 14%
Construction and
land development 46 3% 79 3% 132 3 13 3 - 2%
Second mortgages - 1% - 1% 3 1% 3 1% - 1%
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
Total real estate loans 1,047 97% 938 97% 972 97% 567 96% 100 97%
Consumer installment 37 3% 53 3% 62 3% 94 4% - 3%
Unallocated 382 N/A 282 N/A 372 N/A 401 N/A 377 N/A
- ---------------------------- -------- -------- -------- -------- -------- -------- -------- ------- -------- -------
Total $1,466 100% $1,273 100% $1,406 100% $1,062 100% $477 100%
============================ ======== ======== ======== ======== ======== ======== ======== ======= ======== -------
B-6
Securities
The securities portfolio totaled $54.6 million at June 30, 1995, down from $66.6
million at the same time last year. The Company utilizes a segment of the
available for sale securities portfolio as a short to intermediate term
investment vehicle, and as a source of liquidity. Additional information on the
composition of the securities portfolio is included in Note 8 to the
Consolidated Financial Statements.
Securities consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury:
Held to maturity $19,543 $19,392 $34,328
Available for sale 8,320 12,316 -
U.S. government agencies:
Held to maturity 15,904 18,090 13,957
Available for sale 300 1,005 -
Corporate bonds, notes and debentures:
Held to maturity 3,257 3,467 6,593
Available for sale - 724 -
- -------------------------------------------------------------------------------------------------------------------
Total debt securities:
Held to maturity 38,704 40,949 54,878
Available for sale 8,620 14,045 -
Equities 7,304 6,706 4,434
Money market investments 2 4,792 8,316
Trading account - 107 276
===================================================================================================================
Total securities $54,630 $66,599 $67,904
===================================================================================================================
Securities to total assets 18% 24% 26%
- -------------------------------------------------------------------------------------------------------------------
The maturity distribution and yields on securities at June 30, 1995 were
as follows:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Time Remaining to Maturity at June 30, 1995
1 Year Weighted Over 1 Weighted Over 5 Weighted After Weighted
or less Average to Average to Average 10 years Average
Yield 5 years Yield 10 years Yield Yield
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury:
Held to maturity $ - -% $19,543 6.29% $ - -% $ - -%
Available for sale 4,570 4.81 3,750 6.26 - - - -
U.S. government agencies:
Held to maturity - 12,950 5.59 2,954 6.11 - -
Available for sale 300 5.45 - - - - - -
Corporate bonds, notes
and debentures:
Held to maturity 1,449 6.41 1,708 6.47 - - 100 8.53
Available for sale - - - - - - -
- -------------------------------------------------------------------------------------------------------------------
Total debt securities:
Held to maturity 1,449 6.41 34,201 6.04 2,954 6.11 100 8.53
Available for sale 4,870 4.85 3,750 6.26 - - - -
Equities 7,304 6.43 - - - - - -
Money market investments 2 5.58 - - - - - -
Trading account - - - - - - -
===================================================================================================================
Total securities $13,625 5.86% $37,951 6.06% $2,954 6.11% $100 8.53%
===================================================================================================================
B-7
As discussed in Notes 1 and 8 to the Consolidated Financial Statements, on June
30, 1994 the Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
The Company utilizes securities that are classified as available for sale as
part of its asset/liability management program. These securities have relatively
short maturities and may be sold in response to changes in a number of factors,
including the Company's liquidity needs and market interest rates. At June 30,
1995, gross unrealized gains on available for sale securities totaled $64,000
and gross unrealized losses were $109,000. The unrealized holding gain of
$26,000, net of income taxes, was reported as a separate component of
stockholders' equity.
Investments in real estate
As the result of sales activity, investments in real estate declined from $1.5
million at June 30, 1994 to $1.1 million at year-end 1995.
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Direct:
Stonebridge (30 lot residential subdivision) $1,035 $ 877
Owl Hill (25 unit residential housing) - 390
Allowance for losses (50) (34)
Joint ventures:
Walnut Estates (19 lot residential subdivision) 116 284
===================================================================================================================
Investments in real estate $1,101 $1,517
===================================================================================================================
The Owl Hill project, located in Shelton, Connecticut, was completed in fiscal
1995.
The Stonebridge project is located in Oxford, Connecticut. The construction
phase will be completed by the second quarter of fiscal 1996. Sales commenced in
December, 1994 and 10 lots were sold during the year ended June 30, 1995. The
Company anticipates that the remaining 20 lots will be sold within the next 15
to 20 months.
As an equity partner in joint ventures with local developers, the Company
typically receives 50% of the venture's net profits. Both the Company and its
partner are generally required to make contributions, in equal amounts, to the
venture.
The Company's sole joint venture, Walnut Estates, is located in Shelton,
Connecticut. The construction phase has been completed and 16 lots have been
sold. The Company anticipates that the remaining 3 lots will be sold in fiscal
1996.
A change in federal regulations has made it necessary for the Company to divest
itself of all real estate investments by December 19, 1996. Given the length of
time remaining to complete such divestiture, the Company has not found it
necessary to make significant changes in the timing of expenditures, the
determination of sales prices, or any other material aspect of its real estate
investments.
Additional information on the joint ventures is included in Note 9 to the
Consolidated Financial Statements.
B-8
Deposits
Deposits totaled $268.8 million at June 30, 1995, up $16.7 million, or 7%, from
$252.0 million at year-end 1994.
The Company's deposit acquisition strategies aim at attracting long-term retail
deposit relationships that are generally less sensitive to market interest rate
changes. In keeping with this strategy, the Company does not currently accept
highly volatile brokered deposits. In addition, the Company generally will not
pay a premium rate to attract or retain time deposits with balances of $100,000
or more, as they are considered by management to be sensitive to even moderate
rate changes. As a result, time certificates with balances of $100,000 or more
accounted for only 4% of total deposits at June 30, 1995.
The maturity distribution of time certificates of deposit issued in amounts of
$100,000 or more, and of other time deposits with balances of $100,000 or more
were:
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 Balance % of Total
- -------------------------------------------------------------------------------------------------------------------
Time remaining to maturity:
Three months or less $ 2,013 19%
Over three months to six months 1,796 17
Over six months to twelve months 1,021 9
Over twelve months 5,841 55
===================================================================================================================
Total $10,671 100%
===================================================================================================================
Average outstanding deposits and average rates paid were as follows:
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
($ In thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing deposits:
Time certificates $135,331 4.89% $117,123 4.63% $115,032 5.06%
Savings and NOW 81,090 1.93 83,617 2.02 76,902 2.89
Money market 33,544 4.60 30,593 3.46 29,701 3.87
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits $249,965 3.89% $231,333 3.53% $221,635 4.15%
===================================================================================================================
Non interest-bearing
demand deposits $ 16,079 - $ 13,105 - $ 11,263 -
===================================================================================================================
Borrowings
At June 30, 1995 borrowings totaled $9.5 million, up from $5.2 million at the
same time last year. The $4.3 million increase was attributable to additional
short-term borrowings utilized to fund a portion of the $23.0 million increase
in total assets during 1995. All of the Company's long-term borrowings are
subject to significant prepayment penalties.
B-9
Average outstanding borrowings and average rates paid were as follows:
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------------
Long-term borrowings $3,272 8.07% $3,200 8.75% $3,553 9.20%
Short-term borrowings 1,424 5.13 603 4.31 - -
===================================================================================================================
Total average outstanding borrowings $4,696 7.18% $3,803 8.05% $3,553 9.20%
Asset/Liability Management
The Company's asset/liability management program focuses on minimizing interest
rate risk by maintaining what management considers to be an appropriate balance
between the volume of assets and liabilities maturing or subject to repricing
within the same time interval. In an effort to maximize the net interest margin
at all levels of the interest rate cycle, lending centers on adjustable rate
loans that float at a positive spread over the average cost of the liabilities
funding the loans. This strategy has been reasonably successful in the past,
evidenced by the Company's ability to maintain the net interest margin above
3.20% during each of the past five years. By comparison, the cost of funds
varied between a high of 7.26% and a low of 3.60% during the same period.
The following table presents the Company's rate sensitivity GAP analysis at June
30, 1995. GAP analysis is a basic interest rate risk measurement tool that
provides management with an indication of the effect that future interest rate
movements could have on the Company. When liabilities reprice or mature at a
faster pace than assets, a negative GAP position exists. A negative rate
sensitivity GAP indicates that net interest income would tend to decrease as
interest rates increase, and increase as rates fall. Conversely, if a positive
GAP position exists, net interest income would tend to rise with increases in
interest rates, and fall as rates drop.
As savings and NOW accounts are subject to immediate repricing, they have been
classified as being subject to rate adjustments within six months or less.
However, their sensitivity to changes in market interest rates is relatively low
in comparison to other deposit products. Since these accounts are primarily
utilized for liquidity and bill-paying purposes, and not as investment vehicles,
account holders are somewhat indifferent to the interest rate being paid on
these accounts given the flexibility and convenience that they provide.
Additionally, since savings and NOW accounts are generally low balance accounts,
the interest income that they generate for most account holders is relatively
insignificant under most rate scenarios. Given all of these factors, the
magnitude and speed of changes in savings and NOW account rates tend to lag
behind changes in market interest rates.
As GAP analysis is only a static view of potential interest rate risk,
management also utilizes multiple simulation analysis techniques in an attempt
to estimate how the repricing and maturity mix of assets and liabilities could
change in response to interest rate changes, and the effect of such changes on
net interest income and liquidity. If these analyses indicate a high degree of
probability for a significant adverse change in net interest income or
liquidity, current funding strategies and asset mix would be changed to minimize
the Company's potential risk exposure.
B-10
The following table presents the scheduled maturities, or period to repricing,
of the Company's assets and liabilities at June 30, 1995.
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Rate Sensitive or Due in:
Six Months Over SixTotal Within Over Total
or Less Months to One Year One Year
One Year
- -------------------------------------------------------------------------------------------------------------------
Assets:
Interest-bearing assets:
Loans $ 94,579 $83,342 $177,921 $ 46,846 $224,767
Securities 10,504 3,148 13,652 40,976 54,628
Money market and other securities 2 - 2 - 2
- -------------------------------------------------------------------------------------------------------------------
Total interest bearing assets 105,085 86,490 191,575 87,822 279,397
Other assets, net - - - 19,562 19,562
- -------------------------------------------------------------------------------------------------------------------
Total assets 105,085 86,490 191,575 107,384 298,959
- -------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Time certificates 59,000 24,666 83,666 58,939 142,605
Regular savings 61,459 - 61,459 - 61,459
NOW accounts 15,818 - 15,818 - 15,818
Money market accounts 30,592 - 30,592 - 30,592
Borrowings 5,805 - 5,805 3,700 9,505
- -------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 172,674 24,666 197,340 62,639 259,979
Demand deposits - - - 18,285 18,285
Other liabilities - - - 659 659
Stockholders' equity - - - 20,036 20,036
===================================================================================================================
Total liabilities and stockholders' equity $ 172,674 $24,666 $197,340 $101,619 $298,959
===================================================================================================================
Rate sensitivity GAP $ (67,589) $61,824 $ (5,765) $ 5,765 $ -
===================================================================================================================
Liquidity
The Company regularly monitors its ability to profitably fund both short and
long-term growth in its lending and other investment activities. The Company
also monitors its capacity to fund any rapid unforeseen large cash outflows in
an orderly and cost effective manner.
As lending is the Company's single largest investment activity, the Company's
cash requirements are primarily determined by the level of loan demand. Loan
demand varies in response to changes in market interest rates, the state of the
economy and competition.
The Company's second largest investment activity is the holding of securities. A
portion of the Company's securities can either be sold or used as collateral for
short-term borrowings, providing a source of cash to fund unforeseen rapid
outflows of funds.
Deposits, specifically time certificates of deposit, are the Company's primary
financing source. As the Company does not accept brokered deposits or offer
premium rates to attract large denomination certificates of deposit, essentially
all of its deposit base is comprised of local retail deposit accounts. A local
retail deposit base tends to be somewhat insensitive to moderate interest rate
fluctuations, and provides a reasonably stable and cost effective source of
funds.
B-11
The Company may also borrow from the Federal Home Loan Bank ("the FHLB") on both
a short and long-term basis, and does so whenever the cash requirements of its
investing activities exceed deposit growth. The Company's borrowings from the
FHLB are limited to the amount of qualified collateral that the Company holds.
Based on available collateral, at June 30, 1995, the Company had potential
access to approximately $170 million in additional financing, an amount well in
excess of its normal annual financing requirements.
Federal regulations require that the Company maintain reserves, in the form of
cash on hand or deposit balances at the Federal Reserve Bank, against certain
deposit liabilities. At June 30, 1995 the Company's reserve requirement was $1.3
million.
Management is not aware of any known trends, events, uncertainties, or proposed
regulatory changes that are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations.
Capital resources
The Bank must maintain certain regulatory capital ratios. Depending on the
banking regulators overall quality rating of an institution, all but the highest
rated institutions must maintain a minimum Tier 1 leverage capital ratio of
between 4.00% to 5.00%. The Bank is also required to meet supplemental capital
adequacy standards which measure qualifying capital against risk-weighted assets
plus off-balance sheet items such as outstanding loan commitments and letters of
credit. At June 30, 1995 the Bank's total risk-based capital ratio was in excess
of the 8.00% minimum requirement.
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1995 1994
Bank's capital components:
Tier 1 capital (Stockholders' equity) $18,509 $17,244
Tier 2 capital (Allowance for loan losses) 1,466 1,273
- -------------------------------------------------------------------------------------------------------------------
Bank's total risk-based capital $19,975 $18,517
- -------------------------------------------------------------------------------------------------------------------
Bank's capital ratios:
Total risk-based 12.55% 12.78%
Tier 1 risk-based 11.63 11.90
Tier 1 leverage 6.20 6.25
===================================================================================================================
The Bank is Bancorp's sole source of funds for dividend payments to its
stockholders. Connecticut Banking Laws limit the amount of annual cash dividends
that the Bank may pay to Bancorp to an amount which approximates the Bank's net
income for the then current year, plus its retained net income for the prior two
years. The Bank is also prohibited from paying a cash dividend that would reduce
its capital to asset ratios below minimum regulatory requirements.
During the year ended June 30, 1995, Bancorp paid dividends totaling $817,000,
or $0.62 per share, up 29% from $631,000, or $0.49 per share in the prior year.
The dividend payout ratio was 37% in 1995 and 28% in 1994. Bancorp reviews its
dividend policy based on current earnings and by assessing the need to retain
earnings to support long-term growth.
Net interest income
In 1995 net interest income totaled $8.8 million, up $572,000, or 7%, from $8.3
million in 1994. In 1994 net interest income rose by $166,000 or 2%.
As shown in the tables on the following two pages, growth in interest income was
primarily attributable to increases in the balance of average interest-bearing
assets, specifically in the loan portfolio. Average loans outstanding rose $31.3
million, or 17%, in 1995, and $10.7 million, or 6%, in 1994. In 1995 the average
yield on interest-bearing assets increased marginally, from 6.75% in 1994, to
6.90% in 1995. In 1994 rate changes had a more significant impact on interest
income, with the average yield on interest-bearing assets dropping from 7.54% in
1993, to 6.75% in 1994.
B-12
In 1995 total interest expense rose by $1.6 million, or 19%. The increase was
primarily attributable to growth in average outstanding deposits and higher
deposit costs. Average interest-bearing deposits grew by 8% in 1995, increasing
from $231.3 million in 1994, to $250.0 million in 1995. The cost of deposits
rose from 3.53% in 1994, to 3.89% in 1995. The $1.0 million, or 11%, decrease in
total interest expense during 1994 was chiefly attributable to a drop in the
cost of deposits, which fell from 4.15% in 1994, to 3.53% in 1995.
A higher rate of average outstanding non-interest-bearing sources of funds also
contributed to the increases in net interest income during the past two years.
As a direct result of the Company's marketing efforts, average outstanding
demand deposits increased by $3.0 million, or 23%, in 1995, following a $1.8
million, or 16%, increase in 1994.
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Year ended June 30, 1995 1994 1993
Average Interest Average Average Interest Average Average Interest Average
Balance Rate Balance Rate Balance Rate
Assets:
Loans $212,808 $15,289 7.18% $181,530 $13,122 7.23% $170,864 $14,214 8.32%
- -------------------------------------------------------------------------------------------------------------------
Securities:
Securities 58,571 3,464 5.91 59,769 3,413 5.71 45,906 2,905 6.33
Money market and
other 2,563 143 5.58 6,565 204 3.11 17,016 497 2.92
- -------------------------------------------------------------------------------------------------------------------
Total securities 61,134 3,607 5.90 66,334 3,617 5.45 62,922 3,402 5.41
- -------------------------------------------------------------------------------------------------------------------
Total interest-
bearing assets 273,942 18,896 6.90 247,864 16,739 6.75 233,786 17,616 7.54
Cash and due from banks 6,779 6,073 5,075
Other assets 9,243 11,728 13,725
- -------------------------------------------------------------------------------------------------------------------
Total assets $289,964 $265,665 $252,586
- -------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Interest-bearing deposits:
Time certificates $135,331 $ 6,619 4.89% $117,123 $ 5,424 4.63% $115,032 $ 5,819 5.06%
Savings and NOW 81,090 1,561 1.93 83,617 1,687 2.02 76,902 2,225 2.89
Money market 33,544 1,544 4.60 30,593 1,059 3.46 29,701 1,148 3.87
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 249,965 9,724 3.89 231,333 8,170 3.53 221,635 9,192 4.15
Borrowings 4,696 337 7.18 3,803 306 8.05 3,553 327 9.20
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 254,661 10,061 3.95 235,136 8,476 3.60 225,188 9,519 4.23
Demand deposits 16,079 13,105 11,263
Accrued taxes and
other liabilities 183 36 314
Stockholders' equity 19,041 17,388 15,821
- -------------------------------------------------------------------------------------------------------------------
Total liabilities
and stockholders'
equity $289,964 $265,665 $252,586
===================================================================================================================
Net interest
income/rate spread $ 8,835 2.95% $ 8,263 3.15% $ 8,097 3.31%
===================================================================================================================
Net interest margin 3.23% 3.33% 3.46%
<FN>
(1) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(2) Includes net fee income of $279,000, $285,000 and $565,000 in 1995, 1994 and
1993, respectively.
B-13
The table below presents the changes in interest income and expense for
each major category of interest-bearing assets and liabilities, and the amount
of the change attributable to changes in average outstanding balances ("volume")
and rates. Changes attributable to both volume and rate changes have been
allocated in proportion to the relationship of the absolute dollar amount of the
changes in volume and rate.
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Change from 1994 to 1995 Change from 1993 to 1994 Change from 1992 to 1993
- -------------------------------------------------------------------------------------------------------------------
Attributable to: Attributable to: Attributable to:
- -------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $2,247 $ (80) $2,167 $ 850 $(1,942) $(1,092) $1,676 $(2,353) $ (677)
Securities (270) 317 47 813 (305) 508 547 (691) (144)
Money market & other (25) (32) (57) (323) 30 (293) (269) (326) (595)
- -------------------------------------------------------------------------------------------------------------------
Total interest
income 1,952 205 2,157 1,340 (2,217) (877) 1,954 (3,370) (1,416)
Interest expense:
Deposits:
Time certificates 878 317 1,195 104 (499) (395) 109 (1,502) (1,393)
Savings and NOW (50) (76) (126) 181 (719) (538) 679 (961) (282)
Money market 110 375 485 33 (122) (89) (68) (382) (450)
Total interest expense
on deposits 938 616 1,554 318 (1,340) (1,022) 720 (2,845) (2,125)
Borrowings 67 (36) 31 22 (43) (21) (197) 34 (163)
===================================================================================================================
Total interest
expense 1,005 580 1,585 340 (1,383) (1,043) 523 (2,811) (2,288)
Net interest income $ 947 $(375) $ 572 $1,000 $ (834) $ 166 $1,431 $ (559) $ 872
Composition of non-interest income
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Amount %Change Amount %Change Amount %Change
- -------------------------------------------------------------------------------------------------------------------
Core non-interest income:
Banking service charges $1,014 14% $ 892 4% $ 858 10%
Loan servicing fees 163 (17) 197 n.m. 6 (92)
Trust fees 106 116 49 100 - -
Other 144 1 142 31 108 32
Total core non-interest income 1,427 11 1,280 32 972 4
Gains (losses) on asset sales:
Real estate investments 67 20 56 (63) 151 n.m.
Trading account securities 30 (236) (22) (155) 40 n.m.
Loans 13 (85) 84 (89) 763 18
Securities (20) (109) 235 (57) 541 n.m.
===================================================================================================================
Total gains on asset sales 90 (75) 353 (76) 1,495 200
===================================================================================================================
Total non-interest income $1,517 (7)% $1,633 (34)% $2,467 72%
Total non-interest income decreased 7% in 1995, following a 34% decrease in
1994. As the table above shows, the changes were primarily attributable to
varying levels of gains from asset sales.
Core non-interest income showed improvement in both years, increasing by 11% in
1995 and 32% in 1994.
Banking service charges increased by 14% in 1995 and 4% in 1994. The increases
were primarily attributable to growth in the number of outstanding demand
deposits, and a correspondingly higher level of utilization of banking services
by customers.
B-14
Loan servicing fees declined by $34,000 in 1995, compared to a $191,000 increase
in 1994. The decline in loan servicing fees during 1995 was attributable to a
drop in the loan portfolio. The 1994 increase was primarily attributable to a
decline in the rate of amortization expense on the Company's purchased mortgage
servicing rights ("PMSRs"). In 1993, a falling interest rate environment
precipitated a wave of refinancing activity that caused an unexpected level of
prepayments on the mortgage loans underlying the Company's PMSRs. As the net
present value of future loan servicing income was reduced by these prepayments,
in 1993 the Company sharply increased the rate of amortization expense on PMSR's
to recognize the decline in their value. Since no similar adjustment was
required in 1994, loan servicing income increased in 1994.
In its second year of operations, the trust department generated a total of
$106,000 in fees, up from $49,000 in 1994. The increase in trust fees was driven
by growth in assets under management by the trust department. Assets under
management increased from $9.5 million at June 30, 1994, to $15.4 million at
June 30, 1995.
Other income totaled $144,000 in 1995, up from $142,000 in 1994 and $108,000 in
1993. The increase in 1995 was partially attributable to an increase in Letter
of Credit fees.
Following a $95,000 decline in 1994, income from real estate investments posted
an $11,000 increase in 1995. The relatively small increase in 1995 was caused by
a $120,000 drop in the provision for losses on real estate investments, offset
by a $109,000 decline in sales gains. The 1994 decline was attributable to a
$58,000 drop in sales gains, combined with a $37,000 increase in the provision
for losses on real estate investments.
During 1995 the Company recognized a $30,000 gain from its trading account
activities, versus a loss of $22,000 in 1994 and a gain of $40,000 in 1993.
Trading account gains and losses vary with changes in the market value of the
Company's trading account securities.
The Company sells fixed rate mortgage loans in the secondary market. Throughout
most of fiscal 1994 and 1995, a relatively high interest rate environment caused
a sharp drop in fixed rate mortgage loan originations. The decline in loan
originations is reflected in gains from the sale of loans, which fell from
$763,000 in 1993, to $84,000 in 1994, and $13,000 in 1995.
Security sales generated a $20,000 loss in 1995, a $235,000 gain in 1994 and a
$541,000 gain in 1993. Security gains and losses fluctuate with conditions in
the financial markets and the volume of the Company's sales. The volume of
securities sales varies in response to changes in the Company's liquidity needs
and interest rate risk management strategies.
Composition of non-interest expense
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Amount %Change Amount %Change Amount %Change
- -------------------------------------------------------------------------------------------------------------------
Salaries and benefits $2,919 ( 3)% $2,995 15% $2,610 17%
Professional services 957 30 735 2 724 46
Equipment 876 ( 4) 909 6 859 10
Insurance premiums 714 2 701 9 642 21
Occupancy 106 (54) 228 (3) 236 (30)
Other real estate owned 58 (77) 257 (56) 579 40
Other 747 16 646 6 610 22
===================================================================================================================
Total non-interest expense $6,377 ( 1)% $6,471 3% $6,260 19%
- -------------------------------------------------------------------------------------------------------------------
B-15
In 1995 salaries and benefits declined by $76,000, or 3%. Part of the decline
was attributable to a $68,000 refund of unemployment taxes upon the settlement
of the Company's claim that it had been overcharged. In addition, as a member
bank, the Company received $40,000 upon the disbanding of the New England League
of Savings Institutions. The Company was required to use these funds for the
payment of employee medical plan premiums.
In 1994, salaries and benefits increased by $385,000, or 15%. Part of the
increase was attributable to $104,000 in pension expense during 1994, an expense
item that the Company did not have in the prior year given that the pension plan
was at its full-funding limitation in 1993. Another contributing factor was the
Company's new trust department, whose staffing needs added $132,000 to salaries
and benefits in 1994. Other new hires and salary increases were responsible for
the remaining $149,000 increase during 1994.
The Company's utilization of outside consultants, for technical advice related
to strategic planning issues, was responsible for the $222,000, or 30%, increase
in professional services during 1995. The $11,000, or 2%, increase in 1994
resulted from the continuing utilization of consultants for technical guidance
related to items such as the Company's trust department, revision of the
Company's policies and procedures, strategic planning, and compensation issues.
Primarily as the result of a drop in depreciation expense, equipment expense
declined by $33,000, or 4% in 1995. Higher data processing costs, additional
depreciation expense on new equipment, and increased telecommunication expense
were responsible for most of the increase during 1994.
Higher FDIC deposit insurance assessments were responsible for the majority of
the increases in insurance premiums during the past two years.
Occupancy expenses declined in both 1995 and 1994. The decreases are
attributable to additional rental income generated by the Company's practice of
leasing out unused space at its branch offices.
Expenses related to the disposition of OREO properties include the provision for
OREO losses, carrying expenses net of any rental income, and gains and losses on
the sale of the properties. OREO expenses fell by 77% in 1995, following a 56%
decrease in 1994. The declines in total OREO expense during the years were
primarily attributable to a drop in the provision for OREO losses.
The increases in other expenses were chiefly attributable to an increase in
advertising expenditures.
Recent accounting pronouncements
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). Among other things, FAS 114 requires that certain
impaired loans be valued based on the present value of expected future cash
flows. The Company will adopt FAS 114 in the first quarter of fiscal 1996.
Although the initial effect of adopting FAS 114 is dependent on the level of
actual outstanding impaired loans at the time of adoption, current estimates
indicate that the adoption of FAS 114 will not have a material impact on the
Company's financial position or results of operations.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122 ("FAS 122"), "Accounting for Mortgage
Servicing Rights". FAS 122 amends FAS 65 "Accounting for Certain Mortgage
Banking Activities" to require that a mortgage banking entity recognize as
separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. FAS 65 required separate capitalization of the
cost of rights which were acquired through a purchase transaction but prohibited
separate capitalization when the rights were acquired through loan origination
activities. FAS 122 also requires that a mortgage banking entity assess
capitalized rights for impairment and establish valuation allowances based on
the fair value of those rights which includes rights acquired prior to adoption
of FAS 122. Prospective adoption of FAS 122 is required for fiscal years
beginning after December 15, 1995, although earlier implementation is
encouraged. The Company has not decided when it will adopt FAS 122 and has not
yet assessed the impact that the adoption of FAS 122 may have on the Company's
operating results or financial condition.
B-16
Impact of inflation and changing prices
The Company's financial statements and related data have been prepared in
accordance with 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, virtually all of
the assets and liabilities of the Company are monetary in nature. As a result,
the course of interest rate movements has a more significant impact on the
Company's performance than do the effects of general inflation.
Management believes that effective asset/liability management has reduced
interest rate risk. Notwithstanding the above, deflation can directly affect the
value of loan collateral, in particular real estate. In prior years, decreases
in real estate prices resulted in significant losses on loans and OREO.
B-17
Consolidated Statements of Income
(In thousands, except per share data) June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Interest income
Loans $15,289 $13,122 $14,214
Securities 3,460 3,413 2,905
Money market and other 147 204 497
- -------------------------------------------------------------------------------------------------------------------
Total interest income 18,896 16,739 17,616
- -------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 9,724 8,170 9,192
Borrowings 337 306 327
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 10,061 8,476 9,519
- -------------------------------------------------------------------------------------------------------------------
Net interest income 8,835 8,263 8,097
Provision for loan losses 375 150 793
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,460 8,113 7,304
- -------------------------------------------------------------------------------------------------------------------
Non-interest income
Banking service charges 1,014 892 858
Loan servicing fees 163 197 6
Trust fees 106 49 -
Income from real estate investments 67 56 151
Trading account gains (losses) 30 (22) 40
Gains on sale of loans 13 84 763
Securities gains (losses) (20) 235 541
Other 144 142 108
- -------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,517 1,633 2,467
- -------------------------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,919 2,995 2,610
Professional services 957 735 724
Equipment 876 909 859
Insurance premiums 714 701 642
Occupancy 106 228 236
Other real estate owned 58 257 579
Other 747 646 610
- -------------------------------------------------------------------------------------------------------------------
Total non-interest expense 6,377 6,471 6,260
- -------------------------------------------------------------------------------------------------------------------
Earnings
Income before income taxes and accounting change 3,600 3,275 3,511
Provision for income taxes 1,384 1,300 1,591
- -------------------------------------------------------------------------------------------------------------------
Income before accounting change 2,216 1,975 1,920
Cumulative effect of change in accounting for income taxes - 275 -
===================================================================================================================
Net income $ 2,216 $ 2,250 $ 1,920
===================================================================================================================
Primary income per share
Income before accounting change $ 1.63 $ 1.53 $ 1.52
Net income 1.63 1.74 1.52
Fully diluted income per share
Income before accounting change 1.62 1.50 1.52
Net income 1.62 1.71 1.52
===================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
B-18
Consolidated Statements of Condition
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
---- ----
Assets
Loans:
Real estate $218,811 $184,433
Consumer installment 5,859 6,068
Real estate loans held for sale (fair value $98) 97 -
Total loans 224,767 190,501
Less allowance for loan losses 1,466 1,273
- -------------------------------------------------------------------------------------------------------------------
Net loans 223,301 189,228
- -------------------------------------------------------------------------------------------------------------------
Securities:
Held to maturity (fair value $38,588-1995; $39,727-1994) 38,704 40,949
Available for sale, at fair value 15,924 20,751
Money market investments 2 4,792
Trading account, at fair value - 107
- -------------------------------------------------------------------------------------------------------------------
Total securities 54,630 66,599
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing assets 277,931 255,827
Cash and due from banks 10,132 8,459
Premises and equipment 5,719 5,634
Accrued interest receivable 1,802 1,661
Investments in real estate 1,101 1,517
Other real estate owned 1,055 1,030
Other assets 1,219 1,875
===================================================================================================================
Total assets $298,959 $276,003
- -------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity
Liabilities:
Deposits:
Time certificates $142,605 $120,578
Savings and NOW 77,277 86,673
Money market 30,592 28,576
Demand 18,285 16,219
- -------------------------------------------------------------------------------------------------------------------
Total deposits 268,759 252,046
Borrowings 9,505 5,200
Accrued taxes and other liabilities 659 495
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 278,923 257,741
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 6)
Stockholders' equity:
Preferred stock, $1.00 par value; authorized - 1,000,000 shares;
none issued - -
Common stock, $1.00 par value; authorized - 5,000,000 shares;
issued: 1,446,799 shares 1995; 1,403,956 shares 1994 1,447 1,404
Additional paid-in capital 8,000 7,730
Retained earnings 11,313 9,914
Unrealized holding gain (loss) on securities available for sale, net of taxes 26 (93)
Treasury stock at cost - 103,458 shares 1995; 99,800 shares 1994 (750) (693)
===================================================================================================================
Total stockholders' equity 20,036 18,262
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $298,959 $276,003
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
B-19
Consolidated Statements of Changes in Stockholders' Equity
Common Additional Retained Net Treasury
Stock Paid-in Earnings Unrealized Stock
Capital Loss on
(In thousands) Securities
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992 $1,137 $7,358 $ 7,168 $ - $(693)
Net income - - 1,920 - -
Options exercised 12 76 - - -
10% stock dividend, including cash
payment for fractional shares 107 - (120) - -
Cash dividends ($0.43 per share) - - (540) - -
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 1,256 7,434 8,428 - (693)
Net income - - 2,250 - -
Options exercised 28 296 - - -
10% stock dividend, including cash
payment for fractional shares 120 - (133) - -
Cash dividends ($0.49 per share) - - (631) - -
Unrealized holding loss on securities
available for sale, net of taxes - - - (93) -
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 1,404 7,730 9,914 (93) (693)
Net income - - 2,216 - -
Options exercised 43 270 - - (57)
Cash dividends ($0.62 per share) - - (817) - -
Decrease in net unrealized loss -
on securities available for sale - - - 119 -
===================================================================================================================
Balance at June 30, 1995 $1,447 $8,000 $11,313 $26 $(750)
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
B-20
Consolidated Statements of Cash Flows
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 2,216 $ 2,250 $ 1,920
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
(Gain) loss on sale of:
Securities available for sale 20 (63) 33
Loans held for sale 13 (84) (763)
Other real estate owned (16) (44) (17)
Trading account (30) 22 (40)
Real estate investments (67) (56) (151)
Securities held to maturity - (171) (574)
Loss provisions 487 591 1,429
Depreciation and amortization 415 472 407
Deferred income taxes expense (benefit) 105 (80) (233)
Amortization of premium on mortgage-backed securities 78 189 17
Amortization of premium on other securities 73 171 362
Amortization of deferred loan origination fees (279) (285) (565)
Cumulative effect of change in income taxes - (275) -
Changes in operating assets and liabilities:
Accrued taxes and other liabilities 164 (244) (537)
Trading account assets 137 147 635
Other assets (85) (1,232) (2,578)
Accrued interest receivable (141) 221 96
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,090 1,529 (559)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Loans for portfolio
Net (increase) decrease (26,449) (14,546) 7,779
Purchases (7,623) (5,468) (9,399)
Loans held for sale
Proceeds from sales 977 16,473 22,110
Net decrease (1,087) (13,576) (24,160)
Mortgage-backed securities
Repayments 2,008 4,070 251
Purchases - (10,073) (10,417)
Securities held to maturity
Proceeds from sales - 6,461 9,404
Proceeds from maturities 402 4,298 12,101
Purchases (300) (3,487) (27,239)
Securities available for sale
Proceeds from sales 6,167 2,218 -
Proceeds from maturities 1,300 2,450 -
Purchases (2,688) (8,457) (66)
Net decrease in money market investments 4,790 3,524 8,445
Proceeds from sale of other real estate investments 1,376 2,248 3,035
Proceeds from sale of other real estate owned 733 2,394 2,724
Purchase of premises and equipment (500) (372) (1,204)
Additions to investments in real estate (980) (1,024) (1,836)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,874) (12,867) (8,472)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Borrowings
Proceeds from short-term borrowings 15,603 3,000 -
Repayment of short-term borrowings (11,798) (1,000) -
Proceeds from long-term borrowings 2,000 - -
Repayment of long-term borrowings (1,500) - (1,500)
Net increase (decrease) in time certificates of deposit 22,027 4,611 (1,485)
Options exercised 313 324 88
Increase in Treasury stock (57) - -
Net increase (decrease) in other deposit accounts (5,314) 7,931 13,324
Dividends paid (817) (644) (553)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,457 14,222 9,874
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and due from banks 1,673 2,884 843
Cash and due from banks at beginning of period 8,459 5,575 4,732
- -------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $10,132 $ 8,459 $ 5,575
===================================================================================================================
B-21
Supplemental information
Cash paid during the period for:
Interest $10,087 $ 8,454 $ 9,594
Income taxes 1,135 1,007 1,610
Noncash investing activities:
Transfer from investment securities to securities
available for sale - 20,751 -
Loans transferred to other real estate owned 649 1,024 3,199
Net unrealized loss on securities available for sale (119) 93 -
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
B-22
1. Significant Accounting Policies
Basis of presentation: The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles and include the
accounts of Shelton Bancorp, Inc. ("Bancorp"), and its wholly-owned subsidiary,
Shelton Savings Bank ("the Bank"), collectively referred to as "the Company."
All significant intercompany accounts and transactions have been eliminated from
the consolidated financial statements. Reclassifications have been made to the
prior years' consolidated financial statements to conform to the current
reporting presentation.
The consolidated financial statements necessarily include some amounts that are
based on estimates, the most significant of which relate to the adequacy of the
allowance for loan losses, and the valuation of investments in real estate and
other real estate owned ("OREO"). As these estimates are highly susceptible to
future changes in the state of the general economic environment, actual results
could differ significantly from such estimates.
Loans: Loans, with the exception of real estate loans held for sale, are carried
at their unpaid principal balance, net of deferred loan origination fees and
costs.
Real estate loans held for sale are carried at the lower of aggregate cost or
fair value. Unrealized holding losses are included in gains and losses on the
sale of loans. Gains and losses on the sale of loans are calculated utilizing
the cost basis of the specific loans sold.
Interest on loans is accrued into income utilizing the simple interest method.
Loan origination fees and costs are deferred and amortized into income over the
contractual life of the related loan utilizing the level yield method. When a
loan is prepaid or sold, any remaining unamortized fees and costs are amortized
into income at that time. The accrual of interest income is discontinued when a
loan is past due 90 days or more, or earlier when doubt exists as to its
ultimate collectibility. When the accrual of interest income is discontinued,
all previously accrued and uncollected interest is generally reversed against
the current period's interest income. The accrual of interest on loans past due
90 days or more may be continued when the net realizable value of the property
collateralizing the loan is sufficient to discharge all principal and accrued
interest income due on the loan. A nonaccrual loan is restored to accrual status
when it is no longer delinquent and collectibility of interest and principal is
no longer in doubt.
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). FAS 114 requires, among other things, that certain
impaired loans be valued based on the present value of expected future cash
flows. The Company will adopt FAS 114 in the first quarter of fiscal 1996.
Although the initial effect of adopting FAS 114 is dependent on the level of
actual outstanding impaired loans on adoption, current estimates indicate that
the adoption of FAS 114 will not have a material impact on the Company's
financial position or results of operations.
The cost of purchased mortgage servicing rights ("PMSRs") is amortized over the
estimated lives of the loans serviced, utilizing the level yield method. When a
periodic evaluation indicates that the carrying value of PMSRs exceeds the net
present value of estimated future loan servicing income, the carrying value is
written down. The amortization rate is changed prospectively when the carrying
value is below the net present value of estimated future loan servicing income.
Writedowns and amortization are charged to loan servicing fees.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122 ("FAS 122"), "Accounting for Mortgage
Servicing Rights". FAS 122 amends FAS 65 "Accounting for Certain Mortgage
Banking Activities" to require that a mortgage banking entity recognize as
separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. FAS 65 required separate capitalization of the
cost of rights which were acquired through a purchase transaction but prohibited
separate capitalization when the rights were acquired through loan origination
activities. FAS 122 also requires that a mortgage banking entity assess
capitalized rights for impairment and establish valuation allowances based on
the fair value of those rights which includes rights acquired prior to adoption
of FAS 122. Prospective adoption of FAS 122 is required for fiscal years
beginning after December 15, 1995, although earlier implementation is
encouraged. The Company has not decided when it will adopt FAS 122 and has not
yet assessed the impact that the adoption of FAS 122 may have on the Company's
operating results or financial condition.
B-23
Allowance for loan losses: The allowance for loan losses is established through
charges against income and maintained at a level that management considers
adequate to absorb potential losses in the loan portfolio. Management's estimate
of the adequacy of the allowance for loan losses is based on evaluations of
individual loans, estimates of current collateral values, delinquency trends,
the results of regulatory examinations, the general risk characteristics
inherent in the loan portfolio, concentrations of credit risk, prevailing and
anticipated economic conditions, and historical loan loss experience. Loans are
charged against the allowance for loan losses when management believes that
collection is unlikely. Any subsequent recoveries are credited to the allowance
for loan losses when received.
Other real estate owned: When, among other factors, management estimates that
the borrower has no remaining equity in the property collateralizing the loan
and repayment of the loan can be expected to come only from the sale of the
property, the property is considered to be foreclosed in substance. In-substance
foreclosures and real estate formally acquired in settlement of loans are
initially transferred to OREO at the lower of the loan balance or the estimated
fair value of the property constructively or formally received. If, on the date
of transfer, the loan balance exceeds the estimated fair value of the property,
the excess is charged-off against the allowance for loan losses. An allowance
for OREO losses is established whenever the carrying value of an individual
property exceeds its current fair value, net of estimated selling costs.
Securities: On June 30, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Under FAS 115 debt and equity securities are
classified into one of three categories.
Debt securities that the Company has the intent and ability to hold until
maturity are classified as held to maturity and carried at amortized cost.
Securities purchased for resale, in anticipation of short-term gains, are
classified as trading and carried at fair value. Both realized and unrealized
holding gains and losses are included in trading account gains and losses.
All other debt and equity securities are classified as available for sale.
Securities in this classification may be sold in response to changes in a number
of factors, including the Company's liquidity needs and market interest rates.
Available for sale securities are carried at fair value and unrealized holding
gains and losses, net of income taxes, are reported as a separate component of
stockholders' equity.
Gains and losses on the sale of securities are recorded on the trade date, and
are calculated utilizing the cost basis of the specific security sold. The cost
basis of a security that has experienced other than a temporary decline in fair
value is written down to fair value by a charge to security gains and losses.
Upon adoption of FAS 115, the Company transferred $20.8 million in securities to
the available for sale classification and recorded a net unrealized loss of
$93,000, net of $66,000 in tax benefits.
Investments in real estate: Investments in real estate are carried at the lower
of cost or estimated fair value, net of estimated selling costs. An allowance
for losses on Real Estate investments is established whenever the cost basis of
an individual property exceeds its estimated net realizable value. Construction
and development costs, including interest expense and property taxes, are
capitalized to the extent realizable. General and administrative expenses are
charged to expense as incurred.
B-24
Premises and equipment: Premises, equipment and leasehold improvements are
stated at cost, net of accumulated depreciation and amortization. Major
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred. Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets. Estimated lives range from ten to fifty
years for buildings and improvements, and from three to ten years for equipment.
Leasehold improvements are amortized over the shorter of the term of the related
lease or the useful life of the improvements.
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". FAS 121 establishes accounting standards
for the impairment of long-lived assets and certain identifiable intangibles to
be held and used by an entity or disposed of. FAS 121 is effective for fiscal
years beginning after December 15, 1995, although earlier implementation is
encouraged. The Company has not decided when it will adopt FAS 121 and has not
yet assessed the impact that the adoption of FAS 121 may have on the Company's
operating results or financial position.
Income taxes: Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The
cumulative effect of this accounting method change was a $275,000 credit to
earnings. As FAS 109 was adopted on a prospective basis, amounts presented for
prior years have not been restated.
As required by FAS 109, the Company changed its method of accounting for income
taxes from the deferred method to the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using tax rates and laws currently in effect for the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in enacted tax rates or laws is
recognized in the period that includes the enactment date. A valuation allowance
is established when it is more likely than not that all or a portion of the
company's deferred tax assets will not be realized.
Prior to the adoption of FAS 109, income taxes on temporary differences were
measured using the tax rate and laws in effect in the year in which the
temporary difference originated.
Net income per share: Net income per share has been calculated by dividing net
income by the weighted average number of common shares outstanding during the
year, including common share equivalents when dilutive. The latter consists of
shares issuable upon the exercise of stock options. The dilutive effect of stock
options on primary net income per share is computed utilizing the average market
price of the Company's common stock during the period. When calculating fully
diluted net income per share, the dilutive effect of stock options is computed
utilizing the greater of the closing market price or the average market price
during the period.
The weighted average number of shares utilized in the computation of net income
per share were as follows:
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Primary net income per share 1,359,659 1,294,909 1,263,273
Fully diluted net income per share 1,372,007 1,316,635 1,263,273
===================================================================================================================
B-25
2. Merger Agreement
On June 20, 1995, Shelton Bancorp entered into a definitive merger agreement
pursuant to which Webster Financial Corporation has agreed to acquire Shelton
Bancorp. Under the terms of the agreement, stockholders of Shelton Bancorp will
receive .92 of a share of Webster common stock, in a tax free exchange, for each
of their shares of Shelton Bancorp common stock. The exchange ratio is not
subject to market price adjustment. Subject to shareholder and regulatory
approvals, the acquisition of Shelton Bancorp by Webster Financial is expected
to close during the fourth quarter of 1995.
3. Loans
Loans consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Real estate loans:
First mortgages $180,298 $148,286
Home equity credit lines 18,668 18,796
Commercial 13,136 11,832
Residential construction 5,266 3,736
Commercial construction 1,194 1,403
Second mortgages 1,024 1,097
Real estate loans held for sale 97 -
Deferred loan origination fees (775) (717)
- -------------------------------------------------------------------------------------------------------------------
Total real estate loans 218,908 184,433
Consumer installment loans 5,859 6,068
- -------------------------------------------------------------------------------------------------------------------
Total loans $224,767 $190,501
===================================================================================================================
Nonaccrual and restructured loans, and related interest income were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $1,875 $1,094 $953
Restructured loans 100 102 -
===================================================================================================================
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Interest income recorded:
Nonaccrual loans $ 12 $ 17 $ 30
Restructured loans 7 1 -
Interest income under original contract terms:
Nonaccrual loans 123 111 131
Restructured loans 9 8 -
===================================================================================================================
At June 30, 1995 the Company had no outstanding commitments to lend additional
funds to borrowers whose loans have been restructured.
Directors, executive officers, principal holders of the Company's stock, and
certain of their associates, were customers of and had other transactions with
the Bank. As of June 30, 1995 and 1994, loans to these individuals totaled
$1,329,000 and $1,183,000, respectively, and were performing currently. During
the year ended June 30, 1995, $178,000 in new loans were granted to these
individuals and payments of $32,000 were received.
The Company sells mortgage loans in the secondary market and retains the
servicing rights. Loans serviced for others totaled $77,421,000 and $83,538,000,
at June 30, 1995 and 1994, respectively.
B-26
The changes in PMSRs were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $278 $432 $760
Amortization and write-downs (71) (154) (328)
- -------------------------------------------------------------------------------------------------------------------
Ending balance $207 $278 $432
===================================================================================================================
4. Allowance for Loan Losses
The changes in the allowance for loan losses were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $1,273 $1,406 $1,062
Provision charged to expense 375 150 793
Charge-offs (206) (290) (460)
Recoveries 24 7 11
- -------------------------------------------------------------------------------------------------------------------
Ending balance $1,466 $1,273 $1,406
===================================================================================================================
5. Concentrations of Credit Risk
The profitability of the Company is heavily dependent on the state of the
general economic environment within Connecticut. The Company specializes in
residential real estate lending. Essentially all of the Company's business is
conducted in Connecticut, specifically within the general market area of eastern
Fairfield and southwestern New Haven counties. Loans collateralized by real
estate located in Connecticut and direct investments in local real estate
development projects comprise most of the Company's total assets. This
concentration is the result of the Company targeting its lending and development
activities to the geographic area where management is familiar with housing and
economic trends, combined with the Company's long standing commitment to meeting
the credit needs of the communities from which it obtains deposit funds.
6. Contingencies, Commitments & Financial Instruments With Off-Balance
Sheet Credit Risk
In the normal course of business, the Company enters into agreements to extend
credit which are not reflected in the accompanying consolidated financial
statements.
Commitments to extend credit consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Fixed Variable or Total Fixed Variable or Total
Interest Adjustable Interest Adjustable
Rate Interest Rate Rate Interest Rate
- -------------------------------------------------------------------------------------------------------------------
Home equity credit lines $ - $ 9,162 $ 9,162 $ - $ 8,365 $ 8,365
Mortgage loans 195 6,151 6,346 393 9,913 10,306
Letters of credit - 2,463 2,463 - 1,337 1,337
Personal credit lines 822 - 822 753 - 753
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
Total $ 1,017 $ 17,776 $ 18,793 $1,146 $ 19,615 $ 20,761
B-27
Since the Company can terminate a loan commitment if the borrower does not
comply with the terms of the contract, and some of the agreements may expire
without being drawn upon, they do not necessarily represent a future cash
requirement of the Company. Prior to entering into any agreement to extend
credit, the Company evaluates the borrower's creditworthiness in accordance with
the Company's loan underwriting standards. In most cases the agreements are
collateralized with real estate and the borrower is required to pay a
non-refundable fee. The Company's maximum exposure to credit loss is the total
contract amount of the agreements. In addition, the possibility of future
increases in market interest rates may result in a decline in the market value
of fixed rate loans. Management does not, however, anticipate any material
losses as a result of these agreements and does not consider them to represent
an undue level of credit, interest or liquidity risk for the Company.
There were no outstanding commitments to purchase loans at June 30, 1995, versus
$5.5 million in commitments at June 30, 1994.
To reduce the risk of a potential decline in the market value of fixed rate
loans being originated for sale, the Company enters into contracts to sell such
loans at a pre-agreed upon price and date. The primary risk from these contracts
is the potential inability of the Company to deliver such loans in accordance
with the terms of the contract, in which case the Company would be obligated to
compensate the buyer for any decline that occurred in the market value of the
contractual amount of loans that were not delivered. At June 30, 1995 and 1994,
the Company had no outstanding commitments to sell loans.
The Company is a party to various legal proceedings incident to its business. In
the opinion of management, the resolution of these proceedings will not have a
material effect on the Company.
B-28
7. Other Real Estate Owned
OREO consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Property type:
Single-family homes $ 557 $ 655
Multi-family homes 389 228
Residential land 64 170
Condominiums 47 31
Allowance for OREO losses (2) (54)
- -------------------------------------------------------------------------------------------------------------------
OREO $1,055 $1,030
===================================================================================================================
The changes in the allowance for losses on OREO were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $54 $164 $192
Provision charged to expense 25 234 466
Recoveries - 4 2
Charge-offs (77) (348) (496)
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 2 $ 54 $ 164
===================================================================================================================
OREO Expense consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Operating expenses $61 $ 70 $174
Provision for OREO losses 25 234 466
Rental Income (12) (3) (44)
Gain on sale (16) (44) (17)
- -------------------------------------------------------------------------------------------------------------------
OREO expense $58 $257 $579
===================================================================================================================
8. Securities
The cost, fair value, and gross unrealized gains and losses on securities held
to maturity were as follows:
- -------------------------------------------------------------------------------------------------------------------
Cost Gross Gross Fair
Unrealized Unrealized Value
(In thousands) June 30, 1995 Gains Losses
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury $19,543 $306 $ 67 $19,782
U.S. agencies and corporations:
Mortgage-backed 13,905 - 332 13,573
Other 1,999 1 26 1,974
Corporate bonds, notes and debentures 3,257 19 17 3,259
- -------------------------------------------------------------------------------------------------------------------
Securities held to maturity $38,704 $326 $ 442 $38,588
===================================================================================================================
B-29
- -------------------------------------------------------------------------------------------------------------------
Cost Gross Gross Fair
Unrealized Unrealized Value
(In thousands) June 30, 1994 Gains Losses
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury $19,392 $46 $ 449 $18,989
U.S. agencies and corporations:
Mortgage-backed 15,991 - 716 15,275
Other 2,099 - 67 2,032
Corporate bonds, notes and debentures 3,467 23 59 3,431
- -------------------------------------------------------------------------------------------------------------------
Securities held to maturity $40,949 $69 $1,291 $39,727
===================================================================================================================
The cost, fair value, and gross unrealized gains and losses on securities
available for sale were as follows:
- -------------------------------------------------------------------------------------------------------------------
Cost Gross Gross Fair
Unrealized Unrealized Value
(In thousands) June 30, 1995 Gains Losses
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury $ 8,317 $ 29 $ 26 $ 8,320
U.S. agencies and corporations: 300 - - 300
Equity securities 7,262 80 38 7,304
- -------------------------------------------------------------------------------------------------------------------
Securities available for sale $15,879 $109 $ 64 $15,924
===================================================================================================================
Cost Gross Gross Fair
Unrealized Unrealized Value
(In thousands) June 30, 1994 Gains Losses
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury $12,429 $26 $139 $12,316
U.S. agencies and corporations 1,001 5 1 1,005
Corporate bonds, notes and debentures 722 2 - 724
Equity securities 6,758 46 98 6,706
- -------------------------------------------------------------------------------------------------------------------
Securities available for sale $20,910 $79 $238 $20,751
===================================================================================================================
B-30
Cost and fair value of debt securities, by contractual maturity, were as
follows:
- -------------------------------------------------------------------------------------------------------------------
Held to Maturity Available for Sale
(In thousands) June 30, 1995 Cost Fair Value Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 1,449 $ 1,452 $4,896 $4,870
Due after one year through five years 22,251 22,471 3,721 3,750
Due after five years through ten years 999 991 - -
Due after ten years 100 101 - -
- -------------------------------------------------------------------------------------------------------------------
Total 24,799 25,015 8,617 8,620
Mortgage-backed 13,905 13,573 - -
- -------------------------------------------------------------------------------------------------------------------
Total debt securities $38,704 $38,588 $8,617 $8,620
===================================================================================================================
Mortgage-backed securities have been disclosed separately as they are not due at
a single maturity date.
Proceeds and gross realized gains and losses from the sale of securities were as
follows:
- -------------------------------------------------------------------------------------------------------------------
Debt Securities Equity Securities
(In thousands) Year ended June 30, 1995 1994 1993 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Sales proceeds $6,167 $7,464 $8,830 $ - $1,094 $ -
Realized gains 11 172 574 - 68 -
Realized losses 31 - - - 5 -
===================================================================================================================
Unrealized holding losses on trading securities totaled $105,000 at June 30,
1994. During the year ended June 30, 1993 the Company recognized a $33,000
holding period loss on equity securities.
At June 30, 1995 and 1994, U.S. Treasury securities with a book value of
$2,532,000 and $1,441,000, respectively, were pledged to collateralize U.S.
Government and municipal deposits. The market value of these securities was
$2,592,000 and $1,448,000 at June 30, 1995 and 1994, respectively.
9. Investments in Real Estate
Investments in real estate consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Direct:
Stonebridge (30 lot residential subdivision) $1,035 $ 877
Owl Hill (25 unit residential housing) - 390
Allowance for losses (50) (34)
Joint venture:
Walnut Estates (19 lot residential subdivision) 116 284
- -------------------------------------------------------------------------------------------------------------------
Investments in real estate $1,101 $1,517
===================================================================================================================
Income from real estate investments consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Joint ventures $ 97 $ 283 $ 106
Direct 57 (20) 215
Provision for losses (87) (207) (170)
- -------------------------------------------------------------------------------------------------------------------
Income from real estate investments $ 67 $ 56 $ 151
===================================================================================================================
B-31
Summarized combined financial statements of the joint ventures were as follows:
Statements of Income
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Sales $528 $1,229 $955
Cost of sales 335 669 781
- -------------------------------------------------------------------------------------------------------------------
Gross margin 193 560 174
Miscellaneous income 2 6 1
General and administrative expenses - - -
- -------------------------------------------------------------------------------------------------------------------
Net income $195 $ 566 $175
===================================================================================================================
Statements of Condition
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Assets:
Investment in real estate $227 $542
Cash 4 26
===================================================================================================================
Total assets $231 $568
===================================================================================================================
Partners' capital accounts $231 $568
===================================================================================================================
The Owl Hill project, located in Shelton, Connecticut, was completed in fiscal
1995.
The Stonebridge project is located in Oxford, Connecticut. The construction
phase will be completed by the second quarter of fiscal 1996. Sales commenced in
December, 1994 and 10 lots were sold during the year ended June 30, 1995. The
Company anticipates that the remaining 20 lots will be sold within the next 15
to 20 months.
As an equity partner in joint ventures with local developers, the Company
typically receives 50% of the venture's net profits. Both the Company and its
partner are generally required to make contributions, in equal amounts, to the
venture.
The Company's sole joint venture, Walnut Estates, is located in Shelton,
Connecticut. The development phase has been completed and 16 lots have been
sold. The Company anticipates that the remaining 3 lots will be sold in fiscal
1996.
10. Premises and Equipment
Premises and equipment consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Buildings $4,812 $4,580
Land 1,171 1,055
Equipment 2,173 2,037
Leasehold improvements 68 68
- -------------------------------------------------------------------------------------------------------------------
Total 8,224 7,740
Less accumulated depreciation and amortization 2,505 2,106
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment $5,719 $5,634
===================================================================================================================
For the years ended June 30, 1995, 1994 and 1993, depreciation and
amortization expense totaled $415,000, $472,000 and $407,000, respectively.
In addition to the executive office building, located at 375 Bridgeport Avenue,
Shelton, Connecticut, the Company has five branch offices. The Company owns the
executive office building and four of its branch offices with no encumbrances
that would affect their marketability.
B-32
One of the Company's branch offices is occupied under a noncancelable operating
lease which expires in fiscal 1996. The Company does not intend to renew this
lease. Scheduled payments to termination will be $1,384 in fiscal 1996. For the
years ended June 30, 1995, 1994 and 1993, lease rental expense totaled $8,000,
$8,000, and $10,000, respectively.
The Company receives rental income under various leases for properties it owns.
Rental income under these leases for the years ended June 30, 1995, 1994 and
1993, totaled $379,000, $319,000 and $220,000, respectively.
Future minimum rental receipts are as follows:
(In thousands)
- -------------------------------------------------------------------------------------------------------------------
Year ending June 30:
1996 $ 203
1997 165
1998 126
1999 92
2000 88
Later years 786
===================================================================================================================
Total $1,460
===================================================================================================================
11. Borrowings
Borrowings consisted of the following:
($ In thousands) June 30, 1995 1994
Amount Weighted Amount Weighted
Rate Rate
- -------------------------------------------------------------------------------------------------------------------
Borrowings from the FHLB due in the year ending June 30:
1995 $ - -% $1,500 8.51%
1997 1,000 8.61 1,000 8.61
1997 2,000 6.66 - -
1999 700 8.86 700 8.86
- -------------------------------------------------------------------------------------------------------------------
Long-Term borrowings 3,700 7.60 3,200 8.62
Short-term borrowings 5,808 6.43 2,000 4.36
===================================================================================================================
Borrowings: $9,508 6.89% $5,200 6.98%
===================================================================================================================
The Bank is required to collateralize its borrowings from the Federal Home Loan
Bank ("the FHLB") with securities and mortgage loans. Based on available
collateral, at June 30, 1995 the Bank had access to an additional $170 million
in financing from the FHLB. All of the Company's long-term borrowings are
subject to significant prepayment penalties.
12. Regulatory Matters
On August 29, 1986, the Bank converted from mutual to stock ownership ("the
Conversion"). At the time of the Conversion the Bank established a liquidation
account in an amount equal to the Bank's capital accounts at March 31, 1986. The
liquidation account is being maintained for the benefit of those deposit account
holders who qualified as eligible account holders at the time of the Conversion
and who have continued to maintain their eligible deposit accounts with the Bank
following the Conversion. The liquidation account, which totaled $322,000 at
June 30, 1995, is reduced annually by an amount proportionate to the decrease in
the eligible deposit accounts. In the event of a complete liquidation of the
Bank, each eligible deposit account holder will be entitled to receive a
liquidating distribution equal to their proportionate interest in the
liquidation account, after the payment of all creditors' claims, but before any
distributions on the Bank's common stock.
B-33
At June 30, 1995, retained earnings included approximately $2.4 million for
which no income taxes have been provided. This amount represents the Bank's
cumulative annual bad debt deduction allowable in the determination of taxable
income for tax return purposes. In the unlikely event that the total accumulated
bad debt reserve is used for any purpose other than to absorb bad debt losses,
approximately $1.0 million in taxes will be imposed on the Bank, based on
current applicable tax rates.
The Bank is Bancorp's sole source of funds for dividend payments to its
stockholders. Connecticut Banking Laws limit the amount of annual cash dividends
that the Bank may pay to Bancorp to an amount which approximates the Bank's net
income for the then current calendar year, plus the Bank's retained income for
the prior two calendar years. The Bank is also prohibited from paying a cash
dividend that would reduce its capital accounts below minimum regulatory
requirements, or below the amount required to be maintained in the liquidation
account.
13. Employee Benefit Plans
The Company's pension plan and Employee Stock Ownership Plan ("the ESOP") cover
all full-time employees who meet certain age and length of service requirements.
The Company is a participant in a noncontributory, defined benefit,
multi-employer pension plan. For the years ended June 30, 1995 and 1994, pension
expense totaled $48,000 and $109,000 respectively. As the plan had reached its
full-funding limitation, no contributions were made to the plan during the year
ended June 30, 1993. Information concerning the actuarial present value of
accumulated plan benefits, plan assets, or benefits attributable to individual
organizations participating in the plan is not provided by the plan's
administrator, and is therefore not presented in this report. The pension plan
is the only post-employment or post-retirement plan currently provided to
employees.
Through June 30, 1995, the ESOP has purchased a total of 62,288 shares of the
Company's common stock. Annual contributions by the Company to the ESOP are
discretionary. Contributions to the ESOP for the years ended June 30, 1995, 1994
and 1993 were $60,000, $72,000, and $75,000, respectively.
The Company has stock option plans which provide for the granting of incentive
stock options and non-qualified stock options to key personnel. A total of
235,970 shares of the Company's common stock were originally reserved for
issuance under the plans. Options are granted at the market value of the shares
on the date of grant, have a maximum term of ten years and are fully vested at
the date of grant. Although none have been granted, the plans also provide that
stock appreciation rights ("SAR") relating to options may be granted. The grant
of a SAR permits the optionee to surrender an option and receive in exchange
cash or, if specified in the option agreement, shares of the Company's common
stock with a value equal to the excess of the fair market value of the shares
subject to the option, over the option exercise price. At June 30, 1995, options
for 110,591 shares were exercisable and 24,495 options were available for future
grants.
B-34
Stock option activity was as follows:
- -------------------------------------------------------------------------------------------------------------------
Shares Shares Average
Qualified Non-Qualified Option
Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding June 30, 1992 86,318 31,171 $ 6.88
Exercised (9,114) (4,922) 6.33
- -------------------------------------------------------------------------------------------------------------------
Outstanding June 30, 1993 77,204 26,249 6.95
Granted 46,302 33,068 12.07
Exercised (9,561) (21,328) 7.26
- -------------------------------------------------------------------------------------------------------------------
Outstanding June 30, 1994 113,945 37,989 9.50
Granted - 1,500 15.25
Exercised (28,829) (14,014) 7.31
- -------------------------------------------------------------------------------------------------------------------
Outstanding June 30, 1995 85,116 25,475 $10.44
===================================================================================================================
14. Income Taxes
The provision for income taxes consisted of the following:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Current income taxes:
Federal $ 893 $ 743 $1,020
State 315 361 433
- -------------------------------------------------------------------------------------------------------------------
Total current income taxes 1,208 1,104 1,453
- -------------------------------------------------------------------------------------------------------------------
Deferred income taxes:
Federal 102 187 95
State 74 9 43
- -------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 176 196 138
- -------------------------------------------------------------------------------------------------------------------
Provision for income taxes $1,384 $1,300 $1,591
===================================================================================================================
The net deferred tax asset was attributable to the following temporary
differences:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans, OREO and investments in real estate $623 $ 566
Deferred loan origination fees 31 287
Unrealized losses on securities available for sale - 66
Other 44 144
- -------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 698 1,063
Valuation allowance (31) (31)
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of valuation allowance 667 1,032
- -------------------------------------------------------------------------------------------------------------------
Less deferred tax liabilities:
Premises and equipment 75 70
Excess of tax bad debt reserve over base year reserve 22 27
Unrealized gain on securities available for sale 18 -
Other 9 41
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities 124 138
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $543 $ 894
===================================================================================================================
A valuation allowance has been established for capital loss carry forwards that
the Company may not recover. The valuation allowance was $31,000 at June 30,
1995 and 1994.
B-35
The sources of deferred income taxes (benefit) were as follows:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1993
- -------------------------------------------------------------------------------------------------------------------
Interest and fees on loans $156
Income from real estate investments 13
Security transactions (9)
Accelerated depreciation (9)
Accrued expenses -
Other, net (13)
===================================================================================================================
Total $138
===================================================================================================================
The Company's effective tax rate differed from the statutory federal tax rate
for the following reasons:
- -------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1995 1994 1993
($ In thousands) Amount As a % of Amount As a % of Amount As a % of
Pretax Pretax Pretax
Income Income Income
- -------------------------------------------------------------------------------------------------------------------
Tax at statutory
federal rate $1,224 34.0% $1,113 34.0% $1,194 34.0%
Increase (decrease) in taxes resulting from:
State taxes, net of
federal income
tax benefit 257 7.1 243 7.4 314 8.9
Bad debt deduction - - - - 124 3.5
Other, net (97) (2.7) (56) (1.7) (41) (1.1)
- -------------------------------------------------------------------------------------------------------------------
Provision for
income taxes $1,384 38.4% $1,300 39.7% $1,591 45.3%
===================================================================================================================
15. Parent Company Financial Statements
The financial statements of Shelton Bancorp, Inc. were as follows:
Statements of Income
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Dividend payments from Shelton Savings Bank $ 718 $1,029 $ 326
Equity in undistributed income of Shelton Savings Bank 1,473 1,246 1,624
- -------------------------------------------------------------------------------------------------------------------
Total income 2,191 2,275 1,950
Operating expenses - 14 24
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,191 2,261 1,926
Provision for income taxes (25) 11 6
===================================================================================================================
Net income $2,216 $2,250 $1,920
===================================================================================================================
B-36
Statements of Condition
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 1,137 $ 900
Investment in Shelton Savings Bank 18,867 17,275
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 20,004 $ 18,175
===================================================================================================================
Liabilities and stockholders' equity:
Accrued tax benefit $ (32) $ (87)
Stockholders' equity 20,036 18,262
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 20,004 $ 18,175
===================================================================================================================
Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2,216 $ 2,250 $ 1,920
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred organizational expenses - 14 24
Increase (decrease) in accrued taxes 55 (81) (10)
Equity in undistributed income of Shelton
Savings Bank (1,473) (1,246) (1,624)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 798 937 310
Financing activities:
Issuance of common stock 256 324 88
Cash dividends paid (817) (644) (553)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 237 617 (155)
Cash at beginning of period 900 283 438
- -------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 1,137 $ 900 $ 283
===================================================================================================================
Supplemental information:
Cash paid during the year for income taxes $ 17 $ 14 $ 16
===================================================================================================================
16. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("FAS 107"), requires the disclosure of fair
value for certain financial instruments. When quoted market values are not
available, FAS 107 requires that fair value be estimated utilizing an
appropriate valuation technique. Given the numerous acceptable valuation
techniques available, and the subjectivity of the underlying assumptions,
reasonable comparisons between the Company's fair value information and that of
other financial institutions cannot necessarily be made. In addition, since
there are no quoted market prices for some of the Company's financial
instruments, the fair values shown below are not necessarily indicative of the
underlying net asset value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Financial assets: The fair value of mortgages held for sale is based on quoted
prices in the secondary market. The fair value of fixed rate mortgage loans
collateralized by 1-4 family residential properties is based on quoted prices in
the secondary market for similar loans. The fair value of all other loans has
been estimated by discounting future cash flows utilizing interest rates that
consider the estimated credit and interest rate risk inherent in the loans. The
fair value of investment securities is principally based on quoted market
prices. Trading account securities are carried at quoted market prices. Given
their short-term nature, the carrying amount of cash and due from banks and
money market investments is a reasonable estimate of fair value.
B-37
Financial liabilities: The fair value of time certificates of deposit has been
estimated by discounting future cash flows using the rates currently offered by
the Company on time certificates of deposit with similar remaining maturities.
The carrying amount of all other deposit accounts is a reasonable estimate of
fair value. The fair value of long-term borrowings has been estimated by
discounting future cash flows at rates currently available to the Company for
debt with similar terms and remaining maturities.
Unrecognized financial instruments: The fair value of commitments to extend
credit has been estimated using the fees currently charged by the Company to
enter into similar agreements, taking into account the remaining terms of the
agreements and the creditworthiness of the customer. For fixed rate loan
commitments, fair value also considers the difference between current interest
rates and the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements.
The following table presents a comparison of the carrying value and estimated
fair value of the Company's financial instruments at June 30, 1995 and 1994:
- -------------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
Financial assets:
Real estate loans $218,811 $217,476 $184,433 $176,665
Consumer installment loans 5,859 5,834 6,068 6,023
Real estate loans held for sale 97 98 - -
Allowance for loan losses (1,466) - (1,273) -
Securities held to maturity 38,704 38,588 40,949 39,727
Securities available for sale 15,924 15,924 20,751 20,751
Money market investments 2 2 4,792 4,792
Trading account securities - - 107 107
Cash and due from banks 10,132 10,132 8,459 8,459
Accrued Interest Receivable 1,802 1,802 1,661 1,661
Financial liabilities:
Deposits:
Time certificates 142,605 143,068 120,578 121,687
Savings and NOW 77,277 77,277 86,673 86,673
Money market 30,592 30,592 28,576 28,576
Demand 18,285 18,285 16,219 16,219
Borrowings 9,505 9,602 5,200 5,754
Unrecognized financial instruments:
Commitments to extend credit - 2 - 14
Letters of credit - (40) - (26)
===================================================================================================================
B-38
To the Stockholders and Board of Directors of Shelton Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Shelton
Bancorp, Inc. and subsidiary as of June 30, 1995 and 1994, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Shelton Bancorp,
Inc. and subsidiary as of June 30, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 1, 8 and 14 to the consolidated financial statements, the
Company changed its methods of accounting for investments and income taxes in
1994.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
July 24, 1995
B-39
Selected Unaudited Quarterly Data
Quarters Ended
September December March June
(In thousands, except per share data) 1994 1994 1995 1995
- -------------------------------------------------------------------------------------------------------------------
Interest income $ 4,479 $ 4,678 $ 4,769 $ 4,970
Interest expense 2,310 2,432 2,562 2,757
- -------------------------------------------------------------------------------------------------------------------
Net interest income 2,169 2,246 2,207 2,213
Provision for loan losses 75 90 105 105
Securities losses - (12) (8) -
Gain (loss) on sale of loans 2 (2) - 13
Income from real estate investments 3 3 20 41
Trading account gains (losses) 24 (7) 14 (1)
Other non-interest income 336 357 366 368
Other real estate owned expense 16 23 13 6
Other non-interest expense 1,536 1,517 1,576 1,690
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes
and accounting change 907 955 905 833
Provision for income taxes 360 382 335 307
- -------------------------------------------------------------------------------------------------------------------
Income before accounting change 547 573 570 526
Change in accounting for income taxes - - - -
- -------------------------------------------------------------------------------------------------------------------
Net income $ 547 $ 573 $ 570 $ 526
===================================================================================================================
Per share data:
Fully diluted net income $ .40 $ .42 $ .43 $ .38
High common stock price 19.75 18.88 16.00 20.75
Low common stock price 17.50 15.00 14.00 14.00
Cash dividends 0.15 0.15 0.16 0.16
===================================================================================================================
Quarters Ended
September December March June
(In thousands, except per share data) 1993 1993 1994 1994
- -------------------------------------------------------------------------------------------------------------------
Interest income $ 4,138 $ 4,188 $ 4,141 $ 4,272
Interest expense 2,188 2,079 2,051 2,158
- -------------------------------------------------------------------------------------------------------------------
Net interest income 1,950 2,109 2,090 2,114
Provision for loan losses 30 30 35 55
Securities gains (losses) 21 172 (4) 46
Gain (loss) on sale of loans 163 60 (79) (60)
Income (loss) from real estate investments 30 54 (50) 22
Trading account gains (losses) (16) 11 (6) (11)
Other non-interest income 283 297 318 382
Other real estate owned expense 95 104 41 17
Other non-interest expense 1,617 1,514 1,535 1,548
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and
accounting change 689 1,055 658 873
Provision for income taxes 342 507 165 286
- -------------------------------------------------------------------------------------------------------------------
Income before accounting change 347 548 493 587
Change in accounting for income taxes 275 - - -
===================================================================================================================
Net income $ 622 $ 548 $ 493 $ 587
===================================================================================================================
Per share data:
Fully diluted net income $ .48 $ .41 $ .36 $ .43
High common stock price 14.06 15.94 15.94 20.25
Low common stock price 10.44 13.44 14.31 13.44
Cash dividends 0.12 0.12 0.12 0.13
===================================================================================================================
B-40
Directors:
LeRoy T. Glover Samuel Kreiger Kenneth E. Schaible
Chairman of the Board, Managing Partner, President and Treasurer,
Shelton Bancorp, Inc.; Real Estate Group; Shelton Bancorp, Inc.
Retired Owner, Retired President,
Glover Construction A. Kreiger, Inc.
J. Allen Kosowsky Joseph A. Pagliaro Donald W. Smith
Vice Chairman of the Board, Owner and President, President,
Shelton Bancorp, Inc.; Riverview Funeral Home, Inc. D.W. Smith Builders, Inc.
President, J. Allen Kosowsky, CPA, P.C.
Charles H. Sullivan
Director of Food Services,
Connecticut Valley Hospital
Executive Officers:
Kenneth E. Schaible William C. Nimons Ralph J. Rodriguez
President & Treasurer Executive Vice President & Secretary Senior Vice President, Controller &
Assistant Secretary
Susan L. Kowalczyk*
Gary M. Toole* Vice President & Branch Bedda Emous*
Vice President & Chief Lending Officer Administrator Vice President & Trust Officer
* Officer of Shelton Savings Bank
only
Shareholder Information
- -------------------------------------------------------------------------------------------------------------------
1995 Annual Meeting of Stockholders Market Makers
The annual meeting will be held on October 31, The following firms generally make a market
1995 at Rapp's Paradise Inn, in the Company's stock:
557 Wakelee Terrace,
Ansonia, Connecticut, at 10:00 A.M. Advest, Inc.
Herzog, Heine, Geduld, Inc.
Corporate Headquarters Keefe, Bruyette & Woods, Inc.
375 Bridgeport Avenue Legg Mason Wood Walker, Inc.
Shelton, Connecticut 06484 Ryan Beck & Co., Inc.
(203) 944-2200 Tucker Anthony & R. L. Day
Transfer Agent & Register Dividend Reinvestment & Stock Purchase Plan
Stock Transfer & Trust Company The Company's dividend reinvestment and stock purchase
40 Wall Street plan provides a systematic and convenient way to
New York, New York 10005 purchase additional shares of the Company's stock,
(800) 937-5449 without incurring brokerage commissions or safekeeping
charges. To obtain information about the plan, please
Independent Accountants contact Carol Aimone, Assistant Secretary, at the
Coopers & Lybrand L.L.P. Company's corporate headquarters.
100 Pearl Street
Hartford, Connecticut 06103 FORM 10-K
To obtain a copy of the Company's Form 10-K, please
Stock Listing contact Thomas Phillips, Assistant Controller, at the
The Company's stock is traded on the NASDAQ Company's corporate headquarters.
National Market System under the symbol
"SSBC." At June 30, 1995, there were
1,343,341 shares outstanding and 1,628
stockholders of record including 700
accounts held in nominee name.
B-41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
------------------------------------------
Section 145 of the Delaware General Corporation Law sets forth certain
circumstances under which directors, officers, employees and agents may be
indemnified against liability that they may incur in their capacity as such.
Section 145 of the Delaware General Corporation Law, which is filed as Exhibit
99.1 to this Registration Statement, is incorporated herein by reference.
Article Nine of the Registrant's By-laws, entitled "Indemnification,"
provides for indemnification of the Registrant's directors, officers, employees
and agents under certain circumstances. Article Nine of the Registrant's
By-laws, which are filed as Exhibit 4.2 to this Registration Statement, is
incorporated herein by reference.
The Registrant also has the power to purchase and maintain insurance on
behalf of its directors and officers. The Registrant has in effect a policy of
liability insurance covering its directors and officers, the effect of which is
to reimburse the directors and officers of the Registrant against certain
damages and expenses resulting from certain claims made against them caused by
their negligent act, error or omission.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as express in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
Item 21. Exhibits and Financial Statement Schedules.
------------------------------------------
2.1 Agreement and Plan of Merger dated June 20, 1995, as amended, among the
Registrant, Webster Acquisition Corp. and Shelton Bancorp, Inc.,
including exhibits A through G thereto (incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on Form 8-K/A
filed on July 27, 1995).
II-1
4.2 By-laws of the Registrant, as amended to date (incorporated herein by
reference to Exhibit 3.5 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
*5 Opinion of Hogan & Hartson L.L.P. as to the validity of the securities
registered hereunder, including the consent of that firm.
*8 Form of opinion of Hogan & Hartson L.L.P. as to tax matters.
*12 Statement re: computation of ratios.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
*23.4 Consent of Alex. Brown & Sons, Incorporated
99.1 Section 145 of the Delaware General Corporation Law (incorporated
herein by reference to Exhibit 28.1 to the Registrant's Registration
Statement on Form S-2 (No. 33-54980) filed on November 25, 1992).
99.2 Form of Webster Proxy Card
99.3 Form of Shelton Proxy Card
___________
* previously filed.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
II-2
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act and is used in connection with an offering
of securities subject to Rule 415 under the Securities Act
will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) The undertaking concerning indemnification is included as part
of the response to Item 20.
(f) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of
this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information
contained in documents filed subsequent to the effective date
of the registration statement through the date of responding
to the request.
(g) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waterbury, State of Connecticut, on the 10th day of October, 1995.
WEBSTER FINANCIAL CORPORATION
By: /s/ James C. Smith
------------------------------------
James C. Smith
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the undersigned in the capacities
indicated on the 10th day of October, 1995.
Signature Title
- --------- -----
/s/ James C. Smith
- -------------------------------- Chairman and Chief Executive Officer
James C. Smith (Principal Executive Officer)
/s/ John V. Brennan
- -------------------------------- Executive Vice President, Chief
John V. Brennan Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Peter J. Swiatek
- -------------------------------- Controller
Peter J. Swiatek (Principal Accounting Officer)
/s/ Joel S. Becker
- -------------------------------- Director
Joel S. Becker
/s/ O. Joseph Bizzozero, Jr.
- -------------------------------- Director
O. Joseph Bizzozero, Jr.
/s/ Robert A. Finkenzeller
- -------------------------------- Director
Robert A. Finkenzeller
/s/ Walter R. Griffin
- -------------------------------- Director
Walter R. Griffin
/s/ J. Gregory Hickey
- -------------------------------- Director
J. Gregory Hickey
/s/ C. Michael Jacobi
- -------------------------------- Director
C. Michael Jacobi
/s/ Harold W. Smith
- -------------------------------- Director
Harold W. Smith
/s/ Sr. Marguerite Waite, C.S.J.
- -------------------------------- Director
Sr. Marguerite Waite, C.S.J.
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
2.1 Agreement and Plan of Merger dated June 20, 1995 among the
Registrant, Webster Acquisition Corp. and Shelton Bancorp, Inc.,
including exhibits A through G thereto (incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on
Form 8-K/A filed on July 27, 1995).
4.2 By-laws of the Registrant, as amended to date (incorporated
herein by reference to Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
*5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.
*8 Form of opinion of Hogan & Hartson L.L.P. as to tax matters.
*12 Statement re: computation of ratios.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5)
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
*23.4 Consent of Alex. Brown & Sons, Incorporated
99.1 Section 145 of the Delaware General Corporation Law
(incorporated herein by reference to Exhibit 28.1 to the
Registrant's Registration Statement on Form S-2 (No. 33-54980)
filed on November 25, 1992).
99.2 Form of Webster Proxy Card
99.3 Form of Shelton Proxy Card
_____________
*Previously filed