UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ending September 30, 1995
--------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------------------- -------------------------
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1187536
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
First Federal Plaza, Waterbury, Connecticut 06720
(Address of principal executive offices) (Zip Code)
(203) 753-2921
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 5,514,142 Shares
- - ------------------------------ -------------------------------------
(Class) Issued and Outstanding at October 27, 1995
Webster Financial Corporation and Subsidiaries
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at September 30, 1995
and December 31, 1994 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Statements 11
PART II - OTHER INFORMATION 17
SIGNATURES 18
2
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
- - -------------------------------------------------------------------------------
(Dollars in Thousands, Except Share Data)
ASSETS
September 30, December 31,
1995 1994
------------ ------------
Cash and Due from Depository Institutions $ 39,851 $ 36,089
Interest-bearing Deposits 70,675 52,752
Trading Securities, at Fair value (Note 4) 41,390 23,017
Securities: (Note 4)
Available for Sale, at Fair value 200,563 156,968
Held to Maturity, (Market value: $815,499 in 1995;
$561,899 in 1994) 818,778 590,633
Loans Receivable, Net 1,650,011 1,656,022
Segregated Assets, Net 116,365 137,096
Accrued Interest Receivable 19,702 16,557
Premises and Equipment, Net 30,529 31,075
Foreclosed Properties, Net 18,144 25,636
Prepaid Expenses and Other Assets 28,587 35,619
---------- ----------
Total Assets $3,034,595 $2,761,464
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $2,159,101 $2,163,467
Federal Home Loan Bank Advances 541,715 367,000
Other Borrowings 130,094 43,675
Advance Payments by Borrowers for Taxes and Insurance 7,453 12,336
Accrued Expenses and Other Liabilities 42,403 37,045
---------- ----------
Total Liabilities 2,880,766 2,623,523
---------- ----------
Shareholders' Equity:
Cumulative Convertible Preferred Stock, Series B,
171,869 shares issued and outstanding at September
30, 1995 and 172,129 shares issued and outstanding
at December 31, 1994 2 2
Common Stock, $.01 par value:
Authorized - 14,000,000 shares;
Issued - 5,959,566 shares at September 30, 1995
and 5,958,074 at December 31, 1994 60 60
Paid in Capital 96,727 96,476
Retained Earnings 63,346 52,573
Less Treasury Stock at Cost, 445,424 shares
at September 30, 1995 and 475,874 shares at December
31, 1994 (3,456) (3,692)
Less Employee Stock Ownership Plan Shares
Purchased with Debt (3,207) (3,675)
Unrealized Securities Gains (Losses), Net 357 (3,803)
----------- -----------
Total Shareholders' Equity 153,829 137,941
----------- -----------
Total Liabilities and Shareholders' Equity $ 3,034,595 $ 2,761,464
=========== ===========
3
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Share Data)
- - -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
--------- --------- --------- ---------
Interest Income:
Loans and Segregated Assets $ 34,951 $ 33,025 $ 103,230 $ 92,299
Mortgage-backed Securities 14,392 10,292 36,853 27,556
Securities and Interest-bearing Deposits 2,075 2,634 6,838 6,871
--------- --------- --------- ---------
Total Interest Income 51,418 45,951 146,921 126,726
--------- --------- --------- ---------
Interest Expense:
Interest on Deposits 22,883 17,554 64,885 49,918
Interest on Borrowings 9,175 6,178 23,141 14,656
--------- --------- --------- ---------
Total Interest Expense 32,058 23,732 88,026 64,574
--------- --------- --------- ---------
Net Interest Income 19,360 22,219 58,895 62,152
Provision for Loan Losses 450 475 1,080 2,020
--------- --------- --------- ---------
Net Interest Income After Provision for Loan Losses 18,910 21,744 57,815 60,132
--------- --------- --------- ---------
Noninterest Income:
Fees and Service Charges 3,280 3,062 9,795 8,211
Gain on Sale of Loans, Net 47 1,026 592
Gain (Loss) on Sale of Securities, Net 621 (60) 1,225 (182)
Other Noninterest Income 580 500 2,039 1,756
--------- --------- --------- ---------
Total Noninterest Income 5,114 3,549 14,085 10,377
--------- --------- --------- ---------
Noninterest Expenses:
Salaries and Employee Benefits 8,514 8,752 25,519 23,978
Occupancy Expense of Premises 1,429 1,487 4,274 4,182
Furniture and Equipment Expenses 1,368 1,630 4,129 4,093
Federal Deposit Insurance Premiums 459 1,364 2,984 3,822
Foreclosed Property Expenses and
Provisions, Net (Note 6) 957 2,132 3,337 5,305
Other Operating Expenses 3,974 3,224 10,894 9,362
--------- --------- --------- ---------
Total Noninterest Expenses 16,701 18,589 51,137 50,742
--------- --------- --------- ---------
Income Before Income Taxes 7,323 6,704 20,763 19,767
Income Taxes 2,306 2,421 6,385 7,348
--------- --------- --------- ---------
Net Income 5,017 4,283 14,378 12,419
Preferred Stock Dividends 324 469 972 1,406
--------- --------- --------- ---------
Net Income Available to Common Shareholders $ 4,693 $ 3,814 $ 13,406 $ 11,013
========= ========= ========= =========
Net Income Per Common Share:
Primary $ 0.83 $ 0.74 $ 2.40 $ 2.27
Fully Diluted $ 0.76 $ 0.65 $ 2.19 $ 1.97
Dividends Declared Per Common Share: $ 0.16 $ 0.13 $ 0.48 $ 0.39
4
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
- - ------------------------------------------------------------------------------
Nine Months Ended
September 30,
1995 1994
------ -----
OPERATING ACTIVITIES:
Net Income $ 14,378 $ 12,419
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 1,080 2,020
Provision for Foreclosed Property Losses 1,670 2,370
Provision for Depreciation and Amortization 2,989 2,463
Amortization of Securities Premiums, Net 494 83
Amortization of Core Deposit Intangible 541 1,029
(Gains) Losses on Sale of Foreclosed Property (583) 512
Gains on Sale of Loans, Net (1,026) (592)
(Gains) Losses on Sale of Securities, Net (1,169) 232
Gains on Sale of Trading Securities (56) (50)
(Increase) Decrease in Trading Securities (17,453) 17,765
Loans Originated for Sale (97,880) (201,617)
Sale of Loans, Originated for Sale 90,601 155,588
(Increase) Decrease in Interest Receivable (3,069) 352
Increase in Interest Payable on Interest Bearing Liabilities 2,184 4,257
Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 3,062 (32,797)
Decrease in Prepaid Expenses and Other Assets, Net 2,540 4,086
----------- -----------
Net Cash Used by Operating Activities (1,697) (31,880)
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (8,260) (252)
Purchases of Securities Held to Maturity (13,157) (75,971)
Maturities of Securities 4,624 12,150
Proceeds from Sale of Securities Available for Sale 39,316 224
Net (Decrease) Increase in Interest-bearing Deposits (17,923) 41,558
Purchase of Loans -- (31,681)
Net Decrease (Increase) in Loans 12,889 (128,267)
Proceeds from Sale of Foreclosed Property 9,430 14,923
Net Decrease in Segregated Assets 18,051 35,146
Purchase of Mortgage-backed Securities Available for Sale (102,753) (99,219)
Purchase of Mortgage-backed Securities Held to Maturity (294,520) --
Principal Collected on Mortgage-backed Securities 74,386 125,525
Proceeds from Sale of Mortgage-backed Securities Available For Sale 36,503 9,738
Purchase of Premises and Equipment (2,443) (5,485)
Net Cash and Cash Equivalents Received from Banking Institutions Acquired -- 15,490
----------- -----------
Net Cash Used by Investing Activities (243,857) (86,121)
----------- -----------
FINANCING ACTIVITIES:
Net Decrease in Deposits (4,366) (4,792)
Proceeds from Sale of Common Stock -- 21,923
Repayment of FHLB Advances (411,574) (916,542)
Proceeds from FHLB Advances 586,289 1,058,542
Repayment of Reverse Repurchase Agreements and Other Borrowings (25,140) --
Proceeds from Reverse Repurchase Agreements and Other Borrowings 112,104 --
Cash Dividends to Common and Preferred Shareholders (3,605) (3,046)
Net Decrease in Advance Payments for Taxes and Insurance (4,883) (14,788)
Exercise of Stock Options 491 141
----------- -----------
Net Cash Provided by Financing Activities 249,316 141,438
----------- -----------
Increase in Cash and Cash Equivalents 3,762 23,437
Cash and Cash Equivalents at Beginning of Period 36,089 18,855
----------- -----------
Cash and Cash Equivalents at End of Period $ 39,851 $ 42,292
=========== ===========
Supplemental Disclosures:
Income Taxes Paid $ 5,387 $ 7,512
Interest Paid 85,842 67,587
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of Loans to Foreclosed Property $ 8,073 $ 29,038
Securitization of Residential Real Estate Loans -- 137,458
----------- -----------
Total Noncash Activities $ 8,073 $ 166,496
=========== ===========
5
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All adjustments
were of a normal recurring nature. The results of operations for the three and
nine month periods ended September 30, 1995 are not necessarily indicative of
the results which may be expected for the year as a whole. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in Webster Financial Corporation's 1994 Annual Report to
shareholders.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of Webster
Financial Corporation ("Webster") and its wholly owned subsidiaries First
Federal Bank, a federal savings bank ("First Federal"), and Bristol Savings Bank
("Bristol"), a state chartered savings bank (collectively the "Banks").
Effective November 1, 1995, First Federal and Bristol are expected to merge and
be renamed Webster Bank.
NOTE 3 - ACQUISITIONS
------------
SHORELINE BANK AND TRUST COMPANY
--------------------------------
On December 16, 1994, Webster acquired Shoreline Bank and Trust
Company, a Connecticut chartered commercial bank with $51 million in assets
based in Madison, Connecticut. In connection with the acquisition, Webster
issued 266,500 shares of its common stock for all of the outstanding shares of
Shoreline common stock based on an exchange ratio of 1 share of Webster's common
stock for 2 shares of Shoreline's common stock. The acquisition was accounted
for as a pooling of interests and as such the consolidated financial statements
include Shoreline's financial data as if Shoreline had been combined as of the
beginning of the earliest period presented. As part of the acquisition,
Shoreline was merged into First Federal and its Madison banking office became a
full service office of First Federal.
BRISTOL SAVINGS BANK
--------------------
On March 3, 1994, Bristol Savings Bank converted from a Connecticut
mutual savings bank to a Connecticut capital stock savings bank and concurrently
became a wholly-owned subsidiary of Webster and a sister bank to First Federal
(the "Bristol Acquisition"). Webster became a multiple holding company as a
result of the Bristol Acquisition. In connection with the conversion, Webster
completed the sale of 1,150,000 shares of its common stock in related
subscription and public offerings. Webster invested in Bristol a total of $31.0
million, consisting of the net proceeds of approximately $21.9 million from the
subscription and public offerings plus existing funds from the holding company.
As a result of this investment, Bristol met all ratios required by the FDIC for
a "well-capitalized" institution. The Bristol acquisition was accounted for as a
purchase and results of operations relating to Bristol are included in the
accompanying Consolidated Financial Statements only for the period subsequent to
the effective date of the acquisition.
6
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 4 - SECURITIES AND MORTGAGE-BACKED SECURITIES
-----------------------------------------
On December 31, 1993, Webster adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement requires
securities to be classified into one of three categories. Securities with fixed
maturities that are classified as Held to Maturity are carried at cost, adjusted
for amortization of premiums and accretion of discounts over the estimated terms
of the securities utilizing a method which approximates the level yield method.
Securities that management intends to hold for indefinite periods of time
(including securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, the need to increase regulatory capital or
other similar factors) are classified as Available for Sale. All Equity
Securities are classified as Available for Sale. Securities Available for Sale
are carried at fair value with unrealized gains and losses recorded as
adjustments to shareholders' equity on a tax affected basis. Securities
classified as Trading Securities are carried at fair value with unrealized gains
and losses included in earnings. Gains and losses on the sales of securities are
recorded using the specific identification method.
A summary of securities follows (in thousands):
September 30, 1995 December 31, 1994
----------------------- ------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
Trading Securities:
Collateralized Mortgage Obligation $ 6,868 $ 6,868 $ 9,311 $ 9,311
GNMA 4,853 4,853 13,706 13,706
FHLMC 29,667 29,667 -- --
Other 2 2 -- --
---------- ---------- ---------- ----------
41,390 41,390 23,017 23,017
---------- ---------- ---------- ----------
Available for Sale Portfolio:
U.S. Treasury Notes:
Matures within 1 year -- -- 3,489 3,451
U.S. Government Agency:
Matures within 5 years 12,896 12,524 32,880 31,265
Corporate Bonds and Notes:
Matures over 5 through 10 years 2,742 2,732 2,985 2,974
Equity Securities:
Mutual Funds 8,324 8,172 16,188 15,703
Stock in Federal Home Loan Bank of Boston 27,967 27,967 24,476 24,476
Other Equity Securities 18,255 20,655 11,811 11,456
Collateralized Mortgage Obligations 64,154 65,175 57,121 56,083
Mortgage Backed Securities:
FNMA 17,114 17,199 11,316 11,560
FHLMC 24,837 24,854 -- --
GNMA 21,171 21,285 -- --
Unrealized Securities Gains (Losses), Net 3,103 -- (3,298) --
---------- ---------- ---------- ----------
200,563 200,563 156,968 156,968
---------- ---------- ---------- ----------
Held to Maturity Portfolio:
U.S. Treasury Notes:
Matures within 1 year 2,334 2,325 3,318 3,248
U.S. Government Agency:
Matures within 1 year 1,010 1,011 -- --
Matures within 5 years 55,697 56,955 60,625 59,114
Corporate Bonds and Notes:
Matures over 5 through 10 years 319 316 319 288
Mortgage Backed Securities:
FHLMC 69,380 69,392 74,951 70,622
FNMA 152,328 152,879 165,266 156,857
GNMA 1,697 1,763 1,919 1,922
Collateralized Mortgage Obligations 535,688 530,537 283,861 269,492
Other Mortgage-backed Securities 325 321 374 356
---------- ---------- ---------- ----------
818,778 815,499 590,633 561,899
---------- ---------- ---------- ----------
Total $1,060,731 $1,057,452 $ 770,618 $ 741,884
========== ========== ========== ==========
7
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 5 - NET INCOME PER SHARE
--------------------
Primary net income per share is calculated by dividing net income less
preferred stock dividends by the weighted-average number of shares of common
stock and common stock equivalents outstanding, when dilutive. The common stock
equivalents consist of common stock options. Fully diluted net income per share
is calculated by dividing adjusted net income by the weighted-average fully
diluted common shares, including the effect of common stock equivalents and the
hypothetical conversion into common stock of the Series B 7 1/2% Cumulative
Convertible Preferred Stock. The weighted-average number of shares used in the
computation of primary net income per share for the three and nine months ended
September 30, 1995 were 5,624,886 and 5,584,334, respectively, and for the three
and nine months ended September 30, 1994 were 5,119,477 and 4,851,967,
respectively. The weighted-average number of shares used in the computation of
fully diluted earnings per share for the three and nine months ended September
30, 1995 were 6,621,811 and 6,579,053 and for the three and nine months ended
September 30, 1994 were 6,545,431 and 6,285,843, respectively.
NOTE 6 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
------- ------- ------- -------
(Gain) Loss on Sale of Foreclosed Property, Net $ (301) $ 342 $ (584) $ 512
Provision for Losses on Foreclosed Property 684 820 1,670 2,370
Rental Income (134) (261) (458) (835)
Foreclosed Property Expenses 708 1,231 2,709 3,258
------- ------- ------- -------
Foreclosed Property Expenses and Provisions, Net $ 957 $ 2,132 $ 3,337 $ 5,305
======= ======= ======= =======
NOTE 7 - ACCOUNTING FOR IMPAIRED LOANS
-----------------------------
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Under SFAS No. 114, a loan
is considered impaired when it is probable that the creditor will be unable to
collect amounts due, both principal and interest, according to the contractual
terms of the loan agreement. This statement does not apply to large groups of
small-balance homogeneous loans that are collectively evaluated for impairment
such as residential and consumer loans. When a loan is impaired, a creditor has
a choice of ways to measure impairment. The factors used to measure impairment
include: (i) the present value of expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (ii) the
observable market price of the impaired loan or (iii) the fair value of the
collateral of a collateral-dependent loan. When a loan has been deemed to be
impaired, a valuation allowance is established for the amount of such
impairment.
Webster considers its residential and consumer loan portfolios to be exempt
from the provisions of SFAS No. 114 since these loans are large groups of
small-balance homogeneous loans collectively evaluated for determining loan loss
allowances. In identifying impaired loans under the provisions of SFAS No. 114,
Webster aggregates loans into risk classifications and makes an individual
assessment of each borrower's ability to repay based upon current contract
terms. If it is determined that the borrower will not be able to fulfill the
terms of the original contract, the loan is classified as impaired. Impaired
loans differ from nonaccrual loans based upon the following:
8
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 7 - ACCOUNTING FOR IMPAIRED LOANS - Continued
-----------------------------
Nonaccrual loans are loans which are contractually past due 90 days or more as
to principal or interest payments. In addition, a loan may be placed on
nonaccrual status based on uncertainty as to future principal or interest
payments. In comparison, the measurement of impaired loans is more subjective
due to the use of estimates of future cash flows.
There is no difference in Webster's charge-off policy for impaired loans as
compared to other loans classified as nonaccrual or risk-rated by category.
Loans are charged-off to the loan loss or impaired loan loss allowances when
management determines that a portion of the book value of the loan will not be
recovered either through principal repayment or liquidation of the underlying
collateral.
Webster adopted FAS No. 114 during the quarter ended March 31, 1995, with no
impact on its results of operations. At September 30, 1995, Webster had $11.7
million of impaired loans, of which $5.6 million was measured based upon the
fair value of the underlying collateral and $6.1 million was measured based upon
the expected future cash flows of the impaired loans. Of the total of impaired
loans of $11.7 million, $10.1 million had allowances for losses on impaired
loans of $1.7 million. In the 1995 third quarter, the average balance of
impaired loans was $11.8 million. The allowance for losses on impaired loans was
established as a result of an allocation from the allowance for losses on loans.
In October 1994, the Financial Accounting Standards Board issued SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure", amending SFAS No. 114. SFAS No. 118 allows institutions to use
existing methods for recognizing interest income on impaired loans. Webster's
policy with regard to the recognition of interest income on impaired loans
includes an individual assessment of each loan. Interest which is more than 90
days past due is not accrued. When payments on impaired loans are received,
Webster records interest income on a cash basis or applies the total payment to
principal based on an individual assessment of each loan. Interest income
recognized on impaired loans in the three months and nine months ended September
30, 1995 amounted to $7,139 and $46,199, respectively.
NOTE 8 - REVERSE REPURCHASE AGREEMENTS
-----------------------------
At September 30, 1995, Webster had $87.0 million of reverse repurchase
agreements outstanding. Information concerning borrowings under reverse
repurchase agreements is summarized below (dollars in thousands):
Balance at Fixed Maturity Book Value Market Value
Sept 30, 1995 Term Rate Date of Collateral of Collateral
- - ------------- ---- ------ ----------- ------------- --------------
$14,895 9 months 5.85% 5/10/96 $16,194 $15,827
11,527 9 months 5.83 5/10/96 11,471 12,087
35,992 3 months 5.77 12/14/95 36,381 37,298
24,550 4 months 5.77 1/23/96 27,546 26,358
------- ------- ------
$86,964 $91,592 $91,570
======= ======= ======
The securities underlying the reverse repurchase agreements are all U.S.
Agency collateral and have been delivered to the broker-dealers who arrange the
transactions . Webster uses reverse repurchase agreements when the cost of such
borrowings is favorable as compared to other funding sources. The average
balance and the maximum amount of outstanding repurchase agreements at any
month-end during the 1995 third quarter was $38.3 million and $87.0 million
respectively. There were no reverse repurchase agreements outstanding at
September 30, 1994. The weighted average interest rate of the reverse repurchase
agreements outstanding at September 30, 1995 was 5.79%.
9
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 9 - ACCOUNTING STANDARDS
--------------------
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122
"Accounting for Mortgage Servicing Rights", which amends SFAS 65 "Accounting for
Certain Mortgage Banking Activities." Under SFAS 65, mortgage servicing rights
were required to be capitalized only if servicing was purchased but prohibited
separate capitalization of mortgage servicing rights when acquired through loan
portfolio sales with servicing rights retained. SFAS No. 122 requires that a
mortgage banking entity recognize as a separate asset the value of the right to
service mortgage loans for others, regardless of how those servicing rights are
acquired. Additionally, SFAS No. 122 requires that a mortgage banking entity
assess its capitalized mortgage servicing rights for impairment and establish
valuation allowances based on the fair value of those servicing rights, which
include those servicing rights acquired prior to adoption of SFAS No.122. As
allowed under the provisions of this statement, Webster elected early adoption
of SFAS No. 122 on July 1, 1995. As a result of such adoption, Webster recorded
gains on the sale of loans of $118,000 in the third quarter ended September 30,
1995. At September 30, 1995 the fair value of all Mortgage Servicing Rights
exceeded its book value, therefore, no valuation allowance was recorded.
10
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
- - -------
Webster, headquartered in Waterbury, Connecticut, is the holding company of
First Federal and Bristol. Webster, through its subsidiary banks, is engaged
primarily in retail and commercial banking, attracting deposits from the general
public and investing those funds in first residential mortgage loans, commercial
and industrial loans, commercial real estate loans, home equity loans and
consumer installment loans. Webster's subsidiary banks currently serve customers
from 39 banking offices located in New Haven, Fairfield, Litchfield and Hartford
Counties in Connecticut.
CHANGES IN FINANCIAL CONDITION
- - ------------------------------
Total assets were $3.035 billion at September 30, 1995, an increase of
$273.1 million from December 31, 1994 due primarily to increases in
mortgage-backed securities. Net loans receivable amounted to $1.650 billion at
September 30, 1995 compared to $1.656 billion at December 31, 1994, a decrease
of $6.0 million. The decrease in net loans receivable is primarily attributable
to prepayments and repayments of principal. Segregated Assets decreased to
$116.4 million at September 30, 1995 from $137.1 million at December 31, 1994
due primarily to $6.4 million of gross charge-offs and $14.3 million of
principal repayments. Total foreclosed property, net were $18.1 million at
September 30, 1995 compared to $25.6 million at December 31, 1994, a decrease of
$7.5 million due primarily to $3.3 million in charge-offs and $4.6 million in
foreclosed property sales. Total liabilities at September 30, 1995 increased
$257.2 million from December 31, 1994. The net increase in liabilities consisted
of increases in FHLB advances, other borrowings, and accrued expenses and other
liabilities of $174.7 million, $86.4 million and $5.4 million, respectively,
which were offset by net decreases in deposits and advance payments by borrowers
for taxes and insurance of $4.4 million and $4.9 million, respectively. At
September 30, 1995, Webster had reverse repurchase agreements outstanding of
$87.0 million. There were no reverse repurchase agreements outstanding during
1994.
Shareholders' equity was $153.8 million at September 30, 1995 compared to
$137.9 million at December 31, 1994. First Federal Bank had tier 1 leveraged,
tier 1 risk-based and total risk-based capital ratios of 5.12%, 11.43% and
12.53%, respectively, at September 30, 1995. Bristol's tier 1 leveraged, tier 1
risk-based and total risk-based capital ratios at September 30, 1995 were 7.69%,
12.52% and 13.80%, respectively. Both Banks meet the regulatory capital
requirements for a "well capitalized" institution.
ASSET QUALITY
Webster strives to maintain high asset quality. At September 30, 1995,
residential first mortgage and consumer loans comprised 90% of the loan
portfolio while commercial and industrial loans and commercial real estate loans
comprised 10%, excluding Segregated Assets. Most of Webster's securities are
obligations of the U.S. Treasury or U.S. Government Agencies. All other fixed
income securities must have an investment rating in the top two rating
categories by a major rating service at the time of purchase.
11
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- - -------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of September 30, 1995 and
December 31, 1994 follows (in thousands):
September 30, 1995 December 31, 1994
------------------ -----------------
Residential Mortgage Loans $ 1,374,964 $ 1,390,995
Commercial Real Estate Loans 112,860 109,339
Commercial and Industrial Loans 57,393 58,679
Consumer Loans (Including Home Equity) 146,025 142,445
----------- -----------
Total Loans 1,691,242 1,701,458
Allowance for Loan Losses (41,231) (45,436)
Loans Receivable, Net $ 1,650,011 $ 1,656,022
=========== ===========
Included above at September 30, 1995 and December 31, 1994 were loans held
for sale of $7.3 million and $24.7 million, respectively. Loans held for sale at
September 30, 1995 and December 31, 1994 represented one-to-four family
residential mortgage loans.
The following table details the nonaccrual assets at September 30, 1995 and
December 31, 1994 (in thousands):
September 30, 1995 December 31, 1994
------------------ -----------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $18,593 $17,124
Commercial 16,045 15,201
Consumer 1,075 1,234
------- -------
Total Nonaccrual Loans 35,713 33,559
Foreclosed Properties:
Residential and Consumer 5,483 8,496
Commercial 12,660 17,140
------- -------
Total Nonaccrual Assets $53,856 $59,195
======= =======
The decrease in nonaccrual assets of $5.3 million at September 30, 1995
compared to December 31, 1994 is due primarily to sales of foreclosed property
and charge-offs.
At September 30, 1995, Webster's allowance for losses on loans of $41.2
million represented 115% of nonaccrual loans and its total allowances for losses
on nonaccrual assets of $42.4 million amounted to 77% of nonaccrual assets. A
detail of the changes in the allowances for losses on loans and foreclosed
property for the nine months ended September 30, 1995 follows (in thousands):
Allowances For Losses On
--------------------------------
Total
Impaired Foreclosed Allowances
Loans Loans Properties for Losses
-------- -------- -------- --------
Balance at December 31, 1994 $ 45,436 $ -- $ 2,473 $ 47,909
Provisions for Losses 1,080 -- 1,670 2,750
Allocation from General Allowance (2,000) 2,000 -- --
Losses Charged to Allowances (7,397) (333) (3,301) (11,031)
Recoveries Credited to Allowances 2,445 -- 280 2,725
-------- -------- -------- --------
Balance at September 30, 1995 $ 39,564 $ 1,667 $ 1,122 $ 42,353
======== -------- ======== ========
12
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- - -------------------------------------------------------------------------------
Segregated Assets, Net
- - ----------------------
Segregated Assets, Net at September 30, 1995 included the following assets
purchased from the FDIC in the First Constitution Acquisition which are subject
to a loss-sharing arrangement with the FDIC (in thousands):
September 30, 1995 December 31, 1994
------------------ -----------------
Commercial Real Estate Loans $ 87,627 $ 98,813
Commercial and Industrial Loans 12,724 15,377
Multi-Family Real Estate Loans 17,067 18,124
Foreclosed Properties 2,400 9,202
--------- ---------
119,818 141,516
Allowance for Segregated Assets Losses (3,453) (4,420)
--------- ---------
Segregated Assets, Net $ 116,365 $ 137,096
========= =========
Under the Purchase and Assumption Agreement with the FDIC relating to the
First Constitution Acquisition, during the first five years after October 2,
1992 (the "Acquisition Date"), the FDIC is required to reimburse Webster
quarterly for 80% of all net charge-offs (i.e., the excess of charge-offs over
recoveries) and certain permitted expenses related to the Segregated Assets
acquired by Webster.
During the sixth and seventh years after the Acquisition Date, Webster is
required to pay quarterly to the FDIC an amount equal to 80% of the recoveries
during such years on Segregated Assets which were previously charged off after
deducting certain permitted expenses related to those assets. Webster is
entitled to retain 20% of such recoveries during the sixth and seventh years
following the Acquisition Date and 100% thereafter.
Upon termination of the seven-year period after the Acquisition Date, if
the sum of net charge-offs on Segregated Assets for the first five years after
the Acquisition Date plus permitted expenses during the entire seven-year
period, less any recoveries during the sixth and seventh year on Segregated
Assets charged off during the first five years, exceeds $49.2 million, the FDIC
is required to pay Webster an additional 15% of any such excess over $49.2
million at the end of the seventh year. Reimbursements received for net
charge-offs and eligible expenses on Segregated Assets aggregated $2.4 million
and $6.0 million for the three and nine months ended September 30, 1995,
respectively.
A detail of changes in the allowance for Segregated Assets losses follows
(in thousands):
Balance at December 31, 1994 $ 4,420
Provisions Charged to Operations -
Charge-offs (1,280)
Recoveries 313
-------
Balance at September 30, 1995 $ 3,453
=======
13
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- - -------------------------------------------------------------------------------
The following table details nonaccrual Segregated Assets at September 30,
1995 and December 31, 1994 (in thousands):
September 30, 1995 December 31, 1994
Segregated Assets Accounted For on a
Nonaccrual Basis:
Commercial Real Estate Loans $ 5,326 $13,795
Commercial and Industrial Loans 3,110 3,678
Multi-Family Real Estate Loans 801 576
------- -------
Total Nonaccrual Loans 9,237 18,049
Foreclosed Property:
Commercial Real Estate 1,302 7,753
Multi-Family Real Estate 1,098 1,449
------- -------
Total Nonaccrual Segregated Assets $11,637 $27,251
======= =======
ASSET/LIABILITY MANAGEMENT
- - --------------------------
The goal of Webster's asset/liability management policy is to manage
interest-rate risk so as to maximize net interest income over time in changing
interest-rate environments. To this end, Webster's strategies for managing
interest-rate risk are responsive to changes in the interest-rate environment
and to market demands for particular types of deposit and loan products.
Management measures interest-rate risk using simulation, price elasticity and
GAP analyses. Based on Webster's asset/liability mix September 30, 1995,
management's simulation analysis of the effects of changing interest rates
projects that an instantaneous +/- 200 basis point change in interest rates
would decrease net interest income by less than 5% at September 30, 1995. At
September 30, 1995, Webster had a 4.6% positive GAP position in the one year
time horizon, which means that cumulative interest-rate sensitive assets exceed
cumulative interest-rate sensitive liabilities for that period. Management
believes that its interest-rate risk position represents a reasonable amount of
interest-rate risk at September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Under regulations of the Office of Thrift Supervision, First Federal is
required to maintain assets which are readily marketable in an amount equal to
5% or more of its net withdrawable deposits plus short-term borrowings. At
September 30, 1995, First Federal had a liquidity ratio of 5.20% and was in
compliance with applicable regulations. Bristol, as an FDIC regulated
institution, has no such specific liquidity requirement. At September 30, 1995,
Webster had mortgage commitments outstanding of $42.3 million, unused home
equity credit lines of $142.5 million and commercial lines and letters of credit
of $33.1 million.
RESULTS OF OPERATIONS
- - ---------------------
Comparison of the three and nine month periods ended September 30, 1995 and
1994:
General
- - -------
Net income for the three month period ended September 30, 1995 amounted to
$5.0 million or $.76 per fully diluted share compared to $4.3 million or $.65
per fully diluted share for the same period in 1994. Net income available to
common shareholders increased 23% in the third quarter of 1995 to $4.7 million
compared to $3.8 million for the same period in 1994. Net Income available to
common shareholders for the nine months ended September 30, 1995 amounted to
$13.4 million or $2.19 per fully diluted share compared to $11.0 million or
$1.97 per fully diluted share for the same period in 1994.
14
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- - -------------------------------------------------------------------------------
Net Interest Income
- - -------------------
Net Interest Income for the three and nine months ended September 30, 1995
amounted to $19.4 million and $58.9 million, respectively, compared to $22.2
million and $62.2 million for the same periods in 1994. The decrease is
primarily attributable to the cost of funds increasing more than yields on
earning assets. Net interest rate spread for the three and nine months ended
September 30, 1995 was 2.66% and 2.84%, respectively, compared to 3.30% and
3.23% for the same periods in 1994.
Interest Income for the three and nine months ended September 30, 1995
amounted to $51.4 million and $146.9 million, respectively, compared to $46.0
million and $126.7 million for the same periods in 1994. The increase is due
primarily to a higher amount of average earning assets and higher yields on
loans, mortgage-backed securities and investments, which increased to 7.37% and
7.31% for the three and nine months ended September 30, 1995, respectively,
compared to 6.89% and 6.73% for the same periods in 1994.
Interest Expense for the three and nine months ended September 30, 1995
amounted to $32.1 million and $88.0 million, respectively, compared to $23.7
million and $64.6 million for the same periods in 1994. This increase is due
primarily to a higher amount of average interest-bearing liabilities and an
increase in the cost of deposits and Federal Home Loan Bank advances. The cost
of interest-bearing liabilities increased to 4.71% and 4.48% for the three and
nine months ended September 30, 1995 compared to 3.59% and 3.49% for the same
periods in 1994.
Provision for Loan Losses
- - -------------------------
The provision for loan losses amounted to $450,000 and $1.1 million for the
three and nine month periods ended September 30, 1995, respectively, compared to
$475,000 and $2.0 million for the same periods in 1994. At September 30, 1995,
the allowance for loan losses was $41.2 million and represented 115.5% of
nonaccrual loans, compared to $52.5 million and 115.2% a year earlier.
Noninterest Income
- - ------------------
Noninterest Income for the three and nine months ended September 30, 1995
amounted to $5.1 million and $14.1 million, respectively, compared to $3.5
million and $10.4 million for the same periods in 1994. The increase is due
primarily to gains on sales of loans and securities and to an increase in
deposit product fees as a result of a larger deposit base.
There were $1.3 million and $2.3 million of gains on sales of loans and
securities for the three and nine months ended September 30, 1995, respectively,
compared to losses of $13,000 and gains of $410,000 for the same periods in
1994. The third quarter of 1995 includes a gain on the sale of loans of $118,000
as a result of the early adoption of SFAS No. 122.
Noninterest Expenses
--------------------
Noninterest expenses for the three months ended September 30, 1995 amounted
to $16.7 million compared to $18.6 million for the same period in 1994. The
decrease is due primarily to lower salary expenses, occupancy expenses,
furniture and equipment expenses, Federal Deposit Insurance Corporation ("FDIC")
premiums and foreclosed property expenses and provisions. During the 1995 third
quarter, the FDIC determined that the Bank Insurance Fund ("BIF") had met its
required reserve ratio as of June 1, 1995 and lowered the BIF premium rate
retroactively to that date. Webster received a refund of $801,000 from the BIF.
There was no reduction by the FDIC in the premium rates of the Savings
Association Insurance Fund ("SAIF"), which has not met its required reserve
level. At September 30, 1995, approximately 59% of Webster's deposits are
assessed premiums at the BIF rate and 41% at the SAIF rate. The 1995 third
quarter decrease in noninterest expenses was partially offset by increases in
other operating expenses in the 1995 third quarter are primarily due to $1.3
million of expenses related to the renaming of Webster's banking subsidiaries.
15
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- - ------------------------------------------------------------------------------
Noninterest expenses for the nine months ended September 30, 1995 amounted
to $51.1 million compared to $50.7 million for the same period in 1994. The
increase is due to higher salaries and employee benefit expenses, occupancy
expenses, furniture and equipment expenses and other expenses. Foreclosed
property expenses and provisions, net amounted to $3.3 million for the nine
months ended September 30, 1995 compared to $5.3 million for the same period in
1994 due primarily to a decrease in provisions for foreclosed property losses in
1995. Noninterest expenses for the 1995 nine month period include Bristol
expenses for all nine months while the 1994 period only includes expenses
related to Bristol from the date of acquisition on March 3, 1994.
Income Taxes
- - ------------
Total income tax expense for the three and nine month periods ended
September 30, 1995 amounted to $2.3 million and $6.4 million, respectively,
compared to $2.4 million and $7.3 million for the same periods in 1994. The
decrease in both respective 1995 periods is due primarily to benefits from the
utilization of tax loss carryforwards and the reduction of the deferred tax
valuation allowance, both of which are primarily related to Bristol.
16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
-----------------
Item 2. CHANGES IN SECURITIES - Not Applicable
---------------------
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
-------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) Not Applicable
(b) Not Applicable
(C) Not Applicable
(d) Not Applicable
Item 5. OTHER INFORMATION - Not Applicable
-----------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits - None
(b) Reports on form 8-K
The Registrant filed the following reports on Form 8-K during the
quarter ended September 30, 1995.
Form 8-K/A dated July 27, 1995 (amending the Registrant's Form 8-K
dated June 20, 1995 pertaining to the acquisition of Shelton Bancorp,
Inc).
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: October 27, 1995 By: /s/ John V. Brennan
--------------------- --------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer and
Treasurer
Date: October 27, 1995 By: /s/ Peter J. Swiatek
---------------------- ---------------------
Peter J. Swiatek
Controller
18