UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ending MARCH 31, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-15213
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WEBSTER FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-1187536
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Webster Plaza, Waterbury, Connecticut 06702
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(Address of principal executive offices) (Zip Code)
(203) 753-2921
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(Registrant's telephone number, including area code)
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(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 each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock (par value $ .01) 42,433,987 Shares
- --------------------------------------------- ---------------------------------------------------
Class Issued and Outstanding at April 30, 2000
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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INDEX
PAGE NO.
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PART I - INTERIM FINANCIAL INFORMATION:
Consolidated Statements of Condition at March 31, 2000 (unaudited) and December 31, 1999 (audited) 3
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Comprehensive Income (unaudited) for the three months ended
March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Quantitative and Qualitative Disclosures about Market Risk 17
Forward Looking Statements 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds -
Item 3. Defaults upon Senior Securities -
Item 4. Submission of Matters to a Vote of Security Holders -
Item 5. Other Information -
Item 6. Exhibits and Reports on Form 8-K -
SIGNATURES 25
EXHIBIT INDEX 26
EXHIBITS 27
2
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITIONS
(In thousands, except share and per share data)
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(UNAUDITED) (AUDITED)
MARCH 31, DECEMBER 31,
2000 1999
--------- ---------
ASSETS:
Cash and due from depository institutions $ 202,231 $ 245,783
Interest-bearing deposits 2,106 37,838
Securities: (note 3)
Trading, at fair value 97,100 50,854
Available for sale, at fair value 2,762,265 2,700,585
Held to maturity, (fair value: $289,608 in 2000;
$300,282 in 1999) 302,762 315,462
Loans receivable:
Residential loans 3,882,362 3,898,943
Commercial real estate loans 729,729 741,168
Commercial and industrial loans 939,789 915,035
Home equity loans 504,978 492,684
Other consumer loans 43,246 47,064
Allowance for loan losses (74,561) (72,658)
-------------- -------------
Loans receivable, net 6,025,543 6,022,236
Accrued interest receivable 63,262 58,918
Premises and equipment, net 107,095 103,403
Foreclosed properties, net 4,146 4,909
Intangible assets 140,887 138,829
Cash surrender value of life insurance 150,210 148,252
Prepaid expenses and other assets 203,367 104,675
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TOTAL ASSETS $ 10,060,974 $ 9,931,744
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Checking and NOW $ 1,380,426 $ 1,375,692
Savings and MMDAs 1,730,279 1,719,562
Certificates of deposit 3,085,592 3,095,837
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Total deposits 6,196,297 6,191,091
Federal Home Loan Bank advances 1,886,850 1,714,441
Securities sold under agreements to repurchase and other borrowings (note 4) 1,056,783 1,074,004
Advance payments by borrowers for taxes and insurance 25,246 41,605
Accrued expenses and other liabilities (note 5) 95,740 75,359
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TOTAL LIABILITIES 9,260,916 9,096,500
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Corporation-obligated mandatorily redeemable capital
securities of subsidiary trusts holding solely junior subordinated
debentures of the corporation (note 10) 150,000 150,000
Preferred stock of subsidiary corporation 49,577 49,577
SHAREHOLDERS' EQUITY: (note 6)
Common stock, $.01 par value:
Authorized - 200,000,000 shares
Issued - 45,620,408 shares at March 31, 2000 and
45,243,770 shares at December 31, 1999 456 452
Paid-in capital 307,347 301,336
Retained earnings 421,036 400,413
Less treasury stock at cost, 2,983,997 shares at March 31, 2000
and 140,000 shares at December 31, 1999 (66,821) (3,274)
Less Employee Stock Ownership Plan shares purchased with debt (641) (1,127)
Accumulated other comprehensive loss (60,896) (62,133)
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TOTAL SHAREHOLDERS' EQUITY 600,481 635,667
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,060,974 $ 9,931,744
============= =============
See accompanying notes to consolidated financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
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THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
INTEREST INCOME:
Loans $ 116,481 $ 104,292
Securities and interest-bearing deposits 53,162 55,734
------------- ------------
Total interest income 169,643 160,026
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INTEREST EXPENSE:
Deposits 49,982 52,808
Borrowings 43,389 34,532
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Total interest expense 93,371 87,340
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NET INTEREST INCOME 76,272 72,686
Provision for loan losses 2,200 2,165
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Net interest income after provision for loan losses 74,072 70,521
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NONINTEREST INCOME:
Fees and service charges 12,543 10,266
Trust and investment services 3,868 1,579
Insurance commissions 3,722 2,118
Gain on sale of loans and loan servicing, net 607 1,562
Gain on sale of securities, net 3,050 1,882
Increase in cash surrender value of life insurance 1,959 1,840
Other noninterest income 1,836 2,329
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Total noninterest income 27,585 21,576
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NONINTEREST EXPENSES:
Salaries and employee benefits 28,983 24,830
Occupancy expense of premises 5,633 5,104
Furniture and equipment expenses 6,492 5,152
Intangible amortization 3,875 2,617
Marketing expenses 2,198 2,297
Professional services expenses 1,636 1,926
Capital securities expense (note 10) 3,616 3,661
Dividends on preferred stock of subsidiary corporation 1,038 1,020
Other operating expenses (note 5) 8,078 9,039
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Total noninterest expenses 61,549 55,646
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Income before income taxes 40,108 36,451
Income taxes (note 8) 13,297 12,478
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NET INCOME $ 26,811 $ 23,973
============= ============
NET INCOME PER COMMON SHARE: (note 9)
Basic $0.61 $0.55
Diluted $0.61 $0.54
Dividends declared per common share $0.14 $0.11
See accompanying notes to consolidated financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
(In thousands) 2000 1999
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Net Income $ 26,811 $ 23,973
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities available for sale arising
during the period (net of income tax effect of $2,255
and $(11,305) for 2000 and 1999, respectively) 3,782 (16,591)
Reclassification adjustment for net gains included in
net income (net of income tax effect of $1,371
and $474 for 2000 and 1999, respectively) (2,545) (920)
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Other comprehensive income (loss) 1,237 (17,511)
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COMPREHENSIVE INCOME $ 28,048 $ 6,462
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See accompanying notes to consolidated financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income $ 26,811 $ 23,973
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,200 2,165
Provision for depreciation on premises and equipment 4,203 3,835
Amortization of securities and loan premiums, net 1,105 1,636
Amortization of intangible assets 3,875 2,617
Amortization of hedging costs, net 1,029 1,159
Amortization of mortgage servicing rights 371 526
Gains on sale of foreclosed properties, net (233) (209)
Gains on sale of securities and loans, net (4,524) (2,830)
Losses (gains) on trading securities, net 867 (614)
(Increase) decrease in trading securities (29,478) 17,756
Loans originated for sale (27,950) (17,085)
Proceeds from sale of loans, originated for sale 28,079 23,033
Increase in interest receivable (4,344) (2,144)
Increase in prepaid expenses and other assets, net (1,252) (2,818)
Increase (decrease) in interest payable 1,201 (4,188)
Increase in accrued expenses and other liabilities, net 1,571 5,231
Increase in cash surrender value of life insurance (1,958) (1,840)
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Net cash provided by operating activities 1,573 50,203
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INVESTING ACTIVITIES:
Purchases of securities, available for sale (787,190) (290,162)
Purchases of securities, held to maturity -- (445)
Principal collected on investment securities 74,822 243,803
Maturities of securities 187,511 131,285
Proceeds from sale of securities, available for sale 432,020 119,062
Proceeds from sale of securities, held to maturity -- 15,458
Net decrease (increase) in interest-bearing deposits 35,732 (59,953)
Net increase in loans (7,351) (28,915)
Proceeds from sale of foreclosed properties 2,799 1,980
Purchases of premises and equipment, net (7,895) (2,458)
Net cash (paid) received through purchase acquisitions (4,837) 150
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Net cash (used) provided by investing activities (74,389) 129,805
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FINANCING ACTIVITIES:
Net increase (decrease) in deposits 5,206 (168,130)
Repayment of FHLB advances (967,985) (1,378,149)
Proceeds from FHLB advances 1,090,394 1,108,798
Repayment of securities sold under agreement to repurchase and other borrowings (16,288,373) (9,005,080)
Proceeds from securities sold under agreement to repurchase and other borrowings 16,271,152 9,308,507
Cash dividends to common shareholders (6,188) (4,850)
Net increase (decrease) in advance payments for taxes and insurance (16,359) (25,427)
Exercise of stock options 6,015 4,337
Common stock repurchased (64,598) (52,585)
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Net cash provided (used) by financing activities 29,264 (212,579)
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See accompanying notes to consolidated financial statements.
6
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
2000 1999
(In thousands)
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Decrease in cash and cash equivalents (43,552) (32,571)
Cash and cash equivalents at beginning of period 245,783 213,142
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Cash and cash equivalents at end of period $ 202,231 $ 180,571
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SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 6 $ 2,223
Interest paid $ 94,571 $ 91,951
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties $ 1,803 $ 2,095
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Assets acquired and liabilities assumed in purchase business combinations were
as follows:
THREE MONTHS ENDED MARCH 31,
(In thousands) 2000 1999
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Fair value of noncash assets acquired in purchase acquisitions $ 2,257 $ 1,041
Fair value of liabilities assumed in purchase acquisitions 2,302 187
Common stock issued in purchase acquisitions 1,051 3,500
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See accompanying notes to consolidated financial statements.
7
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
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BUSINESS
Webster Financial Corporation ("Webster" or the "Company"), through its
subsidiaries, Webster Bank and Damman Associates Inc. ("Damman"), delivers
financial services to individuals, families and businesses primarily in
Connecticut. Webster emphasizes five business lines - consumer banking, business
banking, mortgage lending, trust and investment services, and insurance
services, and each is supported by centralized administration and operations.
Webster Bank was founded in 1935 and converted from a federal mutual to a
federal stock institution in 1986.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Consolidated Financial Statements include the accounts of Webster and its
subsidiaries. The Consolidated Financial Statements and notes hereto have been
restated to include the accounts of New England Community Bancorp., Inc.
("NECB") acquired on December 1, 1999, as though this pooling of interests
acquisition had occurred at the beginning of the earliest period presented. The
number of common shares have been restated for stock dividends and stock splits.
The Consolidated Financial Statements have been prepared in conformity with
generally accepted accounting principles and all significant intercompany
transactions have been eliminated in consolidation. The results of operations
for the three month period ended March 31, 2000, are not necessarily indicative
of the results which may be expected for the year as a whole.
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, as of the date of the
consolidated financial statements and the reported amounts of revenues and
expenses for the periods presented. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Webster 1999 Annual Report to Shareholders. The actual results of Webster could
differ from those estimates. Material estimates that are susceptible to
near-term changes include the determination of the allowance for loan losses and
the valuation allowance for the deferred tax asset.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - ACQUISITIONS
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PURCHASE TRANSACTIONS
THE LEVINE ACQUISITION
In February 2000, through Damman, Webster acquired the Levine companies
("Levine"), a privately owned Waterford and Norwich, Connecticut based insurance
agency. Founded in 1928, the group combines three entities; Louis Levine Agency,
Inc., Levine Financial Services, Inc. and Retirement Planning Associates, Inc.
Levine has 50 employees and wrote $41 million in premiums during 1999.
PURCHASE TRANSACTIONS PENDING AT MARCH 31, 2000
THE MECHANICS ACQUISITION
In December 1999, Webster announced a definitive agreement to acquire MECH
Financial, Inc. ("Mechanics"), the holding company for Mechanics Savings Bank,
in a tax-free, stock-for-stock exchange. Mechanics Savings Bank is a
state-chartered, Hartford-based savings bank with $1.1 billion in assets and 16
branch offices in the capitol region. Based on the terms of the agreement,
Mechanics shareholders will receive 1.52 shares of Webster common stock for each
share of Mechanics common stock. Webster expects to close the transaction and
complete the conversion during the second quarter of 2000.
THE CHASE BRANCH ACQUISITION
In November 1999, Webster announced a definitive agreement to acquire six
Connecticut branches from The Chase Manhattan Bank. Webster closed the
transaction and completed the acquisition during April 2000. Webster received
the deposits from the six branches, however acquired only five branch
facilities. The branches are located in Cheshire, Middlebury, North Haven,
Waterbury and Watertown and had approximately $135 million in deposit balances
at the time of closing. The transaction included the purchase of consumer
deposits, small business deposits and loans, and brokerage and custody accounts
associated with these branches.
THE FLEETBOSTON BRANCH ACQUISITION
In November 1999, Webster announced a definitive agreement with FleetBoston
Corporation to purchase four Connecticut branches that are being divested as the
result of the Fleet-BankBoston merger. The branches, with approximately $163
million in deposit balances, are located in Brookfield, Guilford, Meriden, and
Thomaston. The transaction includes the purchase of deposits and loans for
individual and small business customers associated with these branches. Webster
expects to close the transaction and complete the acquisition during the third
quarter of 2000.
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - SECURITIES
----------
Securities are classified as available for sale, held to maturity or trading.
Management determines the appropriate classification of securities at the time
of purchase. Securities are classified as held to maturity when the Company has
the intent and ability to hold the securities to maturity. Held to maturity
securities are stated at amortized cost. Securities classified as trading are
carried at fair value, with net unrealized gains and losses recognized currently
in the income statement. Securities not classified as held to maturity or
trading are classified as available for sale and are stated at fair value.
Unrealized gains and losses, net of tax, on available for sale securities are
included in accumulated other comprehensive income (loss), a separate component
of shareholders' equity. The values at which held to maturity or available for
sale securities are reported are adjusted for amortization of premiums or
accretion of discounts over the estimated terms of the securities using a method
which approximates the level yield method. Such amortization and accretion is
included in interest income from securities. Unrealized losses on securities are
charged to earnings when the decline in fair value of a security is judged to be
other than temporary. The specific identification method is used to determine
realized gains and losses on sales of securities.
A summary of securities follows:
(In thousands) March 31, 2000 December 31, 1999
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Gross Unrealized Gross Unrealized
Amortized ------------------ Fair Amortized ---------------- Fair
Cost Gains Losses Value Cost Gains Losses Value
------------- ------- ------ ------- ------ ----- ------ -------
TRADING SECURITIES:
Mortgage-backed securities (a) $ 97,100(b) $ -- $ -- $ 97,100 $ 50,854(b) $ -- $ -- $ 50,854
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 5,065 -- (154) 4,911 17,070 18 (233) 16,855
U.S. Government Agency 91,651 -- (4,026) 87,625 92,733 -- (4,338) 88,395
Municipal bonds and notes 27,486 5 (1,150) 26,341 27,591 3 (1,463) 26,131
Corporate bonds and notes 75,044 -- (9,903) 65,141 75,068 -- (9,895) 65,173
Equity securities 187,471 12,482 (12,222) 187,731 201,352 7,684 (11,060) 197,976
Mortgage-backed securities (a) 2,467,749 853 (86,598) 2,382,004 2,379,491 6,330 (88,848) 2,296,973
Purchased interest-rate contracts 9,272 -- (760) 8,512 10,874 -- (1,792) 9,082
--------- ------ --------- --------- --------- ------ -------- ---------
2,863,738 13,340 (114,813) 2,762,265 2,804,179 14,035 (117,629) 2,700,585
--------- ------ --------- --------- --------- ------ -------- ---------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes 7,904 -- (104) 7,800 10,396 -- (112) 10,284
U.S. Government Agency 1,506 -- (2) 1,504 1,520 -- (6) 1,514
Municipal bonds and notes 24,843 12 (746) 24,109 24,861 39 (783) 24,117
Corporate bonds and notes 135,451 -- (9,856) 125,595 135,476 405 (12,322) 123,559
Mortgage-backed securities (a) 133,058 404 (2,862) 130,600 143,209 544 (2,945) 140,808
-------- ---- -------- ------- -------- -------- -------- -------
302,762 416 (13,570) 289,608 315,462 988 (16,168) 300,282
-------- ---- -------- ------- -------- -------- --------- -------
Total $ 3,263,600 $ 13,756 $ (128,383) $ 3,148,973 $ 3,170,495 $ 15,023 $(133,797) $3,051,721
========= ====== ========= =========== ========== ====== ========= =========
(a) Mortgage-backed securities, which are guaranteed by Fannie Mae, Federal
Home Loan Mortgage Corporation ("FHLMC") and Government National Mortgage
Association ("GNMA"), represent participating interests in direct pass
through pools of mortgage loans originated and serviced by the issuers of
the securities.
(b) Stated at fair value, including the effect of short futures positions.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 4 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
----------------------------------------------
At March 31, 2000, short-term borrowings through securities sold under
agreements to repurchase totaled $870.4 million. Short-term borrowings through
securities sold under agreements to repurchase averaged approximately $1.0
billion during the first quarter and the maximum amount outstanding at month-end
during the first quarter was $1.1 billion. Securities underlying the repurchase
transactions held as collateral are primarily U.S. Government agency securities
consisting of Fannie Mae, GNMA and FHLMC securities. Securities sold under
agreement to repurchase related to Webster's funding operations are delivered to
broker-dealers. Webster also enters into short-term repurchase agreement
transactions directly with commercial and municipal customers through its
Treasury sales desk.
Information concerning short-term borrowings under securities sold under
agreement to repurchase as of March 31, 2000 is summarized below:
(Dollars in thousands)
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WEIGHTED WEIGHTED BOOK VALUE MARKET VALUE
BALANCE AT AVERAGE AVERAGE OF OF
3/31/00 INTEREST RATE MATURITY DATE COLLATERAL COLLATERAL
-------------- -------------- --------------- -------------- -----------------
$870,381 5.92% less than 2 months $929,275 $905,417
NOTE 5 - ACQUISITION-RELATED EXPENSES
----------------------------
The following table presents a summary of remaining acquisition-related accrued
liabilities for acquisitions that have been completed and accounted for under
the pooling of interests method:
(In thousands) Derby People's Eagle NECB
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Balance of acquisition-related accrued liabilities at December 31, 1998 $ 3,800 $ 1,600 $ 1,400 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Additions/provisions -- -- -- 9,500
Payments and charges against the liabilities:
Compensation (severance and related costs) -- -- -- (3,000)
Data processing contract termination (700) -- -- (400)
Transaction costs (including investment bankers, attorneys and
accountants) -- -- (50) (1,300)
Writedown of fixed assets and facilities costs (100) (1,100) (400) (700)
Acquisition-related miscellaneous expenses (a) -- (100) (175) (800)
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Balance of acquisition-related accrued liabilities at December 31, 1999 $ 3,000 $ 400 $ 775 $ 3,300
- ------------------------------------------------------------------------------------------------------------------------------------
Payments and charges against the liabilities:
Compensation (severance and related costs) -- -- -- --
Data processing contract termination (186) -- -- --
Transaction costs (including investment bankers, attorneys and
accountants) -- -- -- (165)
Writedown of fixed assets and facilities costs (162) -- (92) (233)
Acquisition-related miscellaneous expenses (a) -- -- (22) (1,052)
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Balance of acquisition-related accrued liabilities at March 31, 2000 $ 2,652 $ 400 $ 661 $ 1,850
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes customer retention, data conversion, supplies and other
miscellaneous expenses.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The remaining total accrued liability balance of $5.6 million at March 31, 2000
represents, for the most part, an accrual for data processing contract
termination costs payable over future periods and the estimated loss on sale of
excess fixed assets due to consolidation of overlapping branch locations.
NOTE 6 - SHAREHOLDERS' EQUITY
--------------------
During the first quarter of 2000, Webster repurchased 2.9 million shares of its
common stock. The total cost of the repurchased shares was $64.6 million with an
average per share cost of approximately $22.36. The repurchased stock is
specifically related to the purchase acquisition of Levine that closed during
February, 2000 and the pending acquisition of Mechanics that is scheduled to
close during the second quarter of 2000. See Note 2.
Net income for the three month period ending March 31, 2000 was $26.8 million.
Dividend payments in the amount of $6.2 million were made to common shareholders
during the first quarter period ending March 31, 2000.
NOTE 7 - BUSINESS SEGMENTS
-----------------
Webster has four segments for business segment reporting purposes. These
segments include consumer banking, business banking, mortgage lending and
treasury. The organizational hierarchies that define the business segments are
periodically reviewed and revised. Results may be restated to reflect changes in
organizational structure. The following table presents the statement of
operations and total assets for Webster's reportable segments.
Operating income and total assets by business segment are as follows:
Three months ended March 31, 2000
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CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 45,502 $ 10,985 $ 16,580 $ 2,607 $ 598 $ 76,272
Provision for loan losses 241 1,467 492 -- -- 2,200
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Net interest income after provision 45,261 9,518 16,088 2,607 598 74,072
Noninterest income 10,461 1,046 2,327 6,108 7,643 27,585
Noninterest expense 37,365 4,543 4,237 1,948 8,802 56,895
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Income before income taxes 18,357 6,021 14,178 6,767 (561) 44,762
Income taxes 6,086 1,996 4,700 2,243 (185) 14,840
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Net income (loss) after taxes $ 12,271 $ 4,025 $ 9,478 $ 4,524 $ (376) $ 29,922
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $1,131,882 $1,295,807 $3,953,882 $3,645,113 $34,290 $10,060,974
Three months ended March 31, 1999
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CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 36,817 $ 7,821 $ 26,503 $ 1,522 $ 23 $ 72,686
Provision for loan losses 195 947 1,023 -- -- 2,165
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 36,622 6,874 25,480 1,522 23 70,521
Noninterest income 10,029 432 4,254 4,038 2,823 21,576
Noninterest expense 35,672 4,463 6,831 1,992 2,007 50,965
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 10,979 2,843 22,903 3,568 839 41,132
Income taxes 3,761 968 7,848 1,217 286 14,080
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Net income (loss) after taxes $ 7,218 $ 1,875 $ 15,055 $ 2,351 $ 553 $ 27,052
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $ 807,962 $ 750,160 $3,969,915 $4,084,543 $21,217 $9,633,797
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The consumer banking segment includes consumer lending and the Bank's deposit
generation and direct banking activities, which include the operation of
automated teller machines and telebanking customer support, sales and small
business lending. The business banking segment includes the Bank's investment in
commercial and industrial loans and commercial real estate loans. The business
banking segment also includes deposits and cash management activities for
business banking. The mortgage lending segment includes the Bank's investment in
residential real estate loan origination, servicing and secondary marketing
activities. The treasury segment includes the Bank's investment in assets and
liabilities managed by Treasury and includes interest-bearing deposits,
securities, Federal Home Loan Bank advances, repurchase agreements and other
borrowings. All other includes the results of Webster's trust and investment and
insurance subsidiaries, which offer products to both consumer and business
customers.
During 1999, Webster changed its internal funds transfer pricing methodology,
which charges or credits for the source or use of funds. This change effected
net interest income for all reported segments. As a result of this change in
methodology there was an increase in interest income allocated to Consumer
Banking and an increase in interest expense allocated to Business Banking,
Mortgage Lending and Treasury. The allocations are subject to periodic
adjustment as the internal management accounting system is revised and business
or product lines within the segments change. Also, because the development and
application of these methodologies is a dynamic process, the financial results
presented may be periodically revised.
Management allocates indirect expenses to its business segments. These expenses
include administration, finance, operations and other support related functions.
Net income (loss) after taxes for the segments do not include certain income and
expense categories (net of taxes), that aggregate to net expense of $3.1 million
for the three months ended March 31, 2000 and 1999 respectively, that do not
directly relate to segments. The major categories not included in the segments
for the three months ended March 31, 2000 and 1999, were (on a before tax basis)
$3.6 million and $3.7 million, respectively, of capital securities expense and
$1.0 million of dividend expense on the preferred stock subsidiary corporation
for each respective period.
NOTE 8 - INCOME TAXES
------------
Total income tax expense for the three month periods ended March 2000 and 1999
was $13.3 million and $12.5 million, respectively. Tax expense for the current
year three month period is higher than the corresponding period primarily due to
a higher level of income before taxes. During the first quarter of 1999, Webster
formed a Connecticut Passive Investment Company ("PIC"). PICs are exempt from
state income taxation in Connecticut, and the dividends paid from a PIC to a
related financial institution is also exempt from inclusion in Connecticut
taxable income. Webster Bank qualifies as a financial institution under the
Connecticut statute. The exemption is effective for tax years beginning on or
after January 1, 1999.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - NET INCOME PER COMMON SHARE
---------------------------
The following tables reconcile the components of basic and diluted earnings per
share.
Three months ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Net income $ 26,811 $ 23,973
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 43,606 43,646
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .61 $ .55
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Net income $ 26,811 $ 23,973
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 43,606 43,646
Potential dilutive common stock:
Options 545 761
Total weighted-average diluted shares 44,151 44,407
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .61 $ .54
- ------------------------------------------------------------------------------------------------------------------------------------
At March 31, 2000 and 1999, options to purchase 1,181,391and 663,497 shares of
common stock at exercise prices between $22.10 and $35.38 and $29.20 and $35.38,
respectively, were not considered in the computation of diluted potential common
stock since the options' exercise prices were greater than the average market
price of Webster common stock for the 2000 and 1999 quarter periods.
NOTE 10 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
----------------------------------------------------------------------
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
----------------------------------------------------------------------
CORPORATION
-----------
During 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Corporation. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997. On April 1, 1997, Eagle Financial Capital Trust I, subsequently
renamed Webster Capital Trust II ("Trust II"), completed a $50 million private
placement of 10.00% capital securities. Proceeds from the issue were invested by
Trust II in junior subordinated deferrable debentures issued by Eagle due in
2027. These debentures represent the sole assets of Trust II. The subordinated
debt securities are unsecured obligations of Webster and are subordinate and
junior in right of payment to all present and future senior indebtedness of
Webster. Webster has entered into guarantees, which together with Webster's
obligations under the subordinated debt securities and the declarations of trust
governing Trust I and Trust II, including its obligations to pay costs,
expenses, debts and liabilities (other than trust securities), provides a full
and unconditional guarantee of amounts on the capital securities. Expense on the
securities including amortization of issuance costs, for the three month periods
ended March 31, 2000 and March 31, 1999, was $3.6 million and $3.7 million,
respectively.
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - ACCOUNTING STANDARDS
--------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. Under this statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative and
the measurement approach for determining the ineffective aspect of the hedge.
Those methods must be consistent with the entity's approach to managing risk.
SFAS No. 133, as amended by SFAS No. 137, is now effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Upon adoption, hedging
relationships must be designated anew and documented pursuant to the provisions
of this statement. Early adoption is permitted, however, retroactive application
is prohibited. Management is in the process of evaluating the impact of this
statement on its financial position and results of operations.
NOTE 12 - SUBSEQUENT EVENTS
-----------------
FOLLIS, WYLIE & LANE
On April 5, 2000, Webster through its wholly owned insurance subsidiary Damman
announced the acquisition of Follis, Wylie & Lane, a privately owned
Hamden-based insurance agency. Follis, Wylie & Lane, which has seven employees,
wrote $10 million in premiums in 1999 and had revenues of $1 million. The agency
offers a full range of insurance services, including property and casualty, life
and health. The agency's operations will be relocated to the Webster Insurance
office in Wallingford. The acquisition was accounted for as a purchase and
completed during April 2000.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
- -------
Webster Financial Corporation ("Webster" or the "Corporation"), through its
subsidiaries, Webster Bank (the "Bank") and Damman Associates, Inc. ("Damman"),
delivers financial services to individuals, families and businesses primarily in
Connecticut. Webster emphasizes five business lines - consumer banking, business
banking, mortgage lending, trust and investment services, and insurance
services, each supported by centralized administration and operations. Webster
has grown significantly in recent years, primarily through a series of
acquisitions which have expanded and strengthened its franchise.
Webster on a consolidated basis at March 31, 2000 and December 31, 1999 had
total assets of $10.1 billion and $9.9 billion, total securities of $3.2 billion
and $3.1 billion, respectively, and net loans receivable of $6.0 billion at the
end of each respective period. Total deposits at each period ending March 31,
2000 and December 31, 1999 were $6.2 billion. Shareholders' equity totaled
$600.5 million and $635.7 million at March 31, 2000 and December 31, 1999,
respectively.
At March 31, 2000, the assets of Webster, on an unconsolidated basis, consisted
primarily of its investments in the Bank and Damman that totaled $706.7 million,
investment securities of $121.7 million and $8.0 million of cash and
interest-bearing deposits. Primary sources of income to Webster, on an
unconsolidated basis, are dividend payments received from the Bank and interest
and dividends from investment securities. Primary expenses of Webster, on an
unconsolidated basis, are interest expense on borrowings and interest expense
related to the capital securities.
The Bank's deposits are federally insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and at March 31, 2000, approximately 76% of the Bank's deposits were
subject to BIF assessment rates and 24% were subject to Savings Association
Insurance Fund ("SAIF") assessment rates.
Webster, as a holding company, and the Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision (the
"OTS"), as the primary federal regulator. Webster is also subject to regulation,
examination and supervision by the FDIC as to certain matters. Webster's
executive offices are located at Webster Plaza, Waterbury, Connecticut 06702.
Its telephone number is (203) 753-2921. Webster's internet website is:
www.websterbank.com.
ASSET QUALITY
- -------------
NONACCRUAL ASSETS
Webster devotes significant attention to maintaining high asset quality through
conservative underwriting standards, active servicing of loans and aggressively
managing nonaccrual assets. The aggregate amount of nonaccrual assets decreased
to $40.1 million at March 31, 2000 from $43.3 million at December 31, 1999 and
decreased as a percentage of total assets to .40% at March 31, 2000 from .44% at
December 31, 1999. Nonaccrual loans decreased $2.5 million and foreclosed
properties decreased $763,000 during the current year first quarter period. The
allowance for loan losses at March 31, 2000 was $74.6 million and represented
208% of nonaccrual loans and 1.2% of total loans. Total allowances for
nonaccrual assets of $74.8 million represented 186% of nonaccrual assets. The
following table details nonaccrual assets for the periods presented.
16
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
NONACCRUAL ASSETS:
Loans accounted for on a nonaccrual basis:
Residential $ 10,570 $ 11,490
Commercial 24,225 25,722
Consumer 1,128 1,182
FORECLOSED PROPERTIES:
Residential and Consumer 2,665 2,699
Commercial 1,481 2,210
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 40,069 $ 43,303
- ------------------------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for loan losses follows:
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 72,658 $ 65,201
CHARGE-OFFS:
Residential real estate (492) (431)
Consumer (290) (2)
Commercial (163) (575)
- ------------------------------------------------------------------------------------------------------------------------------------
(945) (1,008)
RECOVERIES:
Residential real estate 70 297
Consumer 91 318
Commercial 487 45
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (297) (348)
Provisions charged to operations 2,200 2,168
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 74,561 $ 67,021
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans outstanding 0.005% 0.006%
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs decreased for the 2000 quarter period when compared to the same
period in 1999 due primarily to reduced commercial loan net charge-offs quarter
that were partially offset by increased net charge-offs for residential and
consumer loans for the current quarter period. Provision for loan losses expense
for the current year period remained relatively unchanged when compared to the
previous year same period. Management believes that the allowance for loan
losses at March 31, 2000 is adequate to cover expected losses in the portfolio.
ASSET/LIABILITY MANAGEMENT
- --------------------------
Interest-rate risk is the sensitivity of the market value of Webster's
interest-sensitive assets and liabilities and the sensitivity of Webster's
earnings to changes in interest rates over short-term and long-term time
horizons. The primary goal of interest-rate risk management is to control risk
within limits approved by Webster's Board of Directors. Webster's Asset &
Liability Management Committee manages interest-rate risk to maximize net
interest income and net market value over time in changing interest-rate
environments. Management measures interest-rate risk using simulation analyses
with particular emphasis on measuring changes in net market value and net
interest income in different rate environments. Market value is measured as the
net present value of future cash flows.
Simulation analysis incorporates assumptions about balance sheet changes such as
asset and liability growth, loan and deposit pricing and changes due to the mix
of assets and liabilities. Key assumptions relate to the behavior of
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
interest rates and spreads, fluctuations in product balances, prepayment speeds
and decay rates on deposits. From such simulations, interest-rate risk is
quantified and appropriate strategies are formulated and implemented.
Webster also uses as part of its asset/liability management strategy various
interest-rate contracts including futures and options, interest-rate swaps and
interest-rate caps and floors. Webster utilizes these financial instruments to
manage interest-rate risk by reducing net exposures. These interest-rate
financial instruments involve, to varying degrees, credit risk and market risk.
Credit risk is the possibility that a loss may occur if a counterparty to a
transaction fails to perform according to the terms of the contract. Market risk
is the effect of a change in interest rates on the value of the instruments. The
notional amount of interest-rate financial instruments is the amount upon which
interest and other payments under the contract are based. The notional amount is
not exchanged and therefore, the notional amounts should not be taken as a
measure of credit risk.
Webster holds futures and options positions and interest-rate contracts to
minimize the price volatility of certain assets held as Trading Securities.
Changes in the market value of these positions are recognized in the
Consolidated Statements of Income in the period for which the change occurred.
The following table summarizes the estimated market value of Webster's
interest-sensitive assets and interest-sensitive liabilities at March 31, 2000
and December 31, 1999, and the projected change to market values if interest
rates instantaneously increase or decrease by 100 basis points.
Book Market Estimated Market Value Impact
(Dollars in thousands) Value Value -100 BP +100 BP
- ------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000
Interest Sensitive Assets:
Trading $ 97,100 $ 97,100 $ (619) $ (252)
Non-trading 8,928,915 8,835,313 208,802 (232,084)
Interest Sensitive Liabilities 9,364,753 9,011,258 (128,839) 125,224
Net Impact 79,344 (107,112)
Net Impact as % of interest
sensitive assets 0.9% (1.2)%
DECEMBER 31, 1999
Interest Sensitive Assets:
Trading $ 50,854 $ 50,854 $ 181 $ (479)
Non-trading 8,780,473 8,695,323 223,137 (256,650)
Interest Sensitive Liabilities 9,219,951 8,838,371 (139,222) 129,373
Net Impact 84,096 (127,756)
Net Impact as % of interest
sensitive assets 1.0% (1.5)%
- ------------------------------------------------------------------------------------------------------------------------------
The tables above exclude interest-earning assets that are not directly impacted
by changes in interest rates. These assets include equity securities of $187.7
million at March 31, 2000 and $201.4 million at December 31, 1999 and nonaccrual
loans of $35.9 million at March 31, 2000 and $38.4 million at December 31, 1999
(see "Asset
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Quality" within the MD&A). Values for mortgage servicing rights have been
included in the tables above as movements in interest rates affect the valuation
of the servicing rights. Equity securities and nonaccrual assets not included in
the above tables are, however, subject to fluctuations in market value based on
other risks. The equity securities at March 31, 2000 and December 31, 1999
include $103.3 million and $103.9 million, respectively, of FHLB stock which is
insensitive to market fluctuations.
Interest-sensitive assets, net of interest-sensitive liabilities, when impacted
by a minus 100 basis point rate change, result in a favorable $79.3 million
change in net market values for March 31, 2000 compared to a favorable $84.1
million net market value change at December 31, 1999. These changes represent
0.9% of interest-sensitive assets at March 31, 2000 and 1.0% of
interest-sensitive assets at December 31, 1999. A plus 100 basis point rate
change results in an unfavorable $107.1 million or 1.2% change at March 31, 2000
compared to an unfavorable $127.8 million or 1.5% change in December 31, 1999.
Based on Webster's asset/liability mix at March 31, 2000, management estimates
that an instantaneous 100 basis point increase in interest rates would decrease
net interest income over the next twelve months by approximately 4.6%. An
instantaneous 100 basis point decline in interest rates would increase net
interest income by approximately 3.6%. These estimates assume that management
takes no action to mitigate any negative effects from changing interest rates.
The market values and net interest income estimates are subject to factors that
could cause actual results to differ. Management believes that Webster's
interest-rate risk position at March 31, 2000, represents a reasonable level of
risk.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations adopted by the OTS. This requirement, which may be varied by the
OTS, is based upon a percentage of net withdrawable deposits and short-term
borrowings. The required liquidity ratio is currently 4.00% and the Bank's
liquidity ratio at December 31, 1999 exceeded the requirement. Webster Bank also
is required by regulation to maintain sufficient liquidity to ensure safe and
sound operations. Adequate liquidity as assessed by the OTS may vary from
institution to institution depending on such factors as the institution's
overall asset/liability structure, market conditions, competition and the nature
of the institution's deposit and loan customers. The OTS considers both an
institution's liquidity ratio as well as safety and soundness issues in
assessing whether an institution has sufficient liquidity.
Liquidity management allows Webster to meet cash needs at a reasonable cost
under various operating environments. Liquidity is actively managed and reviewed
in order to maintain stable cost effective funding to support the balance sheet.
Liquidity comes from a variety of sources such as the cash flow from operating
activities including principal and interest payments on loans and investments,
unpledged securities which can be sold or utilized to secure funding and by
maintaining the ability to attract new deposits. Webster's goal is to maintain a
strong base of core deposits to support its growing balance sheet.
Management monitors current and projected cash needs and adjusts liquidity as
necessary. Webster has a detailed liquidity contingency plan, which is designed
to respond to liquidity concerns in a prompt and comprehensive manner. It is
designed to provide early detection of potential problems and details specific
actions required to address liquidity risks.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Webster is a member of the Federal Home Loan Bank ("FHLB") system and has
additional borrowing capacity from the FHLB of $1.6 billion at March 31, 2000.
At that date, the Bank had FHLB advances outstanding of $1.9 billion compared to
$1.7 billion at December 31, 1999.
Webster's main sources of liquidity at the holding company level are dividends
from the Bank, investment income and net proceeds from capital offerings and
borrowings. The main uses of liquidity are purchases of available for sale
securities, the payment of dividends to common stockholders, repurchases of
Webster's common stock, and the payment of interest to holders of Webster's
senior notes and capital securities. The senior notes have a current book value
of $40.0 million and will mature on June 30, 2000. Repayment of the senior notes
will come from general operating funds. There are certain restrictions on the
payment of dividends by the Bank to Webster. Webster also maintains $90 million
in revolving lines of credit with correspondent banks.
During the first quarter of 2000, Webster repurchased a total of 2,888,897
shares of its common stock under previously announced repurchase programs. The
total cost of the repurchased shares was $64.6 million with an average per share
cost of approximately $22.36. The repurchased stock was specifically related to
the purchase acquisition of Levine that closed during February, 2000 and the
pending acquisition of Mechanics that is scheduled to close during the second
quarter of 2000. See Note 2.
Applicable OTS regulations require the Bank, as a federal savings bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement and risk-based capital requirements. As an OTS regulated savings
institution, the Bank is also subject to a minimum tangible capital requirement.
At March 31, 2000, the Bank was in full compliance with all applicable capital
requirements.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
GENERAL
Net income for the three month period ended March 31, 2000, was $26.8 million or
$.61 per diluted share compared to $24.0 million or $.54 per diluted share for
the same period ended March 31, 1999. The increase in net income of $2.8 million
for the current quarter period is primarily the result of higher net interest
income and fees and service charges income partially offset by increased
operating expenses.
NET INTEREST INCOME
Net interest income for the three month periods ended March 31, 2000 and 1999,
amounted to $76.3 million and $72.7 million, respectively. Increased total
interest income and total interest expense for the current quarter period are a
result of higher interest rates and a higher volume of interest-earning and
interest-bearing average funds. The higher interest rates are due from the
Federal Reserve's increases in the prime lending since the end of the first
quarter of 1999. The increase in the volume of average assets and liabilities is
due, in part, to the acquisitions of Maritime Bank and Trust Company
("Maritime") and Village Bancorp, Inc. ("Village") which were completed during
the second quarter of 1999. Interest-rate spread for the 2000 and 1999 quarter
periods were 3.10% and 3.08%, respectively.
INTEREST INCOME
Total interest income for the three month periods ended March 31, 2000 and 1999
was $169.6 million and $160.0 million, respectively. The increase in interest
income for the current quarter period is the result of an increase of $503.5
million in average loans as well as an increased yield earned on loans. The
higher yield on loans reflects a general increase in base rates. Additionally,
the change in the mix of the loan portfolio to a higher level of commercial
loans, also contributed to the increase in interest income. The yield on total
interest-earning assets for the three month periods ended March 31, 2000 and
1999, was 7.21% and 7.06%, respectively.
INTEREST EXPENSE
Total interest expense for the three month periods ended March 31, 2000 and
1999, was $93.4 million and $87.3 million, respectively. The increase in
interest expense for the current quarter period is primarily the result of an
increase of $322.8 million in average borrowed funds as well as higher realized
costs on the borrowed funds. The total cost of interest-bearing liabilities was
4.11% and 3.98%, respectively, for the 2000 and 1999 first quarter periods.
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned and paid by Webster.
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ----- ------- -------- -----
ASSETS
INTEREST-EARNING ASSETS:
Loans $ 6,078,613 $ 116,481 7.68 % $ 5,575,148 $ 104,292 7.59 %
Securities 3,233,024 53,162 6.35 (a) 3,529,490 55,734 6.34 (a)
--------- -------- ---- --------- ------- -----
TOTAL INTEREST-EARNING ASSETS 9,311,637 169,643 7.21 9,104,638 160,026 7.06
------- -------
Noninterest-earning assets 682,901 635,444
-------- --------
TOTAL ASSETS $ 9,994,538 $ 9,740,082
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Deposits $ 6,142,361 49,982 3.27 % $ 6,188,019 52,808 3.46 %
Borrowings 2,984,276 43,389 5.85 2,661,440 34,532 5.26
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-BEARING LIABILITIES 9,126,637 93,371 4.11 8,849,459 87,340 3.98
------ -------
Noninterest-bearing liabilities 64,359 82,176
------------ -------
TOTAL LIABILITIES 9,190,996 8,931,635
Capital securities and preferred stock of
subsidiary corporation 199,577 199,577
SHAREHOLDERS' EQUITY 603,965 608,870
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,994,538 $ 9,740,082
========= =========
NET INTEREST INCOME $ 76,272 $ 72,686
====== =======
INTEREST-RATE SPREAD 3.10 % 3.08 %
===== =====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.22 % 3.24 %
==== =====
(a) For purposes of this computation, unrealized gains (losses) are
excluded from the average rate calculations.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $2.2 million for the three month period ended
March 31, 2000, an increase of $35 thousand from the same quarter in 1999. At
March 31, 2000, the allowance for loan losses was $74.6 million and represented
207.6% of nonaccrual loans compared to $67.0 million and 202.1%, respectively,
for the three month period ended March 31, 1999.
22
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Total noninterest income increased $6.0 million or 27.9% for the quarter ended
March 31, 2000 as compared to the same quarter in 1999. The increase for the
current quarter period is primarily attributable to a $2.3 million increase in
fees and service charges, a $2.3 million increase in trust and investment
services, $1.6 million in insurance commissions and a $1.2 million increase in
the realized net gain on the sale of securities. These favorable variances were
partially offset by lower net gains on the sale of loans and loan servicing for
the current quarter period. The increase in fees and services charges is
primarily attributable to an increase in volume resulting from acquisitions that
have been completed over the past year and an increase in the rates charged for
fees and service charges. During 1999, Webster formed its own investment
services operation, Webster Investment Services ("WIS"), Inc. a broker-dealer
subsidiary of Webster Bank. WIS offers mutual funds and fixed and variable
annuities, in addition to individual securities transactions as requested by
customers. Previously, Webster outsourced the investment services and received
only a portion of the income. The increase in insurance commissions is a result
of an increase in revenue from Damman, which can be attributed to the Levine
acquisition.
NONINTEREST EXPENSES
Total noninterest expenses for the three month periods ended March 31, 2000 and
1999, were $61.5 million and $55.6 million, respectively. The $5.9 million
increase for the current quarter period was primarily the result of higher costs
for salaries and employee benefits of $4.2 million and furniture and equipment
expenses of $1.3 million. The higher costs for salaries and benefits and the
corresponding increase in furniture and equipment expenses is due primarily to
the formation of WIS, the Maritime, Village and Nowlending, LLC acquisitions and
other initiatives at Webster. The intangible amortization has increased in
conjunction with the purchase acquisitions of Maritime, Village and Nowlending,
LLC.
INCOME TAXES
Total income tax expense for the three month periods ended March 2000 and 1999
was $13.3 million and $12.5 million, respectively. Tax expense for the current
year three month period is higher than the corresponding period primarily due to
a higher level of income before taxes. During the first quarter of 1999, Webster
formed a Connecticut Passive Investment Company ("PIC"). PICs are exempt from
state income taxation in Connecticut, and the dividends paid from a PIC to a
related financial institution are also exempt from inclusion in Connecticut
taxable income. Webster Bank qualifies as a financial institution under the
Connecticut statute. The exemption is effective for tax years beginning on or
after January 1, 1999.
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements within the meaning of the
Securities and Exchange Act of 1934, as amended. Actual results could differ
materially from management expectations, projections and estimates. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products services and prices. Such developments could have an adverse impact on
Webster's financial position and results of operations.
23
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable.
Item 2. Changes in Securities and Use of Proceeds
(a) Not Applicable
(b) Not Applicable
(c) On February 22, 2000, in exchange for an aggregate of 1,589
shares of Levine common stock, Webster issued to Messrs.
Gerald U. Levine, Daniel Carter, David Pugliese and
Christopher Brodeur an aggregate of 44,901 shares of
Webster's common stock and paid an aggregate of $5.1 million
in cash pursuant to the Stock Purchase Agreement, dated as
of February 1, 2000, by and among Webster Financial
Corporation and Damman Associates and LLIA, Inc., Louis
Levine Agency, Inc., Retirement Planning Associates, Inc.,
Levine Financial Services, Inc., Religious Benefit Services,
Inc., and Levine Surety, Inc. and Gerald U. Levine, Daniel
Carter, David Pugliese and Christopher Brodeur. The offer
and sale of the stock satisfied the requirements of Section
(4)(2) of the Securities Act of 1933, as amended (the
"Securities Act") (transactions by an issuer not involving
any public offering).
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Tables.
(b) Reports on Form 8-K
Webster filed the following Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") during the quarter
ended March 31, 2000:
Current Report on Form 8-K filed with the SEC on February 9, 2000
(date of report February 3, 2000) (announcing the date of Webster's
2000 annual meeting of shareholders).
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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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: May 15, 2000 By: /s/ Peter J. Swiatek
- ------------------------- --------------------
Peter J. Swiatek
Controller and Acting Principal
Financial Officer and
Acting Principal Accounting Officer
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Tables.
26