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 June 30, 1996
-----------------------------------------------------
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
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
Webster Plaza, Waterbury, Connecticut 06720
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(Address of principal executive offices) (ZipCode)
(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 the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 8,059,904 Shares
------------------------------ --------------------------------------
(Class) Issued and Outstanding at August 1, 1996
Webster Financial Corporation and Subsidiary
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INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at June 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 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 Subsidiary
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
June 30, December 31,
ASSETS 1996 1995
--------- --------
Cash and Due from Depository Institutions $87,097 $44,228
Interest-bearing Deposits - 26,017
Securities: (Note 3)
Trading at Fair Value 30,108 44,604
Available for Sale, at Fair Value 512,312 498,088
Held to Maturity, (Market Value: $484,130 in 1996;
$505,775 in 1995) 486,376 501,948
Loans Receivable, Net 2,468,940 1,891,956
Segregated Assets, Net 89,696 104,839
Accrued Interest Receivable 23,547 21,585
Premises and Equipment, Net 49,922 40,654
Foreclosed Properties, Net 16,429 17,176
Core Deposit Intangible 46,902 4,729
Prepaid Expenses and Other Assets 25,891 23,846
------------ -------------
Total Assets $3,837,220 $3,219,670
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $3,105,562 $2,400,202
Federal Home Loan Bank Advances 344,851 383,100
Other Borrowings 132,843 170,014
Advance Payments by Borrowers for Taxes and Insurance 20,299 14,435
Accrued Expenses and Other Liabilities 18,996 41,946
------------- ------------
Total Liabilities 3,622,551 3,009,697
----------- ----------
Shareholders' Equity
Cumulative Convertible Preferred Stock, Series B, 168,369 shares issued and
outstanding at June 30, 1996
and 171,869 shares issued and outstanding at December 31, 1995 2 2
Common Stock, $.01 par value:
Authorized - 14,000,000 shares;
Issued -8,521,836 shares at June 30, 1996 and
8,501,746 shares at December 31, 1995 85 85
Paid in Capital 138,840 138,263
Retained Earnings 83,816 75,858
Less Treasury Stock at cost, 420,454 shares at
June 30, 1996 and 424,024 shares at
December 31, 1995 (4,278) (3,290)
Less Employee Stock Ownership Plan Shares
Purchased with Debt (2,574) (3,207)
Unrealized (Losses) Gains on Securities, Net (1,222) 2,262
------------- --------------
Total Shareholders' Equity 214,669 209,973
------------ ------------
Total Liabilities and Shareholders' Equity $3,837,220 $3,219,670
========= =========
3
Webster Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
--------- -------- ------- ------
Interest Income:
Loans and Segregated Assets $50,416 $38,980 $95,767 $76,283
Mortgage-backed Securities 14,570 12,436 28,799 22,835
Securities and Interest-bearing Deposits 1,796 2,872 4,148 6,124
-------- -------- --------- ---------
Total Interest Income 66,782 54,288 128,714 105,242
------- ------- ------- -------
Interest Expense:
Interest on Deposits 29,394 24,984 56,726 47,164
Interest on Borrowings 7,670 7,396 16,264 14,123
-------- -------- ------- -------
Total Interest Expense 37,064 32,380 72,990 61,287
------ ------ ------ ------
Net Interest Income 29,718 21,908 55,724 43,955
Provision for Loan Losses 1,000 455 2,000 840
------- -------- -------- --------
Net Interest Income After Provision for Loan Losses 28,718 21,453 53,724 43,115
------ ------ ------ ------
Noninterest Income:
Fees and Service Charges 4,922 3,520 8,438 7,035
Gain on Sale of Loans and Loan Servicing, Net 340 231 511 392
Gain on Sale of Securities, Net 524 447 849 623
Other Noninterest Income 813 796 1,641 1,734
------- ------- ------- ------
Total Noninterest Income 6,599 4,994 11,439 9,784
------ ------ ------ ------
Noninterest Expenses:
Salaries and Employee Benefits 11,171 9,349 21,913 18,536
Occupancy Expense of Premises 2,374 1,510 4,532 2,946
Furniture and Equipment Expenses 2,344 1,358 4,006 2,948
Marketing Expenses 1,029 1,127 2,113 1,894
Federal Deposit Insurance Premiums 525 1,384 1,050 2,828
Foreclosed Property Expenses and
Provisions, Net (Note 5) 296 1,064 1,194 2,399
Non-recurring Expenses - - 500 -
Other Operating Expenses 5,884 3,206 9,489 6,170
------- ------- ------- -------
Total Noninterest Expenses 23,623 18,998 44,797 37,721
------ ------ ------ ------
Income Before Income Taxes 11,694 7,449 20,366 15,178
Income Taxes 4,247 2,226 7,388 4,721
------- ------- ------- -------
Net Income 7,447 5,223 12,978 10,457
Preferred Stock Dividends 321 324 644 648
-------- -------- -------- --------
Net Income Available to Common Shareholders $7,126 $4,899 $12,334 $9,809
===== ===== ====== =====
Net Income Per Common Share:
Primary $ 0.86 $0.71 $1.49 $1.44
Fully Diluted 0.81 0.67 1.41 1.34
Dividends Declared Per Common Share: $.16 $.16 $.32 $.32
---- ---- ---- ----
4
Webster Financial Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
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Six Months Ended
June 30
--------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net Income $12,978 $10,457
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 2,000 840
Provision for Foreclosed Property Losses 600 998
Provision for Depreciation and Amortization 3,166 2,179
Amortization of Securities Premiums, Net 1,413 271
Amortization of Core Deposit Intangible 2,030 362
Gains on Sale of Foreclosed Properties, Net (531) (296)
Loans and Securities Gains, Net (1,131) (972)
Trading Securities Gains, Net (229) (43)
Decrease (Increase) in Trading Securities 14,371 (11,728)
Loans Originated for Sale (25,035) (103,884)
Sale of Loans, Originated for Sale 32,975 50,418
Decrease (Increase) in Interest Receivable 705 (1,064)
Decrease in Interest Payable (2,773) (721)
(Decrease) Increase in Accrued Expenses and Other Liabilities, Net (21,102) 12,690
(Increase) Decrease in Prepaid Expenses and Other Assets, Net (1,021) 2,885
------------ ----------
Net Cash Provided (Used) by Operating Activities 18,416 (37,608)
------------ ----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (181,137) (61,001)
Purchases of Securities Held to Maturity (95,596) (180,489)
Maturities of Securities 36,501 1,786
Proceeds from Sale of Securities Available for Sale 129,885 74,401
Net Decrease in Interest-bearing Deposits 26,017 12,344
Purchase of Loans - (2,123)
Net (Increase) Decrease in Loans (6,809) 50,574
Proceeds from Sale of Foreclosed Properties 7,310 5,759
Net Decrease in Segregated Assets 15,143 12,208
Principal Collected on Mortgage-backed and Investment Securities 104,085 40,827
Purchases of Premises and Equipment, Net (6,109) (1,682)
Net Cash and Cash Equivalents Received
in the Shawmut Transaction 113,551 -
----------- ---------
Net Cash Provided (Used) by Investing Activities 142,841 (47,396)
----------- ---------
FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (45,888) 33,586
Repayment of FHLB Advances (549,496) (347,372)
Proceeds from FHLB Advances 511,247 388,177
Repayment of Other Borrowings (369,855) -
Proceeds from Other Borrowings 333,412 -
Cash Dividends to Common and Preferred Shareholders (3,265) (2,827)
Net Increase in Advance Payments for
Taxes and Insurance 5,864 2,658
Exercise of Stock Options 1,011 438
Purchase of Webster Financial Corporation Common Stock (1,418) -
------------ ---------
Net Cash (Used) Provided by Financing Activities (118,388) 74,660
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents 42,869 (10,344)
Cash and Cash Equivalents at Beginning of Period 44,228 44,304
----------- ---------
Cash and Cash Equivalents at End of Period $87,097 $33,960
---------- ---------
Supplemental Disclosures:
Income Taxes Paid $10,300 $5,600
Interest Paid 72,760 62,018
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of Loans to Foreclosed Properties 9,424 6,456
5
Webster Financial Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------------------
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
six month periods ended June 30, 1996 are not necessarily indicative of the
results which may be expected for the year as a whole. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Webster Financial
Corporation 1995 Annual Report to shareholders. The consolidated financial
statements include the accounts of Webster Financial Corporation ("Webster") and
its wholly owned subsidiary, Webster Bank (the "Bank"). Previous year periods
have been restated to reflect the acquisition on November 1, 1995 of Shelton
Bancorp, Inc., which was accounted for under the pooling of interests method.
NOTE 2 - ACQUISITION
-----------
On October 1, 1995, Webster entered into a Purchase and Assumption
Agreement with Shawmut Bank Connecticut, as part of the Fleet/Shawmut
Divestiture, to acquire 20 Shawmut banking offices in the Hartford Banking
Market (the "Shawmut Transaction"). The Shawmut Transaction was consummated on
February 16, 1996, with Webster Bank acquiring $586.2 million in loans and
assuming $751.2 million of net deposits. The Shawmut Transaction was accounted
for as a purchase and the results of operations related to the banking offices
acquired are reflected in the Consolidated Statement of Income subsequent to the
date of acquisition. After the Shawmut Transaction and as of June 30, 1996,
Webster operates 63 full service offices in Connecticut as that extend from the
Massachusetts border to Long Island Sound.
The following summarizes assets purchased and liabilities assumed in
the Shawmut Transaction (in thousands):
Assets Acquired:
Loans $586,235
Premises and Equipment 6,327
Other Assets 3,059
---------
Total Assets Acquired 595,621
---------
Liabilities Assumed:
Deposits 846,412
Less Deposits Exchanged (95,163)
---------
Net Deposits Assumed 751,249
Other Liabilities 922
---------
Total Liabilities Assumed 752,171
Net Liabilities Assumed 156,550
Net Premium Paid for Deposits (42,999)
---------
Net Cash Received $113,551
=========
6
Webster Financial Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - 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 effected 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):
June 30, 1996 December 31, 1995
-------------- -----------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
Trading Securities:
Mortgage-Backed Securities:
GNMA $2,394 $2,394 $14,766 $14,766
FHLMC 27,714 27,714 29,838 29,838
-------- -------- ------ ------
30,108 30,108 44,604 44,604
-------- -------- ------ ------
Available for Sale Portfolio:
U.S. Treasury Notes:
Matures within 1 year - - 1,000 1,000
Matures over 1 within 5 years 2,509 2,538 - -
U.S. Government Agency:
Matures over 1 within 5 years 12,914 12,664 12,901 12,522
Corporate Bonds and Notes:
Matures over 1 within 5 years 5 20 23,005 23,005
Matures over 5 within 10 years 2,495 2,490 2,737 2,730
Mutual Funds* 6,605 6,603 34,077 33,947
Equity Securities:
Stock in Federal Home Loan Bank of Boston 30,039 30,039 30,039 30,039
Other Equity Securities 12,073 15,367 9,195 11,930
Mortgage Backed Securities:
FNMA 114,053 112,381 139,860 142,827
FHLMC 40,172 39,906 62,572 63,221
GNMA 168,844 168,683 20,443 20,512
Collateralized Mortgage Obligations 116,928 116,705 155,321 155,539
Unamortized Interest Rate Hedges 6,166 4,916 816 816
Unrealized Securities (Losses) Gains, Net (491) - 6,122 -
------------ ----------- ---------- -------------
512,312 512,312 498,088 498,088
--------- ------- -------- --------
* Mutual Funds consist primarily of funds invested in money market and short
duration instruments.
7
Webster Financial Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
-----------------------------------------------------
June 30, 1996 December 31, 1995
-------------- -----------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------ ---------- ------ ------------
Held to Maturity Portfolio:
U.S. Treasury Notes:
Matures within 1 year 1,104 1,106 1,577 1,577
Matures over 1 within 5 years - - 8,262 8,445
U.S. Government Agency:
Matures within 1 year 6,831 6,792 1,003 1,006
Matures over 1 within 5 years 27,871 28,482 39,868 41,330
Matures over 5 within 10 years 500 482 999 1,008
Corporate Bonds and Notes:
Matures within 1 year 413 420 - -
Matures over 1 within 5 years 1,549 1,538 2,555 2,579
Matures over 5 within 10 years 80 73 330 325
Mortgage Backed Securities:
FHLMC 37,937 38,196 42,877 43,714
FNMA 27,638 28,142 31,785 32,457
GNMA 1,503 1,530 1,622 1,698
Collateralized Mortgage Obligations 380,678 377,100 370,762 371,342
Other Mortgage-backed Securities 272 269 308 294
--------- --------- --------- ---------
486,376 484,130 501,948 505,775
--------- --------- --------- ---------
Total $1,028,796 $1,026,550 $1,044,640 $1,048,467
--------- --------- --------- ---------
NOTE 4 - NET INCOME PER SHARE
--------------------
Primary earnings per share on net income is calculated by dividing net
income less preferred stock dividend requirements 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 earnings per share on net income 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 earnings per share for the
three and six months ended June 30, 1996 were 8,250,414 and 8,250,762,
respectively, and for the three and six months ended June 30, 1995 were
6,833,000 and 6,806,727, respectively. The weighted-average number of shares
used in the computation of fully diluted earnings per share for the three and
six months ended June 30, 1996 were 9,232,009 and 9,234,537, respectively, and
for the three and six months ended June 30, 1995 were 7,822,467 and 7,800,019,
respectively.
8
Webster Financial Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
(Gain) on Sale of Foreclosed Property, Net $(260) $(132) $(531) $(296)
Provision for Losses on Foreclosed Property 250 377 600 998
Rental Income (68) (184) (182) (332)
Foreclosed Property Expenses 374 1,003 1,307 2,029
------ ----- ----- -----
Foreclosed Property Expenses and Provisions, Net $296 $1,064 $1,194 $2,399
====== ===== ===== =====
NOTE 6 - 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. In
comparison to nonaccrual loans, the measurement of impaired loans is more
subjective due to the use of estimates of future cash flows. 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.
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 SFAS No. 114 during the quarter ended March 31, 1995, with no
impact on its results of operations. At June 30, 1996, Webster had $12.8 million
of impaired loans, of which $12.3 million was measured based upon the fair value
of the underlying collateral and $466,000 was measured based upon the expected
future cash flows of the impaired loans. Of total impaired loans of $12.8
million, $8.6 million had allowances for losses of $2.7 million. In the 1996
second quarter, total impaired loans averaged $11.8 million.
9
Webster Financial Corporation and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - ACCOUNTING FOR IMPAIRED LOANS (continued)
-----------------------------------------
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 and six month periods ended June 30,
1996 amounted to $7,000 and $53,000, respectively.
NOTE 7 - REVERSE REPURCHASE AGREEMENTS
-----------------------------
At June 30, 1996, Webster had short term borrowings through reverse repurchase
agreements outstanding. Information concerning borrowings under the reverse
repurchase agreements is summarized below (dollars in thousands):
Balance at Weighted Maturity Book Value Market Value
June 30, 1996 Term Average Rate Date of Collateral of Collateral
------------- ----- ------------ ------------ --------------- --------------
$90,296 3 days to 6 months 5.25% Less than 3 months $94,364 $91,262
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 less than other funding sources. The quarterly average balance and
the maximum amount of outstanding reverse repurchase agreements at any month-end
during the 1996 second quarter was $110.1 million and $123.7 million,
respectively. There were no reverse repurchase agreements outstanding for the
period ending June 30, 1995.
NOTE 8 - Accounting Standards
--------------------
In June 1996, the Financial Accounting Standards Board issued SFAS. No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial components approach that focuses
on control of the underlying assets or liabilities transferred. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. It is expected that the provisions of this statement will not have a
material impact on the financial results of the corporation. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.
10
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GENERAL
- -------
Webster Financial Corporation ("Webster") , through its subsidiary,
Webster Bank (the "Bank"), delivers financial services to local individuals and
business. Webster's mission is to build valuable banking relationships by
helping individuals, families and businesses to reach their financial goals.
Webster is organized along three lines of business - consumer, business and
mortgage banking, with each focused on the special needs of its customers.
Webster's goals are to ensure customer satisfaction by providing superior
customer service and by delivering quality financial products and services, to
provide a stimulating and challenging work environment that encourages, develops
and rewards excellence, and to make a meaningful investment in the communities
Webster serves. Webster currently serves customers from 63 full service banking
offices located in Hartford, New Haven, Fairfield, Litchfield, and Middlesex
counties in Connecticut.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets were $3.84 billion at June 30, 1996, an increase of $617.6
million from $3.22 billion at December 31, 1995. The increase in total assets is
due primarily to the Shawmut Transaction (see Note 2). The change primarily
reflects increases in net loans of $577.0 million, cash of $42.9 million and the
core deposit intangible of $42.2 million that were partially offset by a $41.9
million decrease in securities and interest-bearing deposits.
Segregated Assets, Net decreased to $89.7 million at June 30, 1996 from
$104.8 million at December 31, 1995 due primarily to principal repayments of
$11.1 million and charge-offs of $4.0 million. Total net foreclosed properties
were $16.4 million at June 30, 1996 compared to $17.2 million at December 31,
1995. The net decrease in foreclosed properties of $747,000 for the current
period was primarily attributable to property sales.
Total liabilities were $3.62 billion at June 30, 1996, an increase of
$612.9 million from $3.01 billion at December 31, 1995. The increase in total
liabilities is due primarily to a net increase in deposits of $705.4 million
that was partially offset by decreases of $75.4 million in FHLB advances and
other borrowings and $23.0 million in other liabilities. The changes in the
deposits and FHLB advances are primarily a result of the Shawmut Transaction.
The decrease in other liabilities primarily reflects the settlement of
investment securities.
Shareholders' equity was $214.7 million at June 30, 1996 and $210.0 at
December 31, 1995. The Bank had tier 1 leveraged, tier 1 risk based, and total
risk-based capital ratios of 5.32%, 10.20%, and 11.46% , respectively. The Bank
met the regulatory capital requirements to be categorized as a "well
capitalized" institution at June 30, 1996.
ASSET QUALITY
- -------------
Webster devotes significant attention to maintaining high asset quality through
conservative underwriting standards, active servicing of loans, aggressively
managing nonperforming assets and maintaining adequate reserve coverage on
nonaccrual assets. At June 30, 1996, residential and consumer loans comprised
approximately 84.4% of the loan portfolio. All fixed income securities must have
an investment rating in the top two rating categories by a major rating service
at time of purchase. Unless otherwise noted, the information set forth
concerning loans, nonaccrual loans, foreclosed properties and allowances for
loan losses excludes Segregated Assets which are discussed separately.
11
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of June 30, 1996 and
December 31, 1995 follows (in thousands):
June 30, 1996 December 31, 1995
------------- -----------------
Residential Mortgage Loans $1,889,277 $1,560,822
Commercial Real Estate Loans 225,478 146,630
Commercial and Industrial Loans 165,621 52,763
Consumer Loans (Including Home Equity) 231,302 173,538
---------- ----------
Total Loans 2,511,678 1,933,753
Allowance for Loan Losses (42,738) (41,797)
---------- ----------
Loans Receivable, Net $2,468,940 $1,891,956
========== ==========
Included above at June 30, 1996 and December 31, 1995 were loans held for
sale of $4.9 million and $2.9 million, respectively and were comprised of
one-to-four family residential mortgage loans.
The following table details the nonaccrual assets at June 30, 1996 and
December 31, 1995 (in thousands):
June 30, 1996 December 31, 1995
-------------- ------------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $18,390 $20,560
Commercial 18,972 15,296
Consumer 1,861 1,987
-------- -------
Total Nonaccrual Loans 39,223 37,843
------- ------
Foreclosed Properties:
Residential and Consumer 8,827 6,368
Commercial 7,602 10,808
------- ------
Total Nonaccrual Assets $55,652 $55,019
====== ======
There were no nonaccrual assets received in the Shawmut Transaction.
At June 30, 1996, Webster's allowance for losses on loans of $42.7 million
represented 109.0% of nonaccrual loans and its total allowances for losses on
nonaccrual assets of $43.7 million amounted to 77.2% of nonaccrual assets. A
detail of the changes in the allowances for losses on loans and foreclosed
property for the six months ended June 30, 1996 follows (in thousands):
Allowances For Losses On
-------------------------
Impaired Foreclosed Total
Loans Loans Properties Allowances for Losses
----- -------- ---------- ----------------------
Balance at December 31, 1995 $39,704 $2,093 $991 $42,788
Provisions for Losses 2,000 - 600 2,600
Allocation from General Allowance (562) 562 - -
Purchase Accounting Adjustment 5,000 - - 5,000
Losses Charged to Allowances (6,584) - (714) (7,298)
Recoveries Credited to Allowances 526 - 96 622
-------- ---------- --------- --------
Balance at June 30, 1996 $40,084 $2,655 $973 $43,712
====== ======= ======= ======
12
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Segregated Assets, Net
- ----------------------
Segregated Assets, Net at June 30, 1996 included the following assets
purchased from the Federal Deposit Insurance Corporation ("FDIC") in an
acquisition of certain assets and deposits of First Constitution Bank (the
"First Constitution Acquisition") which are subject to a loss-sharing
arrangement with the FDIC (in thousands):
June 30, 1996 December 31, 1995
------------- -----------------
Commercial Real Estate Loans $67,805 $79,995
Commercial and Industrial Loans 9,447 10,439
Multi-Family Real Estate Loans 14,512 16,341
Foreclosed Properties 874 1,299
-------- ---------
92,638 108,074
Allowance for Segregated Assets Losses (2,942) (3,235)
------- -------
Segregated Assets, Net $89,696 $104,839
====== =======
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. At June 30, 1996, cumulative net
charge-offs aggregated $52.2 million. During the 1996 first quarter, Webster
began recording the additional 15% reimbursement as a receivable from the FDIC.
The reduction of $15.4 million for gross Segregated Assets for the current
period is the result of approximately $4.0 million in gross charge offs and
$11.1 million in payments received. Writedowns and sales of OREO for the current
period totaled approximately $300,000. Reimbursements received for net
charge-offs and eligible expenses on Segregated Assets aggregated $2.3 million
for the six months ended June 30, 1996. A reimbursement request totaling $1.4
million has been submitted to the FDIC for the second quarter 1996 period. An
additional $449,000 has been reported to the FDIC related to the 15% additional
reimbursement that will be collected at the end of the seventh year.
A detail of changes in the allowance for Segregated Assets losses follows
(in thousands):
Balance at December 31, 1995 $3,235
Provisions Charged to Operations -
Charge-offs (515)
Recoveries 222
------
Balance at June 30, 1996 $2,942
=====
13
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table details nonaccrual Segregated Assets at June 30, 1996
and December 31, 1995 (in thousands):
June 30, 1996 December 31, 1995
------------- -----------------
Segregated Assets Accounted For on a Nonaccrual Basis:
Commercial Real Estate Loans $3,689 $2,604
Commercial and Industrial Loans 716 1,203
Multi-Family Real Estate Loans 1,250 1,432
----- -----
Total Nonaccrual Loans 5,655 5,239
Foreclosed Properties:
Commercial Real Estate 576 648
Multi-Family Real Estate 298 651
------ ------
Total Nonaccrual Segregated Assets $6,529 $6,538
===== =====
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 at June 30, 1996,
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 a range of less than 3%. At June 30, 1996,
Webster had a 5.6% 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 June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Under regulations of the Office of Thrift Supervision, Webster Bank 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 June
30, 1996, Webster Bank had an average liquidity ratio of 5.5% and was in
compliance with the applicable regulations. Webster Bank had mortgage
commitments outstanding of $52.7 million, unused home equity credit lines of
$166.6 million, commercial lines and letters of credit of $75.4 million and
available credit card lines of $15.0 million.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the three and six month periods ended June 30, 1996 and 1995.
General
- -------
Net income for the three-month period ended June 30, 1996 amounted to $7.4
million or $.81 per fully diluted share compared to $5.2 million or $.67 per
fully diluted share for the same period in 1995. Net income for the six months
ended June 30, 1996 amounted to $13.0 million or $1.41 per fully diluted share
compared to $10.5 million or $1.34 per fully diluted share for the same period
in 1995. This represented an increase of 43% and 24% over the same respective
periods in the previous year. Net income available to common shareholders for
the three and six month periods ended June 30, 1996 were $7.1 million and $12.3
million, respectively. The results of operations for the 1996 six months ended
June 30, 1996 includes income and expenses related to the Shawmut Transaction
subsequent to February 16, 1996, the date of consummation.
14
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- -------------------
Net interest income for the three and six month periods ended June 30, 1996
amounted to $29.7 million and $55.7 million, respectively , compared to $21.9
million and $44.0 million for the respective periods in 1995. The increase is
primarily attributable to an increased volume of average earning assets and
interest bearing liabilities related to the Shawmut Transaction. The net
interest rate spread for the three and six months ended June 30, 1996 was 3.27%
and 3.18% compared to 2.83% and 2.93% for the same periods in 1995. The
increases in the net interest rate spread reflect the favorable impact of the
Shawmut Transaction.
Interest income for the three and six months ended June 30, 1996 amounted to
$66.8 million and $128.7 million, respectively, compared to $54.3 million and
$105.2 million for the comparable periods in 1995. The increase for the current
periods is due primarily to a higher amount of average earning assets and higher
yields on loans and securities partially offset by a decreased yield on mortgage
backed securities. The yield on interest earning assets for the three and six
months ended June 30, 1996 was 7.40% and 7.44%, respectively as compared to
7.34% and 7.24% for the same periods in the previous year.
Interest expense for the three and six months ended June 30, 1996 amounted to
$37.1 million and $73.0 million, respectively, compared to $32.4 million and
$61.3 million for the same periods during 1995. This increase is due primarily
to a higher amount of average interest-bearing liabilities which was partially
offset by a lower cost of funds, primarily related to FHLB borrowings. The use
of reverse repurchase agreements during the current year periods also provided a
lower cost source of borrowed funds. The cost of interest-bearing liabilities
decreased to 4.13% and 4.26% for the three and six months ended June 30, 1996
compared to 4.51% and 4.32% for the same periods during 1995.
Provision for Loan Losses
- -------------------------
The provision for loan losses amounted to $1.0 million and $2.0 million for
the three and six month periods ended June 30, 1996 as compared to $455,000 and
$840,000 for the respective periods in 1995. The increased provision for the
current year periods is attributable to an increase in the balance of
outstanding loans. At June 30, 1996, the allowance for loan losses was $42.7
million and represented 109.0% of nonaccrual loans, compared to $43.5 million
and 118.2% a year earlier.
Noninterest Income
- ------------------
Noninterest income for the three and six month periods ended June 30, 1996
amounted to $6.6 million and $11.4 million, respectively, compared to $5.0
million and $9.8 million for the same periods one year earlier. The increase is
primarily due to higher fees and service charges resulting from a larger deposit
base and increased net gains realized on the sale of securities and loans. There
were $864,000 and $1.4 million of net gains realized from securities and loan
sales for the three and six months ended June 30, 1996 as compared to $678,000
and $1.0 million for the same respective periods in 1995.
Noninterest Expenses
- --------------------
Noninterest expenses for the three and six month periods ended June 30, 1996
amounted to $23.6 million and $44.8 million, respectively, as compared to $19.0
million and $37.7 million for the same respective periods in the previous year.
The increase for the current year periods is primarily due to additional
operating expenses related to the Shawmut Transaction. The net increase in
noninterest expense of $4.6 and $7.1 million for the three and six months
periods ended June 30, 1996, as compared to the same periods in 1995, reflects
higher costs for salaries and benefits, occupancy expenses, furniture and
equipment and other expenses that were partially offset by reductions in
foreclosed property and federal deposit insurance premium expenses.
15
Webster Financial Corporation and Subsidiary
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Income Taxes
- ------------
Total income tax expenses for the three and six month periods ended June 30,
1996 amounted to $4.2 million and $7.4 million, respectively, compared to $2.2
million and $4.7 million for the same periods in 1995. Income taxes for the six
months ended June 30, 1996 increased due to a higher level of taxable income
which was partially offset by a reduction in state income tax rates. Income
taxes for 1995 were also lower as compared to 1996 due to a higher level of
benefits realized from the utilization of tax loss carry forwards and a
reduction of the deferred tax valuation allowance, both of which are primarily
related to the prior acquisition of Bristol Savings Bank.
Legislation to repeal Internal Revenue Code Section 593 pertaining to how
qualified savings institutions calculate their bad debt deduction for federal
income tax purposes, if they were to convert to their charters; was adopted by
the Congress on August 2, 1996 and is expected to be signed by the President
during the week of August 19, 1996. The legislation (i) repeals future bad debt
deductions; (ii) exempts pre-1988 bad debt deductions from recapture; and (iii)
suspends post-1987 bad debt deductions from recapture, provided that the savings
institution meets a new home mortgage lending test.
16
Webster Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
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 - 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 - None
17
Webster Financial Corporation and Subsidiary
- --------------------------------------------------------------------------------
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: 8/14/96 By: /s/ John V. Brennan
------------- --------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer and Treasurer
Date: 8/14/96 By: /s/ Peter J. Swiatek
------------- ---------------------
Peter J. Swiatek
Controller
18