UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ending September 30, 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
WEBSTER FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-1187536
----------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Webster Plaza, Waterbury, Connecticut 06720
- --------------------------------------- --------
(Address of principal executive offices) (ZipCode)
(203) 753-2921
--------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 8,133,687 Shares
------------------------------ ------------------------------
(Class) Issued and Outstanding at October 31, 1996
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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)
September 30, December 31,
1996 1995
----------- -------------
(Unaudited)
ASSETS
Cash and Due from Depository Institutions $71,763 $44,228
Interest-bearing Deposits 66,308 26,017
Securities: (Note 3)
Trading at Fair Value 62,187 44,604
Available for Sale, at Fair Value 626,957 498,088
Held to Maturity, (Market Value: $455,087 in 1996;
$505,775 in 1995) 461,119 501,948
Loans Receivable, Net 2,450,294 1,891,956
Segregated Assets, Net 82,905 104,839
Accrued Interest Receivable 25,648 21,585
Premises and Equipment, Net 49,159 40,654
Foreclosed Properties, Net 11,528 17,176
Core Deposit Intangible 45,608 4,729
Prepaid Expenses and Other Assets 30,978 23,846
----------- -----------
Total Assets $3,984,454 $3,219,670
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $3,021,818 $2,400,202
Federal Home Loan Bank Advances 476,700 383,100
Other Borrowings 208,505 170,014
Advance Payments by Borrowers for Taxes and Insurance 9,862 14,435
Accrued Expenses and Other Liabilities 50,902 41,946
----------- ------------
Total Liabilities 3,767,787 3,009,697
----------- ------------
Shareholders' Equity
Cumulative Convertible Preferred Stock, Series B, 150,869
shares issued and outstanding at September 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 -8,502,896 shares at September 30, 1996 and
8,501,746 shares at December 31, 1995 85 85
Paid in Capital 137,396 138,263
Retained Earnings 88,660 75,858
Less Treasury Stock at cost, 394,424 shares at
September 30, 1996 and 424,024 shares at
December 31, 1995 (7,149) (3,290)
Less Employee Stock Ownership Plan Shares
Purchased with Debt (2,574) (3,207)
Unrealized Gains on Securities, Net 247 2,262
----------- ------------
Total Shareholders' Equity 216,667 209,973
----------- ------------
Total Liabilities and Shareholders' Equity $3,984,454 $3,219,670
=========== ============
See accompanying notes to consolidated financial statements.
3
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- --------- --------- --------
Interest Income:
Loans and Segregated Assets $50,224 $39,257 $145,991 $115,540
Securities 17,421 17,006 49,977 45,181
Interest-bearing Deposits 532 285 923 1,069
------- ------- -------- --------
Total Interest Income 68,177 56,548 196,891 161,790
------- ------- -------- --------
Interest Expense:
Interest on Deposits 28,698 25,644 85,424 72,808
Interest on Borrowings 9,361 9,263 25,625 23,386
------- ------- -------- -------
Total Interest Expense 38,059 34,907 111,049 96,194
------- ------ -------- -------
Net Interest Income 30,118 21,641 85,842 65,596
Provision for Loan Losses 1,000 555 3,000 1,395
------- ------- -------- -------
Net Interest Income After Provision for Loan Losses 29,118 21,086 82,842 64,201
------- ------- -------- -------
Noninterest Income:
Fees and Service Charges 4,896 3,555 13,334 10,590
Gain on Sale of Loans and Loan Servicing, Net 303 633 814 1,026
Gain on Sale of Securities, Net 369 623 1,218 1,245
Other Noninterest Income 1,102 762 2,743 2,496
------- ------- -------- --------
Total Noninterest Income 6,670 5,573 18,109 15,357
------- ------- -------- --------
Noninterest Expenses:
Salaries and Employee Benefits 11,476 9,348 33,389 27,884
Occupancy Expense of Premises 2,478 1,567 7,010 4,513
Furniture and Equipment Expenses 2,474 1,575 6,480 4,523
Marketing Expenses 820 566 2,933 2,460
Federal Deposit Insurance Premiums (Note 9) 530 444 1,580 3,272
Foreclosed Property Expenses and
Provisions, Net (Note 5) 328 993 1,522 3,392
Non-recurring Expenses (Note 9) 4,730 - 5,230 -
Other Operating Expenses 5,615 3,876 15,104 10,046
------- ------- -------- --------
Total Noninterest Expenses 28,451 18,369 73,248 56,090
------- ------- -------- --------
Income Before Income Taxes 7,337 8,290 27,703 23,468
Income Taxes 2,488 2,718 9,876 7,439
------- ------- -------- --------
Net Income 4,849 5,572 17,827 16,029
Preferred Stock Dividends 283 324 927 972
------- ------- -------- --------
Net Income Available to Common Shareholders $4,566 $5,248 $16,900 $15,057
======= ======= ======== ========
Net Income Per Common Share:
Primary $0.55 $0.76 $2.04 $2.19
Fully Diluted 0.52 0.70 1.92 2.04
Dividends Declared Per Common Share: $0.18 $0.16 $0.50 $0.48
See accompanying notes to consolidated financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars In Thousands)
Nine Months Ended
September 30,
1996 1995
---- ----
OPERATING ACTIVITIES:
Net Income $ 17,827 $ 16,029
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 3,000 1,395
Provision for Foreclosed Property Losses 720 1,691
Provision for Depreciation and Amortization 5,145 3,309
Amortization of Securities Premiums, Net 3,476 632
Amortization of Core Deposit Intangible 3,324 541
(Gains) Losses on Sale of Foreclosed Properties, Net (880) 2,696
Loans and Securities Gains, Net (1,681) (2,215)
Trading Securities Gains, Net (351) (56)
Increase in Trading Securities 3,444 (17,362)
Loans Originated for Sale (39,228) (98,665)
Sale of Loans, Originated for Sale 50,946 91,232
(Increase) in Interest Receivable (1,396) (3,196)
(Decrease) Increase in Interest Payable (215) 2,190
(Decrease) Increase in Accrued Expenses and Other Liabilities, Net (12,754) 3,266
(Increase) in Prepaid Expenses and Other Assets, Net (5,400) (738)
----------- -----------
Net Cash Provided by Operating Activities 25,977 749
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities Available for Sale (388,907) (112,773)
Purchases of Securities Held to Maturity (96,069) (307,700)
Maturities of Securities 36,851 6,862
Proceeds from Sale of Securities Available for Sale 199,813 79,231
Net Decrease in Interest-bearing Deposits (40,291) (20,779)
Purchase of Loans -- (2,123)
Net Decrease in Loans 4,702 6,536
Proceeds from Sale of Foreclosed Properties 15,099 10,122
Net Decrease in Segregated Assets 21,934 18,051
Principal Collected on Mortgage-backed and Investment Securities 153,349 75,593
Purchases of Premises and Equipment, Net (7,323) (2,889)
Net Cash and Cash Equivalents Received
in the Shawmut Transaction 113,551 --
----------- -----------
Net Cash Provided (Used) by Investing Activities 12,709 (249,869)
----------- -----------
FINANCING ACTIVITIES:
Net (Decrease) in Deposits (129,632) (877)
Repayment of FHLB Advances (1,174,900) (436,591)
Proceeds from FHLB Advances 1,268,500 611,306
Repayment of Other Borrowings (746,605) (25,140)
Proceeds from Other Borrowings 785,824 112,104
Cash Dividends to Common and Preferred Shareholders (5,009) (4,248)
Net Decrease in Advance Payments for Taxes and Insurance (4,573) (4,610)
Exercise of Stock Options 1,230 1,212
Purchase of Webster Financial Corporation Common Stock (5,986) --
----------- -----------
Net Cash (Used) Provided by Financing Activities (11,151) 253,156
----------- -----------
Increase in Cash and Cash Equivalents 27,535 4,036
Cash and Cash Equivalents at Beginning of Period 44,228 44,304
----------- -----------
Cash and Cash Equivalents at End of Period $ 71,763 $ 48,340
----------- -----------
Supplemental Disclosures:
Income Taxes Paid $ 15,684 $ 6,062
Interest Paid 108,261 93,995
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of Loans to Foreclosed Properties 12,749 8,449
See accompanying notes to consolidated financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
nine month periods ended September 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. The net premium paid for deposits is being amortized over
10 years using the straight line method. After the Shawmut Transaction and as of
September 30, 1996, Webster operates 63 full service offices in Connecticut 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
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):
September 30, 1996 December 31, 1995
------------------- -----------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
Trading Securities:
Mortgage-Backed Securities:
GNMA $34,667 $34,667 $14,766 $14,766
FHLMC 27,520 27,520 29,838 29,838
------ ------ ------ ------
62,187 62,187 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 2,508 2,538 - -
U.S. Government Agency:
Matures over 1 within 5 years 12,916 13,008 12,901 12,522
Corporate Bonds and Notes:
Matures over 1 within 5 years - - 23,005 23,005
Matures over 5 within 10 years 2,492 2,490 2,737 2,730
Mutual Funds* 6,918 6,908 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 19,173 24,321 9,195 11,930
Mortgage Backed Securities:
FNMA 134,844 133,122 139,860 142,827
FHLMC 34,739 34,556 62,572 63,221
GNMA 264,411 264,399 20,443 20,512
Collateralized Mortgage Obligations 111,312 111,340 155,321 155,539
Unamortized Interest Rate Hedges 5,813 4,236 816 816
Unrealized Securities Gains, Net 1,792 - 6,122 -
-------- -------- ------- -------
626,957 626,957 498,088 498,088
-------- -------- ------- -------
* 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
NOTE 3 - SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
September 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 974 980 1,577 1,577
Matures over 1 within 5 years - - 8,262 8,445
U.S. Government Agency:
Matures within 1 year 6,892 6,892 1,003 1,006
Matures over 1 within 5 years 29,038 28,569 39,868 41,330
Matures over 5 years 499 482 999 1,008
Corporate Bonds and Notes:
Matures within 1 year 202 203 - -
Matures over 1 within 5 years 1,530 1,527 2,555 2,579
Matures over 5 within 10 years - - 330 325
Matures over 10 years 100 100 - -
Mortgage Backed Securities:
FHLMC 34,181 32,945 42,877 43,714
FNMA 23,001 23,525 31,785 32,457
GNMA 1,376 1,428 1,622 1,698
Collateralized Mortgage Obligations 363,326 358,436 370,762 371,342
Other Mortgage-backed Securities - - 308 294
--------- ------------ ----------- -----------
461,119 455,087 $ 501,948 $ 505,775
--------- ------------ ----------- -----------
Total $1,150,263 $1,144,231 $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 and
warrants. 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 nine months ended September 30,
1996 were 8,293,289 and 8,295,417, respectively, and for the three and nine
months ended September 30, 1995 were 6,917,942 and 6,877,390, respectively. The
weighted-average number of shares used in the computation of fully diluted
earnings per share for the three and nine months ended September 30, 1996 were
9,262,353 and 9,292,604, respectively, and for the three and nine months ended
September 30, 1995 were 7,914,867 and 7,872,109, respectively.
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Nine Months
Ended September 30, December 30,
1995 1 1995
Gain on Sale of Foreclosed Property, Net $(349) $ (301) $ (880) $ (596)
Provision for Losses on Foreclosed Property 120 692 720 1,690
Rental Income (33) (143) (215) (475)
Foreclosed Property Expenses 590 745 1,897 2,773
------ ------- ----- -----
Foreclosed Property Expenses and Provisions, Net $ 328 $ 993 $1,522 $3,392
===== ====== ====== ======
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 September 30, 1996, Webster had $6.6
million of impaired loans, of which $4.5 million was measured based upon the
fair value of the underlying collateral and $2.1 million was measured based upon
the expected future cash flows of the impaired loans. Of total impaired loans of
$6.6 million, $2.4 million had allowances for losses of $557,000. In the 1996
third quarter, total impaired loans averaged $9.7 million and for the current
nine month period averaged $10.0 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 for the three and nine month periods ended
September 30, 1996 amounted to $9,077 and $62,077, respectively.
NOTE 7 - REVERSE REPURCHASE AGREEMENTS
At September 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
September 30, 1996 Term Average Rate Date of Collateral of Collateral
------------------ ----- ------------ ------------ --------------- --------------
$165,958 1 day to 2 months 5.37% Less than 3 months $170,189 $169,812
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 actual amount of outstanding reverse repurchase agreements at any
month-end during the 1996 third quarter was $149.3 million and $168.0 million,
respectively. The total balance for reverse repurchase agreements outstanding at
September 30, 1995 was $87.0 million.
NOTE 8 - ACCOUNTING STANDARDS
In September 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.
NOTE 9 - NON-RECURRING EXPENSES
Included in the 1996 results were non-recurring expenses of $5.2 million of
which $4.7 million was related to the recapitalization of the Savings
Association Insurance Fund and $500,000 was related to the Shawmut Transaction.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - SUBSEQUENT EVENTS
On October 8, 1996 Webster announced that it has signed a definitive merger
agreement by which Webster will acquire DS Bancor, Inc., a $1.3 billion savings
bank headquartered in Derby, CT., on a stock for stock basis valued at $43 per
share in a tax free exchange. The acquisition is expected to close in the first
quarter of 1997 and to be accounted for as a pooling of interests.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Webster Financial Corporation ("Webster") , through its subsidiary, Webster
Bank (the "Bank"), focuses on providing financial services to individuals,
families and businesses. Webster emphasizes three business lines- consumer
banking, business banking, and mortgage banking; each supported by centralized
administration, marketing, finance and operations. Webster's goal is to provide
banking services that are fairly priced, reliable and convenient. 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 $3.98 billion at September 30, 1996, an increase of
$764.8 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 $558.3 million, securities and interest-bearing deposits of $145.9
million, cash of $27.5 million and the core deposit intangible of $40.9 million.
Segregated Assets, Net (defined and discussed below) decreased to $82.9
million at September 30, 1996 from $104.8 million at December 31, 1995 due
primarily to principal repayments of $17.8 million, net charge-offs of $3.6
million and sales of $501,000. Total net foreclosed properties were $11.5
million at September 30, 1996 compared to $17.2 million at December 31, 1995.
The net decrease in foreclosed properties of $5.7 million for the current period
was primarily attributable to sales of $12.2 million, valuation write down
adjustments of $5.4 million and a provision for losses of $720,000 that were
partially offset by additions of $12.6 million.
Total liabilities were $3.77 billion at September 30, 1996, an increase of
$758.1 million from $3.01 billion at December 31, 1995. The increase in total
liabilities is due primarily to a net increase in deposits of $621.6 million,
FHLB advances of $93.6 million and other borrowings of $38.5 million. The
increase in deposits is a result of the Shawmut Transaction while increases in
FHLB advances and other borrowings are used to fund asset growth.
Shareholders' equity was $216.7 million at September 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 5.03%, 10.01%, and 11.26% , respectively. The Bank
met the regulatory capital requirements to be categorized as a "well
capitalized" institution at September 30, 1996.
11
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 1996, residential and consumer
loans comprised approximately 84.8% 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.
A breakdown of loans receivable, net by type as of September 30, 1996 and
December 31, 1995 follows (in thousands):
September 30, 1996 December 31, 1995
Residential Mortgage Loans $1,868,164 $1,560,822
Commercial Real Estate Loans 213,268 146,630
Commercial and Industrial Loans 165,554 52,763
Consumer Loans (Including Home Equity) 237,737 173,538
---------- ----------
Total Loans 2,484,723 1,933,753
Allowance for Loan Losses (34,429) (41,797)
---------- ----------
Loans Receivable, Net $2,450,294 $1,891,956
========== ==========
Included above at September 30, 1996 and December 31, 1995 were loans held
for sale of $2.6 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 September 30, 1996 and
December 31, 1995 (in thousands):
September 30, 1996 December 31, 1995
------------------ ------------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $ 8,188 $20,560
Commercial 12,572 15,296
Consumer 1,437 1,987
-------- --------
Total Nonaccrual Loans 22,197 37,843
-------- --------
Foreclosed Properties:
Residential and Consumer 4,871 6,368
Commercial 6,657 10,808
-------- --------
Total Nonaccrual Assets $33,725 $55,019
======== ========
Nonaccrual assets decreased $21.9 million in the 1996 third quarter to
$33.7 million primarily as a result of a nonaccrual bulk sale of $18.0 million
of nonaccrual loans and foreclosed properties.
12
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1996, Webster's allowance for losses on loans of $34.4
million represented 155.1% of nonaccrual loans and its total allowances for
losses on nonaccrual assets of $34.9 million amounted to 102.1% of nonaccrual
assets. A detail of the changes in the allowances for losses on loans and
foreclosed property for the nine months ended September 30, 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 3,000 - 720 3,720
Allocation from General Allowance 304 (304) - -
Allowance on Acquired Loans 5,000 - - 5,000
Losses Charged to Allowances (16,228) (1,232) (1,345) (18,805)
Recoveries Credited to Allowances 2,092 - 116 2,208
------- ------- -------- -------
Balance at September 30, 1996 $33,872 $ 557 $ 482 $34,911
======= ======= ======== =======
Segregated Assets, Net
Segregated Assets, Net at September 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):
September 30, 1996 December 31, 1995
Commercial Real Estate Loans $64,260 $79,995
Commercial and Industrial Loans 7,097 10,439
Multi-Family Real Estate Loans 13,765 16,341
Foreclosed Properties 700 1,299
-------- ---------
85,822 108,074
Allowance for Segregated Assets Losses (2,917) (3,235)
-------- ----------
Segregated Assets, Net $82,905 $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 September 30, 1996, cumulative net
charge-offs aggregated $52.8 million. During the 1996 first quarter, Webster
began recording the additional 15% reimbursement as a receivable from the FDIC.
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
The reduction of $22.3 million for gross Segregated Assets for the nine
months ended September 30,1996, is primarily the result of approximately $4.5
million in gross charge offs and $17.8 million in payments received.
Reimbursements received for net charge-offs and eligible expenses on Segregated
Assets aggregated $3.7 million for the nine months ended September 30, 1996. A
reimbursement request totaling $499,000 has been submitted to the FDIC for the
third quarter 1996 period. An additional $543,000 for the nine months ended
September 30, 1996 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 (547)
Recoveries 229
------
Balance at September 30, 1996 $2,917
======
The following table details nonaccrual Segregated Assets at September 30,
1996 and December 31, 1995 (in thousands):
September 30, 1996 December 31, 1995
Segregated Assets Accounted For on a Nonaccrual Basis:
Commercial Real Estate Loans $3,190 $2,604
Commercial and Industrial Loans 203 1,203
Multi-Family Real Estate Loans 1,107 1,432
----- -----
Total Nonaccrual Loans 4,500 5,239
Foreclosed Properties:
Commercial Real Estate 516 648
Multi-Family Real Estate 184 651
------ ------
Total Nonaccrual Segregated Assets $5,200 $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 September 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 less than 5.0%. At September 30, 1996,
Webster had a 6.7% positive GAP position in the one year time horizon, which
means that cumulative interest-rate sensitive assets exceed cumulative
interest-rate sensitive liabilities for that period. Management believes that
its interest-rate risk position represents a reasonable amount of interest-rate
risk at September 30, 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
September 30, 1996, Webster Bank had a monthly average liquidity ratio of 6.1%
and was in compliance with the applicable regulations. Webster Bank had
residential and commercial mortgage commitments outstanding of $52.8 million,
non-mortgage commercial and consumer commitments of $9.7million, unused home
equity credit lines of $165.1 million, available credit card lines of $20.1
million and commercial lines and letters of credit of $75.2 million.
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
RESULTS OF OPERATIONS
Comparison of the three and nine month periods ended September 30, 1996 and
1995.
General
Net income for the three-month period ended September 30, 1996 amounted to
$4.8 million or $.52 per fully diluted share compared to $5.6 million or $.70
per fully diluted share for the same period in 1995. Net income for the nine
months ended September 30, 1996 amounted to $17.8 million or $1.92 per fully
diluted share compared to $16.0 million or $2.04 per fully diluted share for the
same period in 1995. Included in the 1996 third quarter results was a one-time
FDIC premium charge of $4.7 million, before taxes related to the
recapitalization of the Savings Association Insurance Fund. Also included in the
1996 nine month period was a $500,000 non-recurring expense, before taxes
related to the Shawmut Transaction. Excluding the FDIC charge and non-recurring
expense related to Shawmut Transaction, net income was $7.6 million or $.82 per
share on a fully diluted basis for the three month period ended September 30,
1996 and $20.9 million or $2.24 per share on a fully diluted basis for the nine
month period ended September 30, 1996. Net income available to common
shareholders for the three and nine month periods ended September 30, 1996 were
$4.6 million and $16.9 million, respectively. The results of operations for the
nine months ended September 30, 1996 includes income and expenses related to the
Shawmut Transaction subsequent to February 16, 1996, the date of consummation.
NET INTEREST INCOME
Net interest income for the three and nine month periods ended September
30, 1996 amounted to $30.1 million and $85.8 million, respectively , compared to
$21.6 million and $65.6 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 nine months ended September 30, 1996 was
3.17% for both current periods, compared to 2.67% and 2.83% for the three and
nine month periods, respectively of 1995. The increases in the net interest rate
spread reflect the favorable impact of the Shawmut Transaction.
Interest income for the three and nine months ended September 30, 1996
amounted to $68.2 million and $196.9 million, respectively, compared to $56.5
million and $161.8 million for the comparable periods in 1995. The increase for
the current periods is due primarily to a higher amount of average earning
assets partially offset by lower yields on loans and securities. The yield on
interest earning assets for the three and nine months ended September 30, 1996
was 7.31% and 7.38%, respectively as compared to 7.35% and 7.28% for the same
periods in the previous year.
Interest expense for the three and nine months ended September 30, 1996
amounted to $38.1 million and $111.0 million, respectively, compared to $34.9
million and $96.2 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 deposits and 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 4.14% and 4.21% for the three and nine months ended September 30,
1996 compared to 4.68% and 4.45% for the same periods during 1995.
Provision for Loan Losses
The provision for loan losses amounted to $1.0 million and $3.0 million for
the three and nine month periods ended September 30, 1996 as compared to $555
thousand and $1.4 million 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 and the change in the portfolio mix. Chargeoffs of
$18.8 million for the nine months ended September 30, 1996 exceeded provisions
due to the nonaccrual asset bulk sale of $18.0 million of nonaccrual loans and
foreclosed properties. At September 30, 1996, the allowance for loan losses was
$34.4 million and represented 155.1% of nonaccrual loans, compared to $42.8
million and 112.9% a year earlier.
15
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
Noninterest Income
Noninterest income for the three and nine month periods ended September 30,
1996 amounted to $6.7 million and $18.1 million, respectively, compared to $5.6
million and $15.4 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. There were $672,000 and $2.0 million of net gains realized from securities
and loan sales for the three and nine months ended September 30, 1996 as
compared to $1.3 million and $2.3 million for the same respective periods in
1995.
Noninterest Expenses
Noninterest expenses for the three and nine month periods ended September
30, 1996 amounted to $28.5 million and $73.2 million, respectively, as compared
to $18.4 million and $56.1 million for the same respective periods in the
previous year. The increase for the current year period is primarily due to
additional operating expenses related to the Shawmut Transaction. The net
increase in noninterest expense of $10.1 million and $17.2 million for the three
and nine month periods ended September 30, 1996, as compared to the same periods
in 1995, reflects higher costs for salaries and benefits, occupancy expenses,
furniture and equipment , marketing, deposit insurance and other expenses that
were partially offset by lower foreclosed property expenses. Also included in
the 1996 third quarter results was a one-time FDIC charge of $4.7 million
related to the recapitalization of the Savings Association Insurance Fund.
Income Taxes
Total income tax expenses for the three and nine month periods ended
September 30, 1996 amounted to $2.5 million and $9.9 million, respectively,
compared to $2.7 million and $7.4 million for the same periods in 1995. Income
taxes for the nine months ended September 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 repealing Internal Revenue Code Section 593 pertaining to how
qualified savings institutions calculate their bad debt deduction for federal
income tax purposes was adopted by the Congress on August 2, 1996 and signed by
the President. The legislation (i) repeals future bad debt deductions under the
reserve method; (ii) exempts pre-1988 bad debt reserves 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
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: 11/7/96 By: /s/ John V. Brennan
---------------------- ---------------------------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer and Treasurer
Date: 11/7/96 By: /s/ Peter J. Swiatek
---------------------- ---------------------------------------
Peter J. Swiatek
Controller
18