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 March 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File Number: 0-15213
--------
WEBSTER FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1187536
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(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
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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) 11,981,452 Shares
------------------------------ ----------------------------------------
(Class) Issued and Outstanding at May 8, 1997
Webster Financial Corporation and Subsidiaries
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INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at March 31, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Consolidated
Financial Statements 10
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
----------- -----------
Cash and Due from Depository Institutions $ 90,578 $ 100,113
Interest-bearing Deposits 23,702 27
Securities: (Note 2)
Trading at Fair Value 62,440 59,331
Available for Sale, at Fair Value 1,243,123 810,989
Held to Maturity, (Market Value: $463,855 in 1997;
$500,458 in 1996) 472,465 506,159
Loans Receivable, Net 3,431,896 3,384,465
Segregated Assets, Net 69,889 75,670
Accrued Interest Receivable 30,942 31,400
Premises and Equipment, Net 56,108 56,575
Foreclosed Properties, Net 13,519 12,991
Core Deposit Intangible 44,971 46,442
Prepaid Expenses and Other Assets 43,986 42,116
----------- -----------
Total Assets $ 5,583,619 $ 5,126,278
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 4,054,179 $ 4,099,501
Federal Home Loan Bank Advances 660,945 510,130
Other Borrowings 420,136 144,627
Advance Payments by Borrowers for Taxes and Insurance 11,953 28,447
Accrued Expenses and Other Liabilities 52,869 51,480
----------- -----------
Total Liabilities 5,200,082 4,834,185
----------- -----------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust (Note 9) 100,000 --
----------- -----------
SHAREHOLDERS' EQUITY
Cumulative Convertible Preferred Stock, Series B, No shares
issued and outstanding at March 31, 1997 and 98,084 shares
issued and outstanding at December 31, 1996 -- 1
Common Stock, $.01 par value:
Authorized - 30,000,000 shares;
Issued - 12,003,116 shares at March 31, 1997 and
12,142,555 shares at December 31, 1995 120 120
Paid-in Capital 153,541 171,766
Retained Earnings 133,270 139,936
Less Treasury Stock at cost, 49,609 shares at March 31, 1997
and 575,274 shares at December 31, 1996 (1,710) (18,801)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,971) (2,574)
Unrealized Gains on Securities, Net 287 1,645
----------- -----------
Total Shareholders' Equity 283,537 292,093
----------- -----------
Total Liabilities and Shareholders' Equity $ 5,583,619 $ 5,126,278
=========== ===========
3
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
1997 1996
-------- --------
INTEREST INCOME:
Loans and Segregated Assets $ 67,338 $ 62,608
Securities and Interest-bearing Deposits 24,688 21,571
-------- --------
Total Interest Income 92,026 84,179
-------- --------
INTEREST EXPENSE:
Interest on Deposits 39,315 39,480
Interest on Borrowings 11,340 9,822
-------- --------
Total Interest Expense 50,655 49,302
-------- --------
Net Interest Income 41,371 34,877
Provision for Loan Losses (Note 6) 7,025 1,650
-------- --------
Net Interest Income After Provision for Loan Losses 34,346 33,227
-------- --------
NONINTEREST INCOME:
Fees and Service Charges 5,603 3,987
Gain on Sale of Loans and Loan Servicing, Net 139 115
Gain on Sale of Securities, Net 398 582
Other Noninterest Income 1,165 1,050
-------- --------
Total Noninterest Income 7,305 5,734
-------- --------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 14,596 13,380
Occupancy Expense of Premises 2,949 2,698
Furniture and Equipment Expenses 2,701 1,905
Federal Deposit Insurance Premiums 247 526
Foreclosed Property Expenses and Provisions, Net (Note 4) 437 1,393
Marketing Expenses 1,494 1,422
Core Deposit Intangible Amortization 1,471 913
Non-recurring Expenses (Note 6) 19,858 500
Capital Securities Expense 1,648 --
Other Operating Expenses 5,458 3,942
-------- --------
Total Noninterest Expenses 50,859 26,679
-------- --------
Income (Loss) Before Income Taxes (9,208) 12,282
Income Tax (Benefit) Expense (4,250) 4,594
-------- --------
NET INCOME (LOSS) (4,958) 7,688
Preferred Stock Dividends -- 324
-------- --------
Net Income (Loss) Available to Common Shareholders ($ 4,958) $ 7,364
======== ========
Net Income (Loss) Per Common Share:
Primary ($ 0.41) $ 0.62
Fully Diluted ($ 0.41) $ 0.60
Dividends Declared Per Common Share $ 0.18 $ 0.16
4
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
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THREE MONTHS ENDED
MARCH 31,
1997 1996
------ -----
OPERATING ACTIVITIES:
Net Income (Loss) $ (4,958) $ 7,688
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 7,025 1,650
Provision for Foreclosed Property Losses 63 650
Provision for Depreciation and Amortization 2,171 1,501
Amortization of Securities Premiums, Net (118) 695
Amortization of Hedging Costs, Net 652 101
Amortization and Write-down of Core Deposit Intangible 1,471 913
Amortization of Mortgage Servicing Rights 97 191
Gains on Sale of Foreclosed Properties, Net (151) (348)
Loans and Securities Gains, Net (340) (224)
Gains on Trading Securities, Net (197) (473)
(Increase) Decrease in Trading Securities (5,579) 1,022
Loans Originated for Sale (10,514) (16,758)
Sale of Loans, Originated for Sale 10,508 11,990
Decrease in Interest Receivable 458 119
Increase (Decrease) in Interest Payable 938 (878)
Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 3,118 (15,273)
Decrease in Prepaid Expenses and Other Assets, Net 1,316 1,958
----------- -----------
Net Cash Provided (Used) by Operating Activ ties 5,960 (5,476)
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (503,762) (13,714)
Purchases of Securities, Held to Maturity (5,949) (44,362)
Maturities of Securities 15,002 28,781
Proceeds from Sale of Securities, Available for Sale 28,469 114,016
Net (Increase) Decrease in Interest-bearing Deposits (23,675) 13,001
Purchase of Loans (65,000) (37,382)
Net Decrease in Loans 8,651 12,703
Proceeds from Sale of Foreclosed Properties 1,598 3,786
Net Decrease in Segregated Assets 5,781 5,872
Principal Collected on Mortgage-backed Securities 65,126 48,308
Purchases of Premises and Equipment, Net (1,704) (3,921)
Net Cash and Cash Equivalents Received from Bank Acquisition -- 113,551
----------- -----------
Net Cash (Used) Provided by Investing Activities (475,463) 240,639
----------- -----------
FINANCING ACTIVITIES:
Net Decrease in Deposits (45,322) (10,588)
Repayment of FHLB Advances (997,182) (416,413)
Proceeds from FHLB Advances 1,147,997 291,749
Repayment of Other Borrowings (710,057) (189,317)
Proceeds from Other Borrowings 986,334 156,080
Net Decrease in Advance Payments for Taxes and Insurance (16,494) (8,318)
Net Proceeds from Issuance of Capital Securities 97,700 --
Cash Dividends to Common and Preferred Shareholders (1,708) (1,784)
Common Stock Repurchased (1,660) --
Exercise of Stock Options 360 497
----------- -----------
Net Cash Provided (Used) by Financing Activities 459,968 (178,094)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (9,535) 57,069
Cash and Cash Equivalents at Beginning of Period 100,113 62,653
----------- -----------
Cash and Cash Equivalents at End of Period $ 90,578 $ 119,722
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid 1,535 1,681
Interest Paid 42,220 49,591
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 8,159 6,040
5
Webster Financial Corporation and Subsidiaries
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 month
period ended March 31, 1997 are not necessarily indicative of the results which
may be expected for the year as a whole. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Webster Financial Corporation 1996 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"). On January 31, 1997, Webster acquired DS Bancor, Inc. ("DS Bancor")
through a merger transaction. The transaction was accounted for as a pooling of
interests; accordingly, the financial statements as of and for the periods prior
to the DS Bancor transaction have been restated to reflect the combination.
NOTE 2 - SECURITIES
----------
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 are as follows (Dollars in Thousands):
March 31, 1997 December 31, 1996
--------------------------- ---------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
TRADING SECURITIES:
Mortgage-Backed Securities:
GNMA $35,205 $35,205 $31,537 $31,537
FHLMC 27,235 27,235 27,794 27,794
-------- --------- --------- --------
62,440 62,440 59,331 59,331
-------- --------- --------- --------
6
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SECURITIES (continued)
March 31, 1997 December 31, 1996
---------------------------- ------------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
-------- ------------ ------- ------------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes:
Matures over 1 within 5 years 2,507 2,522 2,508 2,544
U.S. Government Agency:
Matures over 1 within 5 years 12,923 13,008 12,883 12,974
Matures over 5 within 10 years -- -- 9,700 9,638
Matures over 10 years 5,700 5,511 -- --
Corporate Bonds and Notes:
Matures within 1 year -- -- 2,000 1,999
Matures over 1 within 5 years 170 172 -- --
Matures over 5 within 10 years 2,492 2,490 2,659 2,655
Mutual Funds* 12,257 12,257 7,216 7,236
Equity Securities:
Stock in Federal Home Loan Bank of Boston 41,499 41,499 39,832 39,832
Other Equity Securities 55,014 60,591 32,486 36,644
Mortgage Backed Securities:
FNMA 259,621 255,229 142,497 141,944
FHLMC 71,509 71,614 17,214 17,425
GNMA 518,576 518,801 236,393 239,142
Collateralized Mortgage Obligations 241,992 240,398 296,180 294,920
Unamortized Hedge Instruments 17,484 19,031 5,460 4,036
Unrealized Securities Gains, Net 1,379 -- 3,961 --
------------ ------------- ----------- ---------
1,243,123 1,243,123 810,989 810,989
------------ ------------- ----------- ----------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes:
Matures within 1 year 699 700 944 956
U.S. Government Agency:
Matures within 1 year 5,225 5,201 6,867 6,867
Matures over 1 within 5 years 23,041 23,454 28,089 28,712
Matures over 5 within 10 years 499 479 499 487
Corporate Bonds and Notes:
Matures within 1 year 700 700 301 302
Matures over 1 within 5 years 777 769 1,176 1,173
Matures over 10 years 100 99 100 100
Money Market Preferred Stock 7,500 7,500 8,000 8,000
Mortgage Backed Securities:
FHLMC 28,065 28,204 84,862 84,069
FNMA 80,069 79,145 28,859 29,086
GNMA 1,259 1,295 1,309 1,369
Collateralized Mortgage Obligations 324,531 316,309 345,153 339,337
------------- ------------ ------------ ----------
472,465 463,855 506,159 500,458
------------- ----------- ----------- ----------
Total $1,778,028 $1,769,418 $1,376,479 $1,370,778
============= ============ ============ ==========
* Mutual Funds consist primarily of funds invested in money market and
short duration instruments.
7
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - NET INCOME PER SHARE
--------------------
Primary net income per share is calculated by dividing net income less
preferred stock dividends by the weighted-average number of shares of common
stock and common stock equivalents outstanding, when dilutive. The common stock
equivalents consist of common stock options and warrants. Fully diluted net
income per share is calculated by dividing adjusted net income by the
weighted-average fully diluted common shares, including the effect of common
stock equivalents and the hypothetical conversion into common stock of the
Series B 7 1/2% Cumulative Convertible Preferred Stock. The weighted-average
number of shares used in the computation of primary net income per share for the
three months ended March 31, 1997 was 12,114,585 and for the three months ended
March 31, 1996 was 11,842,415. The weighted-average number of shares used in the
computation of fully diluted earnings per share for the three months ended March
31, 1997 was 12,183,746 and for the three months ended March 31, 1996 was
12,871,539.
NOTE 4 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
-------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as
follows (in thousands):
Three Months
Ended March 31,
1997 1996
Gain on Sale of Foreclosed Property, Net $ (151) $ (348)
Provision for Losses on Foreclosed Property 63 650
Rental Income (27) (119)
Foreclosed Property Expenses 552 1,210
------- -------
Foreclosed Property Expenses and Provisions, Net $ 437 $ 1,393
======= =======
NOTE 5 - REVERSE REPURCHASE AGREEMENTS
At March 31, 1997, Webster had short term borrowings through reverse
repurchase agreements outstanding. Information concerning borrowings under
reverse repurchase agreements is summarized below (dollars in thousands):
BALANCE AT WEIGHTED MATURITY BOOK VALUE MARKET VALUE
MARCH 31, 1997 TERM AVERAGE RATE DATE OF COLLATERAL OF COLLATERAL
- ------------------- -------------- ------------ ------------------ --------------- ----------------
$230,790 1 to 3 months 5.41% Less than 3 months $237,366 $238,697
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 average balance and the
maximum amount of outstanding reverse repurchase agreements at any month-end
during the 1997 first quarter was $165.3 million and $245.8 million,
respectively. The total balance for reverse repurchase agreements outstanding at
March 31, 1996 was $93.5 million.
8
Webster Financial Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - DS BANCOR ACQUISITION
---------------------
In connection with the acquisition of DS Bancor, Inc., which was
completed on January 31, 1997, Webster recorded approximately $19.9 million in
merger-related charges and a $5.6 million addition to the provision for loan
losses to conform to Webster's credit policies.
The following table presents a summary of the merger-related accrued
liability (in thousands):
Balance of DS Bancor merger-related accrual
at December 31, 1996 $ 0
Additions 19,900
Compensation (severance and related costs) (6,500)
Data Processing Contract Termination (1,100)
Write down of fixed assets (600)
Transaction costs (including investment bankers,
attorneys and accountants) (1,700)
Merger related and miscellaneous expenses (2,500)
--------
Balance of DS Bancor merger-related accrual
at March 31, 1997 $ 7,500
========
The remaining liability of $7.5 million represents, for the most part,
an accrual for data processing contract termination and the estimated loss on
sale of excess fixed assets due to consolidation of overlapping branch
locations.
NOTE 7 - ACCOUNTING STANDARDS
--------------------
In September 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" which was amended by SFAS No. 127 in December 1996 to defer the
effective date of certain provisions of SFAS No. 125 for one year. 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. On January 1,
1997, Webster adopted SFAS No. 125, except as amended by SFAS No.127, with no
material impact on its financial results.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." This statement simplifies the standards for
computing and presenting earnings per share previously found in APB Opinion No.
15 and makes them comparable to international standards. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share and requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with complex capital
structures. It is expected that the implementation of this statement will not
have a material impact on the financial results of Webster. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods.
NOTE 8 - CONVERSION OF CONVERTIBLE PREFERRED STOCK
------------------------------------------
During the month of January 1997, preferred stockholders converted the
remaining 98,084 shares of convertible preferred shares into 563,002 shares of
common stock.
NOTE 9 - CAPITAL-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST.
-----------------------------------------------------------------------
On January 30, 1997, Webster completed the sale of $100 million of Webster
Capital Trust I Capital Securities. Webster Capital Trust I is a business trust
formed for the purpose of issuing capital securities and investing the proceeds
in junior subordinated debentures, due 2027, issued by Webster. The primary
assets of the Trust are the junior subordinated debentures. Interest payments on
the debenutures are tax deductible by Webster. The securities have an annual
interest rate of 9.36%, payable semiannually, beginning July 29, 1997. Webster
will use the capital for general corporate purposes.
9
Webster Financial Corporation and Subsidiaries
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 individuals, families
and businesses located throughout Connecticut. Webster Bank emphasizes three
business lines - consumer, business and mortgage banking, each supported by
centralized administration and operations. The Corporation has grown
significantly in recent years, primarily through a series of acquisitions which
have expanded and strengthened its franchise. Webster currently serves customers
from 78 full service banking offices located in Hartford, New Haven, Fairfield,
Litchfield, and Middlesex counties in Connecticut.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets were $5.6 billion at March 31, 1997, an increase of $457.3
million from $5.1 billion at December 31, 1996. The increase in total assets is
due primarily to the purchase of securities and an increase in net loans of
$401.5 million and $47.4 million, respectively. The increases were funded, in
part, by the capital received in January 1997 discussed below.
Net Segregated Assets decreased to $69.9 million at March 31, 1997 from
$75.7 million at December 31, 1996 due primarily to principal repayments of $5.7
million and net chargeoffs of $99,000. Total net foreclosed properties were
$13.5 million at March 31, 1997 compared to $13.0 million at December 31, 1996.
The net increase in foreclosed properties of $500,000 for the current quarter
was primarily attributable to additions of $4.4 million, that were offset by
sales of $1.5 million and valuation write downs of $2.4 million.
Total liabilities were $5.2 billion at March 31, 1997, an increase of
$365.9 million from $4.8 billion at December 31, 1996. The increase in total
liabilities is due primarily to a net increase in borrowings of $426.3 million
that was partially offset by a decrease of $45.3 million in deposits.
On January 30, 1997, Webster completed the sale of $100 million of
Webster Capital Trust I Capital Securities. Webster Capital Trust I is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in subordinated debentures, due 2027, issued by Webster.
Interest payments on the debentures are tax deductible by Webster. The
securities have an annual interest rate of 9.36%, payable semiannually,
beginning July 29, 1997. Webster will use the net proceeds for general corporate
purposes.
Shareholders' equity was $283.5 million at March 31, 1997 and $292.1 at
December 31, 1996. At March 31, 1997, the Bank had Tier 1 leveraged, Tier 1
risk-based, and total risk-based capital ratios of 6.09%, 12.23% and 13.49% ,
respectively. The Bank met the regulatory capital requirements to be categorized
as a "well capitalized" institution at March 31, 1997.
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 March 31, 1997, residential and consumer loans
comprised approximately 87% 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.
10
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of March 31, 1997 and
December 31, 1996 follows (in thousands):
March 31, 1997 December 31, 1996
--------------- -----------------
Residential Mortgage Loans $2,640,860 $2,574,304
Commercial Real Estate Loans 266,072 267,265
Commercial Loans 180,715 194,220
Consumer Loans (Including Home Equity) 392,502 390,284
---------- ----------
Total Loans 3,480,149 3,426,073
Allowance for Loan Losses (48,253) (41,608)
----------- ----------
Loans Receivable, Net $3,431,896 $3,384,465
=========== ==========
Included above at March 31, 1997 and December 31, 1996 were loans held for
sale of $3.8 million and $3.9 million, respectively. Loans held for sale at
March 31, 1997 and December 31, 1996 represented one-to-four family residential
mortgage loans.
The following table details the nonaccrual assets at March 31, 1997 and
December 31, 1996 (in thousands):
March 31, 1997 December 31, 1996
--------------- -----------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $23,901 $24,067
Commercial 11,965 12,874
Consumer 2,867 3,116
-------- ---------
Total Nonaccrual Loans 38,733 40,057
Foreclosed Properties:
Residential and Consumer 5,772 5,082
Commercial 7,747 7,909
--------- ----------
Total Nonaccrual Assets $52,252 $53,048
========= ==========
The net decrease in nonaccrual assets of $796,000 at March 31, 1997 as
compared to the December 31, 1996 balance is due primarily to payoffs,
foreclosed property sales and charge-offs.
At March 31, 1997, Webster's allowance for losses on loans of $48.3
million represented 124.6% of nonaccrual loans and its total allowances for
losses on nonaccrual assets of $48.8 million amounted to 92.4% of nonaccrual
assets. A detail of the changes in the allowances for losses on loans and
foreclosed property for the three months ended March 31, 1997 follows (in
thousands):
Allowances For Losses On
------------------------------------
Impaired Foreclosed Total
Loans Loans Properties Allowance for Losses
----- ----- ---------- --------------------
Balance at December 31, 1996 $39,152 $ 2,456 $ 740 $42,348
Provisions for Losses 1,375 - 27 1,402
Provision for DS Bancor Loan Losses 5,650 - - 5,650
Allocation to General Allowance 1,600 (1,600) - -
Losses Charged to Allowances (2,715) - (283) (2,998)
Recoveries Credited to Allowances 2,335 - 76 2,411
-------- --------- ---------- --------
Balance at March 31, 1997 $ 47,397 $ 856 $ 560 $ 48,813
======== ========= ========= ========
11
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Segregated Assets, Net
Segregated Assets, Net at March 31, 1997 included the following assets
purchased from the FDIC in the First Constitution Acquisition which are subject
to a loss-sharing arrangement with the FDIC (in thousands):
March 31, 1997 December 31, 1996
---------------- ------------------
Commercial Real Estate Loans $ 53,394 $ 58,745
Commercial Loans 6,449 6,606
Multi-Family Real Estate Loans 12,502 12,772
Foreclosed Properties 398 406
----------- ---------
72,743 78,529
Allowance for Segregated Assets Losses (2,854) (2,859)
---------- ----------
Segregated Assets, Net $ 69,889 $ 75,670
========== ========
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 March 31, 1997, cumulative net
charge-offs aggregated $54.1 million.
The reduction of $5.8 million for gross Segregated Assets for the
current quarter is the result of approximately $340,000 in gross charge-offs and
$5.7 million in payments received. In the 1997 first quarter, Webster received
reimbursements for net charge-offs and eligible expenses on Segregated Assets
aggregating $926,000. A reimbursement request totaling $89,000 has been
submitted to the FDIC for the first quarter 1997 period.
A detail of changes in the allowance for Segregated Assets losses
follows (in thousands):
Balance at December 31, 1996 $ 2,859
Charge-offs (17)
Recoveries 12
-------
Balance at March 31, 1997 $ 2,854
=======
12
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table details nonaccrual Segregated Assets at March 31,
1997 and December 31, 1996 (in thousands):
March 31, 1997 December 31, 1996
---------------- ------------------
Segregated Assets Accounted For on a Nonaccrual Basis:
Commercial Real Estate Loans $ 3,725 $ 3,337
Commercial Loans 192 192
Multi-Family Real Estate Loans 723 495
-------- ------
Total Nonaccrual Loans 4,640 4,024
Foreclosed Properties:
Commercial Real Estate 269 269
Multi-Family Real Estate 129 138
-------- -------
Total Nonaccrual Segregated Assets $ 5,038 $ 4,431
======== =======
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 March 31, 1997,
management's simulation analysis of the effects of changing interest rates
estimates that an instantaneous +/- 100 basis point change in interest rates
would change net interest income by less than 2%. Estimates regarding the impact
of changes in interest rates are based on a number of assumptions, and
therefore, Webster can provide no assurance as to the actual impact of such
changes. Management believes that its interest-rate risk position represents a
reasonable amount of interest-rate risk at March 31, 1997.
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 March
31, 1997, Webster Bank had a liquidity ratio of 5.9% and was in compliance with
the applicable regulations. Webster Bank had mortgage commitments outstanding of
$70.2 million, non-mortgage commitments of $26.4 million, unused home equity
credit lines of $255.2 million, available credit card lines of $60.2 million and
commercial lines and letters of credit of $95.7 million.
13
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1996
GENERAL
- -------
Net income for the current three month period ended March 31, 1997,
excluding non-recurring items, was $10.0 million, or $.82 per fully diluted
share, an increase of $2.0 million, as compared to $8.0 million or $.62 per
fully diluted share for the same period in 1996. Including the non-recurring
after tax charges of $15.0 million related to Webster's acquisition of DS
Bancor, Inc., Webster reported a net loss of $5.0 million or $0.41 per fully
diluted share for the 1997 first quarter. Results for the first quarter of 1996
included $290,000 of after tax non-recurring conversion costs related to the 20
branches acquired from Shawmut Bank Connecticut National Association (the
"Shawmut Transaction"). The results of operations for the 1996 first quarter
period included 44 days of income and expense related to the Shawmut
Transaction, consummated on February 16, 1996.
NET INTEREST INCOME
-------------------
Net interest income for the three month period ended March 31, 1997
amounted to $41.4 million, an increase of $6.5 million or 19% as compared to
$34.9 million for the same period in 1996. The increase is primarily
attributable to an increased volume of average interest-earning assets and
interest-bearing liabilities and a decrease in the cost of interest-bearing
liabilities. The net interest rate spread for the three months ended March 31,
1997 was 3.20% as compared to 2.96% for the same period in 1996.
Interest Income for the three months ended March 31, 1997 amounted to
$92.0 million as compared to $84.2 million for the same period in 1996. The
increase is due primarily to a higher volume of average interest-earning assets,
offset by a decrease in the yield on loans. The yield on loans for the current
three month period was 7.72% as compared to 7.86% for the same period a year
earlier.
Interest Expense for the three months ended March 31, 1997 amounted to
$50.7 million compared to $49.3 million for the same period in 1996. This
increase is due primarily to a higher amount of average interest-bearing
liabilities offset by a decrease in the cost of interest-bearing liabilities.
The cost of interest-bearing liabilities decreased to 4.16% for the three months
ended March 31, 1997 compared to 4.50% for the same period in 1996. Interest
expense on borrowings for the three months ended March 31, 1997 amounted to
$11.3 million as compared to $9.8 million for the same period in 1996. The
increase in interest expense on borrowings is primarily attributed to a higher
volume of borrowings offset by a lower cost of funds.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses amounted to $7.0 million for the three
month period ended March 31, 1997 as compared to $1.7 million for the same
period in 1996. Included in the provision for the current quarter was a $5.6
million provision related to loans acquired in the DS Bancor Acquisition. At
March 31, 1997, the allowance for loan losses was $48.3 million and represented
124.6% of nonaccrual loans, compared to $53.0 million and 102.6% a year earlier.
14
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- ------------------
Noninterest income increased to $7.3 million for the three month
period ended March 31, 1997 from $5.7 million in the same period in 1996. The
increase was due primarily to a $1.6 million increase in fees and service
charges, offset by a $160,000 decrease in net gains from loan and securities
sales. There were $537,000 of net gains on sales of loans and securities for the
three months ended March 31, 1997 as compared to $697,000 of net gains for the
same period in 1996.
NONINTEREST EXPENSES
- --------------------
Noninterest expenses for the three months ended March 31, 1997
amounted to $50.9 million as compared to $26.7 million for the same period in
1996. The increase in noninterest expenses for the current quarter is due
primarily to $19.9 million in non-recurring expenses related to the acquisition
of DS Bancor, Inc., completed on January 31, 1997. Additionally, increases in
salaries and employee benefits, furniture and equipment, core deposit intangible
amortization, Capital Securities expenses and other operating expenses were
offset by decreases in foreclosed property expenses and FDIC premiums.
INCOME TAXES
- ------------
Webster recorded an income tax benefit for the three months ended March
31, 1997 of $4.3 million compared to income tax expense of $4.6 million for the
comparable 1996 quarter. The income tax benefit was due to the net loss recorded
by Webster as a result of the $25.4 million of non-recurring expenses related to
the DS Bancor, Inc. Acquisition.
15
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
Item 2. CHANGES IN SECURITIES - Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant had a special meeting of shareholders on January
30, 1997. The Registrant's annual meeting of shareholders was held
on April 17, 1997.
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
Item 5. OTHER INFORMATION
On April 4, 1997, Webster announced that it had signed a definitive
merger agreement by which Webster will acquire People's Savings
Financial Corp., a $482 million savings bank headquartered in New
Britain, CT., on a stock for stock basis valued at $34 per share in a
tax free exchange. The acquisition is expected to close in the third
quarter of 1997 and be accounted for as a pooling of interests.
On May 6, 1997, Webster announced that it had entered into an Agreement
and Plan of Merger by which Webster will acquire Sachem Trust National
Association ("Sachem Trust"), a trust company headquartered in
Guilford, CT with $300 million in trust assets, in a tax free
stock-for-stock exchange. Under the terms of the Agreement, Sachem
Trust shareholders will receive 0.493 shares of Webster common stock
for each share of Sachem Trust common stock. Webster will issue up to
85,333 shares of Webster common stock in exchange for all 173,000
outstanding shares of Sachem Trust. Ten percent of the consideration
will be held in escrow pending certain conditions and may be used by
Webster to fund certain expenses detailed in the merger agreement.
Sachem Trust is the largest independent trust company in Connecticut
and operates trust offices in Guilford, Westport and Greenwich. The
acquisition is expected to close in the third quarter of 1997 and be
accounted for as a purchase. Webster plans to Repurchase shares of
Webster common stock up to the total number of shares issued to Sachem
Trust shareholders.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 3. Bylaws of Registrant, as amended
Exhibit No. 27. Financial Data Table
(b) Reports on Form 8-K
Form 8K filed January 2 , 1997 (announcing the approval from the
OTS to acquire DS Bancor, Inc.)
Form 8K filed February 14, 1997 (announcing the completion of the
acquisition of DS Bancor, Inc.)
Form 8K filed February 21 , 1997 (announcing the date for the
Registrant's annual meeting of shareholders)
16
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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, 1997 By: /s/ John V. Brennan
---------------------- --------------------
John V. Brennan
Executive Vice President
Chief Financial Officer and Treasurer
Date: May 15, 1997 By: /s/ Peter J. Swiatek
---------------------- ---------------------
Peter J. Swiatek
Controller
17