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, 1998
---------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________to____________
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1187536
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Webster Plaza, Waterbury, Connecticut 06720
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(Address of principal executive offices) (Zip Code)
(203) 753-2921
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 38,319,266 SHARES
- ------------------------------ ----------------------------------------
(Class) Issued and Outstanding at August 1, 1998
Webster Financial Corporation and Subsidiaries
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INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Consolidated Financial
Statements 11
Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 21
EXHIBIT INDEX 22
2
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
-------------- ----------
(unaudited)
Cash and Due from Depository Institutions $ 144,556 $ 151,322
Interest-bearing Deposits 9,005 77,104
Securities: (Note 2)
Trading at Fair Value 77,527 84,749
Available for Sale, at Fair Value 3,285,305 3,092,287
Held to Maturity, (Market Value: $375,777 in 1998;
$412,061 in 1997) 374,192 412,237
Loans Receivable, Net 4,920,663 4,995,570
Accrued Interest Receivable 53,287 52,658
Premises and Equipment, Net 77,944 71,887
Foreclosed Properties, Net 8,137 12,224
Intangible Assets 83,550 78,493
Cash Surrender Value of Bank Owned Life Insurance 102,662 12,750
Prepaid Expenses and Other Assets 52,315 54,606
----------- -----------
TOTAL ASSETS $ 9,189,143 $ 9,095,887
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 5,736,374 $ 5,719,030
Federal Home Loan Bank Advances 1,513,247 1,516,634
Reverse Repurchase Agreements and Other Borrowings (Note 6) 1,057,319 1,032,963
Advance Payments by Borrowers for Taxes and Insurance 38,904 30,570
Accrued Expenses and Other Liabilities 95,296 84,851
----------- -----------
Total Liabilities 8,441,140 8,384,048
----------- -----------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust 150,000 145,000
Preferred Stock of Subsidiary Corporation 49,577 49,577
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized - 50,000,000 shares;
Issued - 38,346,942 shares at June 30, 1998 and
37,574,176 shares at December 31, 1997 (1) 384 376
Paid-in Capital 248,369 241,552
Retained Earnings (Note 7) 281,830 257,954
Less Treasury Stock at cost, 19,979 shares at June 30, 1998
and 22,958 shares at December 31, 1997 (1) (658) (1,116)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,340) (1,971)
Accumulated Other Comprehensive Income 19,841 20,467
----------- -----------
Total Shareholders' Equity 548,426 517,262
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,189,143 $ 9,095,887
=========== ===========
(1) The number of common shares issued and treasury shares have been adjusted
to reflect a two-for-one stock split, effected in the form of a stock
dividend, effective for shareholders of record as of April 6, 1998.
See accompanying notes to condensed consolidated financial statements.
3
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share Data)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
INTEREST INCOME:
Loans $ 95,035 $ 96,552 $192,893 $190,434
Securities and Interest-bearing Deposits 64,593 44,803 125,934 82,649
-------- -------- -------- --------
Total Interest Income 159,628 141,355 318,827 273,083
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on Deposits 57,018 55,735 113,693 112,534
Interest on Borrowings 42,959 22,817 82,086 38,649
-------- -------- -------- --------
Total Interest Expense 99,977 78,552 195,779 151,183
-------- -------- -------- --------
NET INTEREST INCOME 59,651 62,803 123,048 121,900
Provision for Loan Losses 1,900 3,320 3,800 11,310
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses 57,751 59,483 119,248 110,590
-------- -------- -------- --------
NONINTEREST INCOME:
Fees and Service Charges 9,552 7,693 19,065 15,030
Gain on Sale of Loans and Loan Servicing, Net 2,299 203 2,565 357
Gain on Sale of Securities, Net 7,028 268 10,126 676
Other Noninterest Income 2,931 1,524 5,380 3,196
-------- -------- -------- --------
Total Noninterest Income 21,810 9,688 37,136 19,259
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 19,219 18,367 38,756 38,169
Occupancy Expense of Premises 3,892 3,966 7,767 8,010
Furniture and Equipment Expenses 4,271 3,430 8,638 6,910
Foreclosed Property Expenses and Provisions, Net (Note 5) 153 674 559 1,501
Intangible Amortization 2,363 2,322 4,662 4,646
Marketing Expenses 2,140 1,693 4,029 3,614
Acquisition Related Expenses (Note 8) 17,400 -- 17,400 19,858
Capital Securities Expense 3,692 2,398 7,354 4,046
Dividends on Preferred Stock of Subsidiary Corporation 1,038 -- 2,076 --
Other Operating Expenses 8,680 9,048 17,070 17,201
-------- -------- -------- --------
Total Noninterest Expenses 62,848 41,898 108,311 103,955
-------- -------- -------- --------
Income Before Income Taxes 16,713 27,273 48,073 25,894
Income Tax Expense 7,313 10,504 18,952 9,428
-------- -------- -------- --------
NET INCOME $ 9,400 $ 16,769 $ 29,121 $ 16,466
======== ======== ======== ========
Net Income Per Common Share (1):
Basic $ 0.25 $ 0.45 $ 0.77 $ 0.44
Diluted $ 0.24 $ 0.43 $ 0.75 $ 0.43
Dividends Declared Per Common Share (1) $ 0.11 $ 0.10 $ 0.21 $ 0.19
(1) Per share amounts have been adjusted to reflect a two-for-one stock split,
effected in the form of a stock dividend, effective for shareholders of
record as of April 6, 1998.
See accompanying notes to condensed consolidated financial statements.
4
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars In Thousands)
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SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 29,121 $ 16,466
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 3,800 11,310
Provision for Foreclosed Property Losses 245 278
Provision for Depreciation and Amortization 6,013 5,541
Amortization of Securities Premiums, Net 1,654 (156)
Amortization of Hedging Costs, Net 2,301 1,477
Amortization and Write-down of Intangibles 4,662 4,647
Amortization of Mortgage Servicing Rights 921 268
Gains on Sale of Foreclosed Properties, Net (562) (442)
Loans and Securities Gains, Net (12,502) (966)
Gains on Trading Securities, Net (189) (67)
Decrease (Increase) in Trading Securities 27,140 (9,905)
Loans Originated for Sale (17,625) (29,955)
Sale of Loans, Originated for Sale 79,124 29,602
Increase in Interest Receivable (384) (1,503)
Decrease in Interest Payable 2,484 3,277
(Decrease) Increase in Accrued Expenses and Other Liabilities, Net (52,605) 10,913
Increase in Cash Surrender Value of Bank Owned Life Insurance (89,912) -
Decrease (Increase) in Prepaid Expenses and Other Assets, Net 2,562 (2,474)
Pooling Adjustments, Net 7,860 -
----------- -----------
Net Cash (Used) Provided by Operating Activities (5,892) 38,311
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (1,498,887) (1,024,243)
Purchases of Securities, Held to Maturity (49,717) (11,269)
Maturities of Securities 72,420 58,512
Proceeds from Sale of Securities, Available for Sale 872,010 89,614
Net Decrease (Increase) in Interest-bearing Deposits 65,664 (34,176)
Purchase of Loans (66,173) (120,078)
Net Decrease (Increase) in Loans 67,110 (23,257)
Proceeds from Sale of Foreclosed Properties 8,197 11,911
Principal Collected on Mortgage-backed Securities 569,909 157,502
Purchases of Premises and Equipment, Net (11,646) (4,647)
----------- -----------
Net Cash Provided (Used) by Investing Activities 28,887 (900,131)
----------- -----------
FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits 430 (66,000)
Repayment of FHLB Advances (2,645,554) (2,226,599)
Proceeds from FHLB Advances 2,599,870 2,736,426
Repayment of Reverse Repurchase Agreements & Other Borrowings (5,192,771) (1,978,521)
Proceeds from Reverse Repurchase Agreements & Other Borrowings 5,218,471 2,304,004
Net Increase (Decrease) in Advance Payments for Taxes and Insurance 2,522 (3,876)
Net Proceeds from Issuance of Capital Securities -- 97,700
Cash Dividends to Common and Preferred Shareholders (10,143) (7,710)
Common Stock Repurchased (10,305) (1,660)
Exercise of Stock Options 7,719 1,858
----------- -----------
Net Cash (Used) Provided by Financing Activities (29,761) 855,622
----------- -----------
Decrease in Cash and Cash Equivalents (6,766) (6,198)
Cash and Cash Equivalents at Beginning of Period 151,322 131,567
----------- -----------
Cash and Cash Equivalents at End of Period $ 144,556 $ 125,369
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $25,386 $ 14,825
Interest Paid 192,405 147,511
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 10,963 16,946
See accompanying notes to condensed consolidated financial statements.
5
Webster Financial Corporation and Subsidiaries
CONDENSED 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, 1998 are not necessarily indicative of the results which may be
expected for the year as a whole. On April 15, 1998, Webster acquired Eagle
Financial Corp. ("Eagle") 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 Eagle transaction have been restated to
reflect the combination. On June 1, 1998, Webster completed its acquisition of
Damman Insurance Associates ("Damman"). The transaction was accounted for as a
purchase and, therefore, periods prior to the merger date have not been
restated. These financial statements should be read in conjunction with the
restated financial statements and notes thereto included in the Current Report
filed on Form 8-K on July 23, 1998. The consolidated financial statements
include the accounts of Webster Financial Corporation ("Webster") and its
subsidiaries.
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
net of taxes included in Other Comprehensive Income (See Note 4). 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, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------- -------- --------- ----------- ----------- -------- --------- -----------
TRADING SECURITIES:
Mortgage-Backed Securities $ 77,527(a) $ -- $ -- $ 77,527 $ 84,749(a) $ -- $ -- $ 84,749
----------- -------- --------- ----------- ----------- -------- --------- -----------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 14,022 50 (8) 14,064 19,522 37 (8) 19,551
U.S. Government Agency 29,227 220 (4) 29,443 50,229 220 (24) 50,425
Municipal Bonds and Notes 14,687 379 -- 15,066 14,685 -- (126) 14,559
Corporate Bonds and Notes 5,594 30 (200) 5,424 10,045 33 (227) 9,851
Equity Securities 271,156 13,659 (1,149) 283,666 210,041 14,983 (1,049) 223,975
Mortgage-Backed Securities 2,898,056 37,954 (5,641) 2,930,369 2,737,522 36,307 (7,720) 2,766,109
Purchased Interest-Rate Contracts 18,354 -- (11,081) 7,273 15,079 -- (7,262) 7,817
----------- -------- --------- ----------- ----------- -------- --------- -----------
3,251,096 52,292 (18,083) 3,285,305 3,057,123 51,580 (16,416) 3,092,287
----------- -------- --------- ----------- ----------- -------- --------- -----------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes 2,457 14 -- 2,471 2,447 28 -- 2,475
U.S. Government Agency 15,749 13 (9) 15,753 32,274 14 (65) 32,223
Municipal Bonds & Notes 12,500 58 (28) 12,530 12,500 93 (1) 12,592
Corporate Bonds and Notes 49,723 343 (120) 49,946 1,199 3 -- 1,202
Money Market Preferred Stock -- -- -- -- 1,000 -- -- 1,000
Mortgage-Backed Securities 293,763 2,728 (1,414) 295,077 362,817 2,533 (2,781) 362,569
----------- -------- --------- ----------- ----------- -------- --------- -----------
374,192 3,156 (1,571) 375,777 412,237 2,671 (2,847) 412,061
----------- -------- --------- ----------- ----------- -------- --------- -----------
Total $ 3,702,815 $ 55,448 $ (19,654) $ 3,738,609 $ 3,554,109 $ 54,251 $ (19,263) $ 3,589,097
=========== ======== ========= =========== =========== ======== ========= ===========
(a) Stated at fair market value.
6
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income available
to common shareholders by the weighted-average number of shares of common stock
outstanding. Diluted net income per share is calculated by dividing adjusted net
income by the weighted-average number of diluted common shares, including the
effect of common stock equivalents. The common stock equivalents consist of
common stock options and warrants. The weighted-average shares used in the
calculation of net income per share have been adjusted to reflect the
two-for-one stock split which was effective for shareholders of record as of
April 6, 1998. The weighted-average number of shares used in the computation of
basic net income per share for the three and six month periods ended June 30,
1998 was 38,020,449 and 37,923,320, respectively, and for the three and six
month periods ended June 30, 1997 was 37,479,565 and 37,401,391, respectively.
The weighted-average number of shares used in the computation of diluted
earnings per share for the three and six month periods ended June 30, 1998 was
38,798,872 and 38,679,191, respectively, and for the three and six months ended
June 30, 1997 was 38,734,838 and 38,361,483 respectively.
NOTE 4 - COMPREHENSIVE INCOME
The provisions of Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" were adopted as of January 1, 1998. SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components (such as changes in net unrealized investment gains
and losses). Comprehensive income includes net income and any changes in equity
from non-owner sources that bypass the income statement. The purpose of
reporting comprehensive income is to report a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. Application of SFAS No. 130 will not impact amounts previously reported
for net income or affect the comparability of previously issued financial
statements.
The following table summarizes comprehensive income for the three and six
month periods ended June 30, 1998 and 1997 (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------- -------- --------- ---------
Net income $ 9,400 $ 16,769 $ 29,121 $ 16,466
Other comprehensive income, net of tax
Unrealized gains (losses) on investments:
Unrealized holding gains arising during period
(net of income tax expense of $1,837 and
$3,595 for the three and six months ended June 30, 1998,
respectively, and $797 and $1,084 for the three and
six months ended June 30, 1997, respectively) 2,537 1,274 4,964 1,732
Less reclassification adjustment for gains included in
net income (net of income tax expense of $2,811 and
$4,048 for the three and six months ended June 30, 1998,
respectively, and $115 and $176 for the three and
six months ended June 30, 1997, respectively) 3,882 184 5,590 281
-------- -------- -------- --------
Other comprehensive income (loss) (1,345) 1,090 (626) 1,451
-------- -------- -------- --------
Comprehensive income $ 8,055 $ 17,859 $ 28,495 $ 17,917
======== ======== ======== ========
7
Webster Financial Corporation and Subsidiaries
CONDENSED 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,
1998 1997 1998 1997
----- ------- ----- ------
Gain on Sale of Foreclosed Property, Net $(67) $ (294) $(407) $ (442)
Provision for Losses on Foreclosed Property 37 120 245 278
Rental Income (8) (36) (65) (87)
Foreclosed Property Expenses 191 884 786 1,752
----- ------- ----- ------
Foreclosed Property Expenses and Provisions, Net $ 153 $ 674 $ 559 $1,501
===== ======= ===== ======
NOTE 6 - REVERSE REPURCHASE AGREEMENTS
At June 30, 1998, Webster had short term borrowings through reverse
repurchase agreements outstanding. Information concerning borrowings under
reverse repurchase agreements is summarized below (dollars in thousands):
WEIGHTED
BALANCE AT WEIGHTED AVERAGE BOOK VALUE MARKET VALUE
JUNE 30, 1998 TERM AVERAGE RATE MATURITY DATE OF COLLATERAL OF COLLATERAL
------------- ---- ------------ ------------- ------------- -------------
$895,952 1 to 12 months 5.79% Less than 2 months $951,126 $907,039
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 1998 second quarter was $1.1 billion and $1.2 billion, respectively.
The outstanding balance of reverse repurchase agreements at June 30, 1997 was
$453.7 million.
NOTE 7 - SHAREHOLDERS' EQUITY
On April 15, 1998, Webster acquired Eagle through a merger transaction
accounted for as a pooling of interests. Prior to the acquisition, Eagle's
fiscal year ended September 30. In recording this pooling of interests
transaction, Eagle's financial statements as of and for the twelve months ended
September 30, 1997, 1996 and 1995 were combined with Webster's financial
statements as of and for the twelve months ended December 31, 1997, 1996 and
1995, respectively. Eagle's unaudited results of operations for the three months
ended December 31, 1997 included net interest income of $15.7 million, income
before taxes of $8.0 million and net income of $4.9 million. An adjustment of
$4.9 million has been made to increase shareholders' equity as of June 30, 1998
to reflect Eagle's results of operations for the three months ended December 31,
1997.
8
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 8 - ACQUISITION RELATED COSTS
In connection with the acquisitions of DS Bancor, Inc. ("Derby") and
People's Savings Financial Corp. ("People's"), that were completed on January
31, 1997 and July 31, 1997, respectively, Webster recorded approximately $27.1
million of merger-related charges, of which $19.9 million was recorded in the
six month period ended June 30, 1997. Additionally, Webster recorded an increase
of $7.1 million to the provision for loan losses related to the acquisitions of
Derby and People's, of which $5.6 million was recorded in the six month period
ended June 30, 1997, for conformity to Webster's credit policies. In connection
with the acquisition of Sachem Trust National Association on August 1, 1997,
Webster recorded costs that did not impact the statements of operations as that
transaction was recorded as a purchase transaction.
In connection with the acquisition of Eagle, that was completed on April
15, 1998, Webster recorded approximately $17.4 million of merger-related charges
during the three month period ended June 30, 1998. Additionally, Webster
recorded an increase of $1.5 million to the provision for loan losses related to
the acquisitions of Eagle, which was recorded in the three and six month periods
ended June 30, 1998, for conformity to Webster's credit policies. In connection
with the acquisition of Damman on June 1, 1998, Webster recorded a liability for
costs that did not impact the statements of operations as that transaction was
recorded as a purchase transaction.
The following table presents a summary of the merger-related accrued
liabilities (in thousands):
Derby People's Eagle
-------- -------- --------
Balance of acquisition-related accrued liabilities
at December 31, 1996 $ -- $ -- $ --
Additions: 19,900 7,200 --
Payments/Writedowns:
Compensation (severance and related costs) (6,700) (1,400) --
Data processing contract termination (1,600) -- --
Write down of fixed assets (1,200) -- --
Transaction costs (including investment bankers,
attorneys and accountants) (2,200) (1,300) --
Merger related and miscellaneous expenses (2,800) (2,100) --
-------- -------- --------
Balance of acquisition-related accrued liabilities
at December 31, 1997 5,400 2,400 --
-------- -------- --------
Additions: -- -- 17,400
Payments/Writedowns:
Compensation (severance and related costs) -- (100) (6,700)
Data processing contract termination (400) --
Transaction costs (including investment bankers,
attorneys and accountants) -- -- (2,700)
Merger related and miscellaneous expenses (100) (200) (2,800)
-------- -------- --------
Balance of acquisition-related accrued liabilities
at June 30, 1998 $ 4,900 $ 2,100 $ 5,200
======== ======== ========
The remaining accrued liability of $12.2 million represents, for the most
part, accruals for data processing contract termination costs payable over a
future period and the estimated loss on sale of excess fixed assets due to
consolidation of overlapping branch locations.
9
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Under this
statement, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. This statement amends
SFAS No. 52, "Foreign Currency Translation", and SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments". This statement supersedes SFAS No.
80, "Accounting for Futures Contracts", SFAS No. 105, "Disclosure Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", and SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments".
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
statement. Early adoption is permitted, however, retroactive application is
prohibited. The Corporation has not yet determined the impact which the adoption
will have on its financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." This statement amends the
disclosure requirements of Statements No. 87, "Employer's Accounting for
Pensions", No. 88 "Employer's Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits" and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement standardizes the disclosure requirements of Statements No. 87 and No.
106 to the extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This statement
addresses disclosure only and does not change any measurement or recognition
provisions provided in previous statements. Disclosure requirements affecting
amounts related to a company's results of operations should be provided for each
period an income statement is presented and similarly, disclosure requirements
affecting amounts related to a company's statement of financial position should
be presented for each period a statement of financial condition is presented.
This statement is effective for fiscal years beginning after December 15, 1997
and will be adopted by Webster in connection with the 1998 annual financial
statements. This statement will require additional disclosures, regarding
pensions but it is not expected to have an impact on the Corporation's financial
position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the method in which public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to shareholders. This statement requires that public business
enterprises report quantitative and qualitative information about its reportable
segments, including profit or loss, certain specific revenue and expense items
and segment assets. Webster plans to report segment information along its five
business lines: consumer, business, mortgage banking, insurance and trust and
investment management services. This statement also requires reconciliations of
total segment revenues, total segment profit or loss, total segment assets and
other amounts disclosed for segments to corresponding amounts in the
Consolidated Financial Statements. This statement is effective for financial
statements for periods beginning after December 15, 1997 and in the initial year
of application, comparative information for earlier years is required.
Comparative interim information is required in the year subsequent to adoption.
This statement will be adopted in connection with the 1998 annual financial
statements. This statement will require additional disclosures, regarding
segments but it is not expected to have an impact on the Corporation's financial
position or results of operations.
10
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 is organized along five
business lines: consumer, business, mortgage banking, insurance, and trust and
investment management services, 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.
CHANGES IN FINANCIAL CONDITION
Total assets were $9.2 billion at June 30, 1998, an increase of $93.3
million from $9.1 billion at December 31, 1997. The change in total assets is
due primarily to a net increase in securities of $147.8 million, offset by a
decrease in loans receivable, net of $74.9 million and a decrease in
interest-bearing deposits of $68.1 million. The increase in securities was
funded, in part, by increases in deposits of $17.3 million and borrowings of
$21.4 million.
In June 1998, Webster completed the bulk sale of $20.6 million of
nonaccrual residential assets, most of which had been associated with previous
bank acquisitions. Also, in May 1998, the Bank sold its credit card portfolio,
totaling $31.7 million, to First USA Bank with which an agency relationship was
established.
The Cash Surrender Value of Bank Owned Life Insurance increased to $102.7
million at June 30, 1998 from $12.8 million at December 31, 1997. The increase
is due to the purchase of a single premium life insurance contract of which the
Bank is the beneficiary. Total liabilities were $8.4 billion at June 30, 1998,
unchanged from December 31, 1997.
Shareholders' equity was $548.4 million at June 30, 1998 and $517.3 million
at December 31, 1997. At June 30, 1998, the Bank had Tier 1 leveraged, Tier 1
risk-based, and total risk-based capital ratios of 6.33%, 13.40% and 14.65%,
respectively. The Bank met the regulatory capital requirements to be categorized
as a "well capitalized" institution at June 30, 1998.
During the second quarter of 1998, Webster repurchased approximately
300,000 shares of Webster common stock related to the settlement of warrants to
purchase 600,000 shares issued to Fleet Financial Group in 1996. The warrants
were issued in connection with Webster's purchase of 20 former Shawmut Bank
branches divested following the Fleet-Shawmut merger. The repurchase was
accounted for as a reduction of shareholders' equity.
ASSET QUALITY
Webster devotes significant attention to maintaining 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, 1998, 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.
11
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of June 30, 1998 and
December 31, 1997 follows (in thousands):
June 30, 1998 December 31, 1997
-------------- ------------------
Residential Mortgage Loans $3,832,334 $3,871,438
Commercial Real Estate Loans 394,497 386,837
Commercial Loans 245,357 243,302
Consumer Loans (Including Home Equity) 505,079 556,134
---------- ----------
Total Loans 4,977,267 5,057,711
Allowance for Loan Losses (56,604) (62,141)
----------- ----------
Loans Receivable, Net $4,920,663 $4,995,570
=========== ==========
Included above at June 30, 1998 and December 31, 1997 were loans held for
sale of $3.3 million and $3.5 million, respectively.
The following table details the nonaccrual assets at June 30, 1998 and
December 31, 1997 (in thousands):
June 30, 1998 December 31, 1997
-------------- ------------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $10,110 $26,640
Commercial 17,365 12,229
Consumer 2,204 3,274
------- -------
Total Nonaccrual Loans 29,679 42,143
Foreclosed Properties:
Residential and Consumer 5,342 7,711
Commercial 2,794 4,513
------- -------
Total Nonaccrual Assets $37,815 $54,367
======= =======
The net decrease in nonaccrual assets of $16.6 million at June 30, 1998 as
compared to the December 31, 1997 balance is due primarily to the bulk sale of
$20.6 million of nonaccrual residential assets, as well as payoffs, foreclosed
property sales and charge-offs.
At June 30, 1998, Webster's allowance for losses on loans of $56.6 million
represented 190.7% of nonaccrual loans and its total allowances for losses on
nonaccrual assets of $57.1 million amounted to 149.0% of nonaccrual assets.
Included in the loan charge-offs for the six months ended June 30, 1998 were
write-downs of $5.6 million related to the bulk sale 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, 1998 follows (in thousands):
Allowances For Losses On
-----------------------------------------------------
Foreclosed Total
Loans Properties Allowance for Losses
----- ---------- --------------------
Balance at December 31, 1997 $ 62,141 $ 1,222 $ 63,363
Provisions for Losses 3,800 245 4,045
Losses Charged to Allowances (10,830) (1,141) (11,971)
Recoveries Credited to Allowances 1,513 106 1,619
Fiscal Year Adjustment (20) 66 46
-------- -------- --------
Balance at June 30, 1998 $ 56,604 $ 498 $ 57,102
======== ======== ========
12
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SEGREGATED ASSETS, NET
Segregated Assets, Net consisted of all commercial real estate, commercial,
and multi-family loans acquired from the Federal Deposit Insurance Corporation
("FDIC") in the First Constitution Bank ("First Constitution") acquisition.
Segregated Assets were subject to a loss-sharing arrangement with the FDIC. The
FDIC was required to reimburse the Bank quarterly for 80% of the total net
charge-offs and certain related expenses on Segregated Assets through December
1997, with such reimbursement increasing to 95% (less recoveries in years six
and seven) as to such charge-offs and expenses in excess of $49.2 million (with
payment at the end of the seventh year as to such excess). Effective January 1,
1998, the balance of all remaining Segregated Assets, totaling $41.0 million,
was transferred to the loan portfolio. During 1998 and 1999, the Bank 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. The Bank is
entitled to retain 20% of such recoveries during the sixth and seventh years
following the First Constitution acquisition and 100% thereafter.
ASSET/LIABILITY MANAGEMENT
The goal of Webster's asset/liability policy is to manage interest-rate
risk so as to maximize net interest income over time in changing interest-rate
environments while maintaining acceptable levels of risk. Webster must provide
for sufficient liquidity for daily operations while maintaining mandated
regulatory liquidity levels. To this end, Webster's strategies for managing
interest-rate risk are responsive to changes in the interest-rate environment
and market demands for particular types of deposit and loan products. Management
measures interest-rate risk using duration, GAP and simulation analysis with
particular emphasis on measuring changes in the market value of equity and
changes in net interest income in different interest-rate environments. The
simulation analyses incorporate assumptions about balance sheet changes such as
asset and liability growth, loan and deposit pricing and changes due to the mix
and maturity of such assets and liabilities. From such simulations, interest
rate risk is quantified and appropriate strategies are formulated.
As part of its asset/liability management strategy, Webster utilizes
various interest rate instruments including short futures positions, interest
rate swaps, interest rate caps and interest rate floors. Webster holds short
futures positions to minimize the price volatility of certain adjustable rate
assets held as Trading Securities. Changes in the market value of the short
futures positions and trading securities are recognized as a gain or loss in the
consolidated statements of income in the period for which the change occurred.
Interest rate caps, interest rate floors and interest rate swaps are
entered into as hedges against future interest rate fluctuations. Webster does
not trade in speculative interest rate contracts. Those agreements meeting the
criteria for hedge accounting treatment are designated as hedges and are
accounted for as such. If a contract is terminated, any unrecognized gain or
loss is deferred and amortized as an adjustment to the yield of the related
asset or liability over the remainder of the period that was being hedged. If
the linked asset or liability is disposed of prior to the end of the period
being managed, the related interest rate contract is marked to fair value, with
any resulting gain or loss recognized in current period income as an adjustment
to the gain or loss on the disposal of the related asset or liability. Interest
income or expense associated with interest rate caps and swaps is recorded as a
component of net interest income. Interest rate instruments that hedge available
for sale securities are marked to fair value monthly with adjustments to
shareholders' equity on a tax-effected basis.
13
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Webster's main sources of liquidity at the holding company level are
dividends from the Bank and net proceeds from capital offerings and borrowings,
while the main outflows are the payment of dividends to preferred and common
stockholders, repurchases of Webster's common stock and the payment of interest
to holders of Webster's 8 3/4% Senior Notes, Webster's 9.36% Capital Trust I
Capital Securities and Eagle Financial Capital Trust I 10.00% Capital
Securities. There are certain restrictions on the payment of dividends by the
Bank to Webster. The Bank is required to maintain minimum levels of liquid
assets as defined by regulations adopted by the Office of Thrift Supervision
("OTS"). This requirement, which may be varied by the OTS, is based upon a
percentage of net withdrawable deposits and short-term borrowings. The required
liquidity ratio as revised by the OTS is currently 4.00% and the Bank's
liquidity ratio at June 30, 1998 exceeded the requirement. Webster Bank is also
required by regulation to maintain sufficient liquidity to ensure safe and sound
operations. Adequate liquidity as assessed by the OTS may vary from institution
to institution depending on such factors as the institution's overall
asset/liability structure, market conditions, competition and the requirements
of the institution's deposit and loan customers. The OTS considers both an
institution's adherence to the liquidity ratio requirement, as well as safety
and soundness issues, in assessing whether an institution has sufficient
liquidity.
Webster Bank had mortgage commitments outstanding of $146.8 million,
non-mortgage commitments of $28.2 million, unused home equity credit lines of
$312.1 million and commercial lines and letters of credit of $196.7 million at
June 30, 1998.
14
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1998 AND
JUNE 30, 1997
GENERAL
Net income for the three month period ended June 30, 1998 was $22.6
million, or $0.58 per diluted share, adjusted for acquisition expenses, compared
to $16.8 million or $.43 per diluted share for the same period in 1997. Net
income for the six month period ended June 30, 1998 was $42.3 million, or $1.09
per diluted share, adjusted for acquisition expenses, compared to $31.5 million
or $.82 per diluted share, adjusted for acquisition expenses, for the same
period in 1997. Including the acquisition related after tax charges of $13.2
million related to Webster's acquisition of Eagle Financial Corp. ("Eagle") on
April 15, 1998, Webster reported net income of $9.4 million or $0.24 per diluted
share for the 1998 second quarter. Including the acquisition related after tax
charges of $15.0 million related to Webster's acquisition of DS Bancor, Inc.
("Derby") on January 31, 1997, Webster reported net income of $16.5 million or
$0.43 per diluted share for the first six months of 1997. Diluted earnings per
share for the 1998 and 1997 periods have been adjusted to reflect a two-for-one
stock split effective for shareholders of record on April 6, 1998.
NET INTEREST INCOME
Net interest income for the three and six month periods ended June 30, 1998
amounted to $59.7 million and $123.0 million, respectively, compared to $62.8
million and $121.9 million for the respective periods in 1997. The increase in
the six month period is primarily attributable to an increased volume of average
interest-earning assets between the respective periods. The net interest rate
spread for the three and six month periods ended June 30, 1998 was 2.48% and
2.59%, respectively, compared to 3.05% and 3.07% for the same periods in 1997.
The decrease in interest rate spread for 1998, as compared to the same periods
in 1997, reflects a higher cost of funds in addition to a decrease in the yield
on interest-earning assets. The interest rate spread has been declining since
the fourth quarter of 1997 due to a high level of repayments associated with
mortgage loans and mortgage securities and a high relative wholesale borrowing
cost due to the flattening of the yield curve.
INTEREST INCOME
Interest income for the three and six months ended June 30, 1998 amounted
to $159.6 million and $318.8 million, respectively, compared to $141.4 million
and $273.1 million, respectively, for the comparable periods in 1997. The
increases for both periods are due primarily to a higher volume of average
interest-earning assets, which were $9.1 billion and $9.0 billion, respectively,
for the 1998 periods and $7.7 billion and $7.4 billion, respectively, for the
1997 periods. The increases resulting from higher levels of interest-earning
assets in the current periods were partially offset by lower yields on
interest-earning assets. The yield on interest-earning assets for the three and
six months ended June 30, 1998 was 7.00% and 7.10%, respectively, compared to
7.35% and 7.35%, respectively, for the same periods the previous year.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 1998 amounted
to $100.0 million and $195.8 million, respectively, compared to $78.6 million
and $151.2 million, respectively, for the same periods in 1997. This increase is
due primarily to an increase in average borrowings, which were $3.0 billion and
$2.8 billion, respectively, for the 1998 periods as compared to $1.6 billion and
$1.3 billion, respectively, for the 1997 periods. The cost of interest-bearing
liabilities increased to 4.52% and 4.51%, respectively, for the 1998 periods
compared to 4.30% and 4.28%, respectively, for the same periods in 1997.
Interest expense on borrowings for the three and six months ended June 30, 1998
amounted to $43.0 million and $82.1 million, respectively, as compared to $22.8
million and $38.6 million, respectively, for the same periods in 1997.
15
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following tables show the major categories of average assets and
average liabilities together with their respective interest income or expense
and the rates earned and paid by Webster.
THREE MONTHS ENDED JUNE 30, 1998 1997
- --------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ----- ------- -------- -----
ASSETS:
INTEREST EARNING ASSETS:
Loans $4,953,184 $95,035 7.66% $4,964,187 $96,552 7.77%
Securities 4,160,018 64,593 6.21 2,732,500 44,803 6.56
---------- ------- ---- ---------- ------- ----
TOTAL INTEREST EARNING ASSETS 9,113,202 159,628 7.00 7,696,687 141,355 7.35
------- -------
Noninterest Earning Assets 496,665 339,704
---------- ----------
TOTAL ASSETS $9,609,867 $8,036,391
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Deposits $5,789,534 57,018 3.93 $5,764,136 55,735 3.94
Borrowings 2,994,007 42,959 5.68 1,588,893 22,817 5.70
---------- ------- ---- ---------- ------- ----
TOTAL INTEREST BEARING LIABILITIES 8,783,541 99,977 4.52 7,353,029 78,552 4.30
---------- ------- ------------ -------
Noninterest Bearing Liabilities 99,057 106,361
---------- ----------
TOTAL LIABILITIES 8,882,598 7,459,390
Capital Securities and Preferred Stock of
Subsidiary Corporation 199,577 100,000
SHAREHOLDERS' EQUITY 527,692 477,001
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,609,867 $8,036,391
========== ==========
NET INTEREST INCOME $59,651 $62,803
======= =======
INTEREST RATE SPREAD 2.48% 3.05%
===== =====
NET YIELD ON AVERAGE INTEREST EARNING ASSETS 2.64% 3.27%
===== =====
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998 1997
- --------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ----- ------- -------- -----
ASSETS:
INTEREST EARNING ASSETS:
Loans $4,766,579 $192,893 8.09% $4,915,947 $190,434 7.75%
Securities 4,220,979 125,934 5.97 2,510,358 82,649 6.59
---------- -------- ---- ---------- -------- ----
TOTAL INTEREST EARNING ASSETS 8,987,558 318,827 7.10 7,426,305 273,083 7.35
-------- -------
Noninterest Earning Assets 484,309 349,243
---------- ----------
TOTAL ASSETS $9,471,867 $7,775,548
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Deposits $5,796,915 113,693 3.91 $5,768,113 112,534 3.92
Borrowings 2,845,271 82,086 5.74 1,352,489 38,649 5.68
---------- -------- ---- ---------- -------- ----
TOTAL INTEREST BEARING LIABILITIES 8,642,186 195,779 4.51 7,120,602 151,183 4.28
---------- -------- ---------- -------
Noninterest Bearing Liabilities 137,185 82,002
---------- ----------
TOTAL LIABILITIES 8,779,371 7,202,604
Capital Securities and Preferred Stock of
Subsidiary Corporation 174,992 100,000
SHAREHOLDERS' EQUITY 517,504 472,944
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,471,867 $7,775,548
========== ==========
NET INTEREST INCOME $123,048 $121,900
======== ========
INTEREST RATE SPREAD 2.59% 3.07%
===== =====
NET YIELD ON AVERAGE INTEREST EARNING ASSETS 2.76% 3.30%
===== =====
16
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses amounted to $1.9 million and $3.8 million for
the three and six month periods ended June 30, 1998, respectively, compared to
$3.3 million and $11.3 million for the respective periods in 1997. Included in
the provision for the three and six month periods ended June 30, 1998 was a $1.5
million provision related to loans acquired in the Eagle Acquisition. Included
in the provision for the six month period ended June 30, 1997 was a $5.6 million
provision related to loans acquired in the Derby Acquisition. At June 30, 1998,
the allowance for loan losses was $56.6 million and represented 190.7% of
nonaccrual loans, compared to $63.4 million and 110.9%, respectively, a year
earlier.
NONINTEREST INCOME
Noninterest income for the three and six month periods ended June 30, 1998
amounted to $21.8 million and $37.1 million, respectively, compared to $9.7
million and $19.3 million, respectively, for the same periods in 1997. The
increase is due primarily to an increase in the net gains on the sale of
securities and loans, in addition to increased income from fees and service
charges in the 1998 periods. There were $2.3 million and $2.6 million of net
gains on sales of loans for the three and six months ended June 30, 1998,
respectively, compared to $203,000 and $357,000, respectively, for the same
periods in 1997. Included in the 1998 periods is the gain of $2.1 million on the
sale of the credit card portfolio.
There were $7.0 million and $10.1 million of net gains on sales of
securities for the three and six months ended June 30, 1998, respectively,
compared to $268,000 and $676,000, respectively, for the same periods in 1997.
During the current three month period, the Bank sold approximately $350 million
of securities, most of which were mortgage securities with relatively narrow
spreads to wholesale funding. Fees and service charges increased to $9.6 million
and $19.1 million, respectively, for the three and six months ended June 30,
1998 from $7.7 million and $15.0 million, respectively, for the same periods in
1997 due primarily to deposit related fees and charges.
NONINTEREST EXPENSES
Noninterest expenses for the three and six months ended June 30, 1998
amounted to $62.8 million and $108.3 million, respectively, compared to $41.9
million and $104.0 million for the same respective periods in 1997. Included in
noninterest expenses for the current three and six month periods are $17.4
million of acquisition expenses related to the Eagle acquisition. Included in
noninterest expenses for the 1997 six month period are $19.9 million in
acquisition expenses related to the Derby acquisition. Additionally, increases
in salaries and employee benefits, furniture and equipment, intangible
amortization, capital securities expense and dividends on preferred stock of the
subsidiary corporation were offset by decreases in occupancy and foreclosed
property expenses for the three and six month periods.
INCOME TAXES
Total income tax expense for the three and six month periods ended June 30,
1998 amounted to $7.3 million and $19.0 million, respectively, compared to $10.5
million and $9.4 million, respectively, for the same periods in 1997. Income
taxes for the three months ended June 30, 1998 decreased compared to the year
earlier period due primarily to lower income before taxes as a result of the
$18.9 million of acquisition related expenses recorded in connection with the
Eagle Acquisition. Income taxes for the six months ended June 30, 1998 increased
due to a higher level of income before taxes compared to the same period in
1997.
17
Webster Financial Corporation and Subsidiaries
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table details the estimated market value of Webster's
financial assets at June 30, 1998 if interest rates instantaneously increase or
decrease 100 basis points.
Book Market Estimated Market Value Impact
Value Value -100 BP +100BP
----- ----- ------- ------
Interest-Sensitive Assets
Trading $ 77,527 $ 77,527 $ (221) $ (577)
Non-Trading 8,337,704 8,462,879 122,627 (156,485)
Interest-Sensitive Liabilities 8,545,420 8,399,586 (123,784) 116,556
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $283.7
million (See Note 2 to Consolidated Financial Statements) and nonaccrual loans
of $29.7 million (See "Asset Quality" within the MD&A). Values for mortgage
servicing rights have been included in the table above as changes in interest
rates affect the valuation of the servicing rights. Equity securities and
nonaccrual assets not included in the above table are however, subject to
fluctuations in market value based on other risks.
Based on Webster's asset/liability mix at June 30, 1998, management's
sensitivity analysis of the effects of changing interest rates estimates that an
instantaneous 100 basis point increase in interest rates would decrease net
interest income over the next twelve months by about 2.1% and an instantaneous
100 basis point decline in interest rates would decrease net interest income
over the next twelve months by about 1.5%. The above estimated market values are
subject to factors that could cause actual results to differ from such
projections and estimates.
18
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable
(b) Not Applicable
(c) On June 1, 1998, Webster issued 274,609 shares of its common
stock to the shareholders of Damman Associates, Inc. ("Damman")
in connection with its acquisition of Damman. The acquisition was
effected by the merger of Damman and a wholly owned subsidiary of
Webster. The transaction was exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act")
pursuant to Section 4(2) of the Securities Act, as it was a
transaction by an issuer not involving any public offering.
(d) Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Not Applicable
(b) Not Applicable
(c)i.The following matters were voted upon and approved by the
Registrant's shareholders at the special meeting of shareholders
on April 2, 1998:
(I) approval of the Agreement and Plan of Merger by and between
Webster Financial Corporation and Eagle Financial Corp. (Proposal
1); (ii) amendment to Webster's Restated Certificate of
Incorporation to increase of the number of authorized shares of
Webster's common stock from 30 million to 50 million (Proposal
2). As to Proposal 1, shareholders cast 10,585,405 votes for,
56,879 against, 93,513 abstentions, and no broker non-votes. As
to Proposal 2, shareholders cast 10,890,433 votes for, 1,182,355
against, 100,947 abstentions, and no broker non-votes.
ii. The following matters were voted upon and approved by the
Registrant's shareholders at the 1998 annual meeting on April 23,
1998:
(I) re-election of three directors to serve a three year term
(Proposal 1); (ii) amendment of the 1992 stock option plan
(Proposal 2); (iii) approval of the material terms of the
qualified performance-based compensation plan (Proposal 3); (iv)
ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of Webster for the year ending December 31,
1998 (Proposal 4). As to Proposal 1, Joel S. Becker received
12,295,142 votes for election and 157,350 votes were withheld,
Harry P. DiAdamo, Jr. received 12,317,178 votes for election and
135,313 votes were withheld and James C. Smith received
12,318,422 votes for election and 134,069 votes were withheld.
There were no abstentions or broker non-votes for any of the
nominees. Continuing directors include: Achille A. Apicella, O.
Joseph Bizzozero, Jr., John J. Crawford, Robert A. Finkenzeller,
Walter R. Griffin, J. Gregory Hickey, C. Michael Jacobi and
Sister Marguerite Waite. As to Proposal 2, shareholders cast
9,279,854 votes for, 666,995 against, 167,181 abstentions, and no
broker non- votes. As to Proposal 3, shareholders cast 11,673,935
votes for, 613,369 against, 165,181 abstentions, and no broker
non-votes. As to Proposal 4, shareholders cast 12,364,098 votes
for, 24,636 against, 63,754 abstentions, and no broker non-votes.
19
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
(d) Not Applicable
Item 5. OTHER INFORMATION
5.1 On June 1, 1998, Webster completed its previously announced
acquisition with Damman Insurance Associates, Inc.
5.2 During June 1998, Webster's Board of Directors approved a 500,000
share common stock repurchase program.
5.3 During June 1998, Webster repurchased approximately 300,000 shares
of Webster common stock related to the settlement of warrants to purchase
600,000 shares issued to Fleet Financial Group in 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. 10.1 Amendment No. 3 to the 1992 Stock Option Plan.
Exhibit No. 10.2 Qualified Performance-Based Compensation Plan
(incorporated herein by reference from Exhibit A
to the Corporation's definitive proxy materials
for the 1998 Annual Meeting of Shareholders).
Exhibit No. 10.3 First Amended and Restated Directors Retainer
Fees Plan.
Exhibit No. 27 Financial Data Tables.
(b) Reports on Form 8-K
Webster filed the following Current Report on Form 8-K with the
Securities and Exchange Commission (the ("SEC") during the
quarter ended June 30, 1998:
Current Report on Form 8-K filed with the SEC on April 30, 1998
(announcing the completion of Webster's acquisition of Eagle and
the amendment of the Restated Certificate of Incorporation and
Bylaws of the Corporation).
20
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: August 14, 1998 By:/s/ John V. Brennan
------------------- --------------------
John V. Brennan
Executive Vice President
Chief Financial Officer and Treasurer
Principal Financial Officer
Principal Accounting Officer
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Webster Financial Corporation and Subsidiaries
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EXHIBIT INDEX
Exhibit No. Description
10.1 Amendment No. 3 to the 1992 Stock Option Plan.
10.2 Qualified Performance-Based Compensation Plan (incorporated
herein by reference from Exhibit A to the Corporation's
definitive proxy materials for the 1998 Annual Meeting of
Shareholders).
10.3 First Amended and Restated Directors Retainer Fees Plan.
27 Financial Data Tables.
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