UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ending SEPTEMBER 30, 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
(Address of principal executive offices) (Zip Code)
(203) 753-2921
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for the issuer's classes of
common stock, as of the latest practicable date.
Common Stock (par value $ .01) 37,876,994 SHARES
- ------------------------------ -------------------------------------------
(Class) Issued and Outstanding at November 1, 1998
Webster Financial Corporation and Subsidiaries
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Consolidated Financial Statements 13
Quantitative and Qualitative Disclosures about Market Risk 20
Forward Looking Statements 20
Year 2000 Impact 21
PART II - OTHER INFORMATION 24
SIGNATURES 25
EXHIBIT INDEX 26
2
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
-------------- ----------------
(unaudited)
Cash and Due from Depository Institutions $ 127,795 $ 151,322
Interest-bearing Deposits 8,728 77,104
Securities: (Note 2)
Trading at Fair Value 97,849 84,749
Available for Sale, at Fair Value 3,150,556 3,092,287
Held to Maturity, (Market Value: $444,726 in 1998;
$412,061 in 1997) 439,836 412,237
Loans Receivable, Net 4,931,885 4,995,570
Accrued Interest Receivable 55,863 52,658
Premises and Equipment, Net 79,372 71,887
Foreclosed Properties, Net 6,153 12,224
Intangible Assets 81,037 78,493
Cash Surrender Value of Bank Owned Life Insurance 139,146 12,750
Prepaid Expenses and Other Assets 45,466 54,606
----------- -----------
TOTAL ASSETS $ 9,163,686 $ 9,095,887
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 5,621,371 $ 5,719,030
Federal Home Loan Bank Advances 1,607,322 1,516,634
Reverse Repurchase Agreements and Other Borrowings (Note 6) 1,046,804 1,032,963
Advance Payments by Borrowers for Taxes and Insurance 17,271 30,570
Accrued Expenses and Other Liabilities 105,425 84,851
----------- -----------
Total Liabilities 8,398,193 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 - 38,353,424 shares at September 30, 1998 and
37,574,176 shares at December 31, 1997 384 376
Paid-in Capital 247,709 241,552
Retained Earnings (Note 7) 297,697 257,954
Less Treasury Stock at cost, 410,030 shares at September 30, 1998
and 45,916 shares at December 31, 1997 (11,567) (1,116)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,340) (1,971)
Accumulated Other Comprehensive Income 33,033 20,467
----------- -----------
Total Shareholders' Equity 565,916 517,262
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,163,686 $ 9,095,887
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ --------- -------- --------
(unaudited) (unaudited)
INTEREST INCOME:
Loans $ 95,056 $ 97,957 $287,949 $288,469
Securities and Interest-bearing Deposits 57,227 52,551 183,161 135,201
-------- -------- -------- --------
Total Interest Income 152,283 150,508 471,110 423,670
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on Deposits 55,465 55,614 169,158 168,148
Interest on Borrowings 37,175 29,830 119,261 68,479
-------- -------- -------- --------
Total Interest Expense 92,640 85,444 288,419 236,627
-------- -------- -------- --------
NET INTEREST INCOME 59,643 65,064 182,691 187,043
Provision for Loan Losses 1,500 10,828 5,300 22,138
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses 58,143 54,236 177,391 164,905
-------- -------- -------- --------
NONINTEREST INCOME:
Fees and Service Charges 12,039 8,343 31,104 23,373
Gain on Sale of Loans and Loan Servicing, Net 235 194 2,800 551
Gain on Sale of Securities, Net 1,143 1,169 11,269 1,845
Other Noninterest Income 2,977 1,189 8,357 4,308
-------- -------- -------- --------
Total Noninterest Income 16,394 10,895 53,530 30,077
-------- -------- -------- --------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 19,640 19,572 58,396 57,741
Occupancy Expense of Premises 4,251 4,174 12,018 12,184
Furniture and Equipment Expenses 4,352 3,321 12,990 10,231
Foreclosed Property Expenses and Provisions, Net (Note 5) 8 1,902 567 3,403
Intangible Amortization 2,512 2,304 7,174 6,950
Marketing Expenses 1,837 2,187 5,866 5,802
Acquisition Related Expenses (Note 8) -- 9,934 17,400 29,792
Capital Securities Expense 3,692 3,660 11,046 7,706
Dividends on Preferred Stock of Subsidiary Corporation 1,037 -- 3,113 --
Other Operating Expenses 8,651 8,316 25,721 25,518
-------- -------- -------- --------
Total Noninterest Expenses 45,980 55,370 154,291 159,327
-------- -------- -------- --------
Income Before Income Taxes 28,557 9,761 76,630 35,655
Income Tax Expense 8,474 4,386 27,426 13,814
-------- -------- -------- --------
NET INCOME $ 20,083 $ 5,375 $ 49,204 $ 21,841
======== ======== ======== ========
Net Income Per Common Share:
Basic $ 0.53 $ 0.14 $ 1.30 $ 0.58
Diluted $ 0.52 $ 0.14 $ 1.27 $ 0.56
Dividends Declared Per Common Share $ 0.11 $ 0.10 $ 0.32 $ 0.30
See accompanying notes to condensed consolidated financial statements.
4
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars In Thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net Income $ 49,204 $ 21,841
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 5,300 22,138
Provision for Foreclosed Property Losses 285 1,328
Provision for Depreciation and Amortization 9,334 8,346
Amortization of Securities Premiums, Net 2,540 (1,029)
Amortization of Hedging Costs, Net 3,485 2,273
Amortization and Write-down of Intangibles 7,174 6,950
Amortization of Mortgage Servicing Rights 1,388 473
Gain on Sale of Deposits -- (546)
Loss on Sale of Premises & Equipment -- 912
Gains on Sale of Foreclosed Properties, Net (678) (787)
Loans and Securities Gains, Net (15,343) (2,107)
(Loss) Gains on Trading Securities, Net 1,274 (289)
Decrease (Increase) in Trading Securities 10,803 (32,447)
Loans Originated for Sale (26,097) (43,358)
Sale of Loans, Originated for Sale 106,107 43,893
Increase in Interest Receivable (2,960) (5,045)
Increase in Interest Payable 3,263 10,947
(Decrease) Increase in Accrued Expenses and Other Liabilities, Net (48,703) 13,524
Increase in Cash Surrender Value of Bank Owned Life Insurance (3,396) --
Increase in Prepaid Expenses and Other Assets, Net (607) (6,715)
Pooling Adjustments, Net 7,860 --
------------ ------------
Net Cash Provided by Operating Activities 110,233 40,302
------------ ------------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (1,892,632) (1,711,921)
Purchases of Securities, Held to Maturity (151,988) (16,713)
Maturities of Securities 117,683 139,194
Proceeds from Sale of Securities, Available for Sale 1,142,403 137,189
Purchases of Bank Owned Life Insurance (123,000) --
Net Decrease (Increase) in Interest-bearing Deposits 65,941 (96,757)
Purchase of Loans (66,173) (120,078)
Net Decrease (Increase) in Loans 35,432 (12,483)
Proceeds from Sale of Foreclosed Properties 10,937 18,845
Principal Collected on Mortgage-backed Securities 842,653 248,634
Purchases of Premises and Equipment, Net (16,395) (7,664)
------------ ------------
Net Cash Used by Investing Activities (35,139) (1,421,754)
------------ ------------
FINANCING ACTIVITIES:
Net Decrease in Deposits (114,573) (174,696)
Repayment of FHLB Advances (3,568,579) (4,025,440)
Proceeds from FHLB Advances 3,616,970 4,696,989
Repayment of Reverse Repurchase Agreements & Other Borrowings (11,079,560) (3,211,095)
Proceeds from Reverse Repurchase Agreements & Other Borrowings 11,094,745 4,004,754
Net Decrease in Advance Payments for Taxes and Insurance (19,111) (13,564)
Net Proceeds from Issuance of Capital Securities -- 141,558
Cash Dividends to Common and Preferred Shareholders (14,358) (11,587)
Common Stock Repurchased (22,583) (6,020)
Exercise of Stock Options 8,428 3,149
------------ ------------
Net Cash (Used) Provided by Financing Activities (98,621) 1,404,048
------------ ------------
(Decrease) Increase in Cash and Cash Equivalents (23,527) 22,596
Cash and Cash Equivalents at Beginning of Period 151,322 131,567
------------ ------------
Cash and Cash Equivalents at End of Period $ 127,795 $ 154,163
============ ============
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 30,447 $ 20,862
Interest Paid 284,266 225,028
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 12,750 24,496
Transfer of Securities from HTM to AFS -- 109,329
See accompanying notes to condensed consolidated financial statements.
5
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented. All adjustments were of a normal
recurring nature. The results of operations for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results which may
be expected for the year as a whole. The accompanying consolidated financial
statements 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.
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
September 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.
On June 30, 1997, securities with a book value of approximately $109.3
million were transferred from held to maturity to available for sale. The
transfer resulted in an unrealized gain of approximately $299,000, which is net
of income tax expense of approximately $200,000, being recorded as an increase
to shareholders' equity. The securities were transferred due to a change in
intent with respect to holding the securities to maturity precipitated by
changes in the balance sheet following Eagle's merger with MidConn.
6
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
A summary of securities follows (in thousands):
September 30, 1998
------------------------------------------------------
Amortized Gross Unrealized Market
Cost Gains Losses Value
-------------- -------- --------- -----------
TRADING SECURITIES:
Mortgage-Backed Securities $ 97,849(a) $ -- $ -- $ 97,849
----------- -------- --------- -----------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 13,518 172 -- 13,690
U.S. Government Agency 21,500 379 -- 21,879
Municipal Bonds and Notes 14,687 604 -- 15,291
Corporate Bonds and Notes 5,327 54 (200) 5,181
Equity Securities 286,053 6,512 (6,773) 285,792
Mortgage-Backed Securities 2,735,348 62,480 (3,667) 2,794,161
Purchased Interest-Rate Contracts 17,170 -- (2,608) 14,562
----------- -------- --------- -----------
3,093,603 70,201 (13,248) 3,150,556
----------- -------- --------- -----------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes 2,450 20 -- 2,470
U.S. Government Agency 15,499 19 -- 15,518
Municipal Bonds & Notes 12,500 617 -- 13,117
Corporate Bonds and Notes 151,546 1,457 (742) 152,261
Money Market Preferred Stock -- -- -- --
Mortgage-Backed Securities 257,841 4,121 (602) 261,360
----------- -------- --------- -----------
439,836 6,234 (1,344) 444,726
----------- -------- --------- -----------
Total $ 3,631,288 $ 76,435 $ (14,592) $ 3,693,131
=========== ======== ========= ===========
December 31, 1997
------------------------------------------------------
Amortized Gross Unrealized Market
Cost Gains Losses Value
-------------- -------- --------- -----------
TRADING SECURITIES: $ 84,749(a) $ -- $ -- $ 84,749
Mortgage-Backed Securities ----------- -------- --------- -----------
AVAILABLE FOR SALE PORTFOLIO: 19,522 37 (8) 19,551
U.S. Treasury Notes 50,229 220 (24) 50,425
U.S. Government Agency 14,685 -- (126) 14,559
Municipal Bonds and Notes 10,045 33 (227) 9,851
Corporate Bonds and Notes 210,041 14,983 (1,049) 223,975
Equity Securities 2,737,522 36,307 (7,720) 2,766,109
Mortgage-Backed Securities 15,079 -- (7,262) 7,817
Purchased Interest-Rate Contracts ----------- -------- --------- -----------
3,057,123 51,580 (16,416) 3,092,287
----------- -------- --------- -----------
HELD TO MATURITY PORTFOLIO: 2,447 28 -- 2,475
U.S. Treasury Notes 32,274 14 (65) 32,223
U.S. Government Agency 12,500 93 (1) 12,592
Municipal Bonds & Notes 1,199 3 -- 1,202
Corporate Bonds and Notes 1,000 -- -- 1,000
Money Market Preferred Stock 362,817 2,533 (2,781) 362,569
Mortgage-Backed Securities ----------- -------- --------- -----------
412,237 2,671 (2,847) 412,061
----------- -------- --------- -----------
$ 3,554,109 $ 54,251 $ (19,263) $ 3,589,097
Total =========== ======== ========= ===========
(a) Stated at fair market value.
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 nine month periods ended September
30, 1998 was 38,011,104 and 37,952,903, respectively, and for the three and nine
month periods ended September 30, 1997 was 37,526,042 and 37,443,160,
respectively. The weighted-average number of shares used in the computation of
diluted earnings per share for the three and nine month periods ended September
30, 1998 was 38,663,761 and 38,650,302, respectively, and for the three and nine
months ended September 30, 1997 was 38,844,339 and 37,697,620 respectively.
7
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 nine
month periods ended September 30, 1998 and 1997 (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
Net income $20,083 $ 5,375 $49,204 $21,841
Other comprehensive income, net of tax
Unrealized gains on investments:
Unrealized holding gains arising during period
(net of income tax expense of $10,511 and $14,106 for the three
and nine months ended September 30, 1998, respectively, and $8,519
and $9,603 for the three and
nine months ended September 30, 1997, respectively) 14,515 13,609 19,480 15,341
Less reclassification adjustment for gains included in
net income (net of income tax expense of $959 and $5,007 for the
three and nine months ended September 30, 1998, respectively, and
$273 and $449 for the three and
nine months ended September 30, 1997, respectively) 1,324 437 6,914 718
------- ------- ------- -------
Other comprehensive income 13,191 13,172 12,566 14,623
------- ------- ------- -------
Comprehensive income $33,274 $18,547 $61,770 $36,464
======= ======= ======= =======
NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
1998 1997 1998 1997
------- ------- ------- -------
Gain on Sale of Foreclosed Property, Net $ (271) $ (343) $ (678) $ (787)
Provision for Losses on Foreclosed Property 40 1,050 285 1,328
Rental Income (40) (56) (105) (142)
Foreclosed Property Expenses 279 1,251 1,065 3,004
------- ------- ------- -------
Foreclosed Property Expenses and Provisions, Net $ 8 $ 1,902 $ 567 $ 3,403
======= ======= ======= =======
8
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - REVERSE REPURCHASE AGREEMENTS
At September 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
SEPTEMBER 30, 1998 TERM AVERAGE RATE MATURITY DATE OF COLLATERAL OF COLLATERAL
- ------------------ ---- ------------ ------------- ------------- -------------
$860,841 1 to 11 months 5.75% Less than 2 months $933,658 $862,727
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 third quarter was $896.1 million and $941.3 million,
respectively. The outstanding balance of reverse repurchase agreements at
September 30, 1997 was $677.3 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. As a result, Webster's financial statements for 1998 include Eagle's
results of operations from January 1, 1998 through the merger date.
NOTE 8 - ACQUISITION RELATED COSTS
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 nine month period ended September 30, 1998. Additionally, Webster
recorded an increase of $1.5 million to the provision for loan losses related to
the acquisition of Eagle, which was recorded in the nine month period ended
September 30, 1998, for conformity to Webster's credit policies. In connection
with the acquisition of Damman on June 1, 1998, Webster recorded a liability of
$1.0 million for costs that did not impact the statements of operations as that
transaction was recorded as a purchase transaction. As of September 30, 1998,
approximately $783,000 of the liability remains.
9
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - ACQUISITION RELATED COSTS (Continued)
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, and Eagle's acquisition of MidConn
Bank ("MidConn"), which was completed on May 31, 1997, Webster recorded
approximately $29.8 million of merger-related charges in the nine month period
ended September 30, 1997, of which $9.9 million was recorded in the three month
period ended September 30, 1997. Additionally, Webster recorded an increase of
$9.8 million to the provision for loan losses related to the acquisitions of
Derby, People's and MidConn in the nine month period ended September 30, 1997,
of which $4.2 million was recorded in the three month period ended September 30,
1997, for conformity to Webster's credit policies. There are no further merger
related accrued liabilities related to MidConn. In connection with the
acquisition of Sachem Trust National Association on August 1, 1997, Webster
recorded a liability of $1.1 million for costs that did not impact the
statements of operations as that transaction was recorded as a purchase
transaction. As of September 30, 1998, approximately $572,000 of the liability
remains.
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) (7,800)
Data processing contract termination (500) --
Transaction costs (including investment bankers,
attorneys and accountants) -- -- (4,100)
Merger related and miscellaneous expenses (100) (400) (3,600)
-------- -------- --------
Balance of acquisition-related accrued liabilities
at September 30, 1998 $ 4,800 $ 1,900 $ 1,900
======== ======== ========
The remaining accrued liability of $8.6 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.
10
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 a new 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.
11
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS
On November 4, 1998, Webster announced a definitive agreement to acquire
Maritime Bank & Trust ("Maritime"), headquartered in Essex, Connecticut for
$26.67 per share in a tax-free, stock-for-stock exchange. At the time of the
announcement, Maritime had approximately $100 million in total assets, $90
million in deposits and three branches.
On November 11, 1998, Webster announced a definitive agreement to acquire
Village Bancorp ("Village"), the holding company for Village Bank & Trust,
headquartered in Ridgefield, Connecticut for $23.57 per share in a tax-free,
stock-for-stock exchange. At the time of the announcement, Maritime had
approximately $230 million in total assets, $152 million in deposits and six
branches.
Subsequent to the acquisitions, Webster will have approximately $9.5
billion in total assets and more than 100 banking offices, three commercial
banking centers and more than 174 ATMs. The definitive agreements have been
approved by each companies' board of directors and are subject to the approval
of Maritime's and Village's shareholders and the appropriate regulatory
agencies. Webster expects both transactions to close during the first quarter of
1999.
12
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 September 30, 1998, an increase of $67.8
million from $9.1 billion at December 31, 1997. The change in total assets is
due primarily to a net increase in securities of $99.0 million and an increase
in the Cash Surrender Value of Bank Owned Life Insurance of $126.4 million,
offset by a decrease in loans receivable, net of $63.7 million and a decrease in
interest-bearing deposits of $68.4 million. The increases in assets were funded,
in part, by an increase in borrowings of $104.5 million offset by a decrease in
deposits of $97.7 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 $139.1
million at September 30, 1998 from $12.8 million at December 31, 1997. The
increase is due to additional funding of the Bank Owned Life Insurance program.
Total liabilities were $8.4 billion at September 30, 1998, unchanged from
December 31, 1997.
Shareholders' equity was $565.9 million at September 30, 1998 and $517.3
million at December 31, 1997. At September 30, 1998, the Bank had Tier 1
leveraged, Tier 1 risk-based, and total risk-based capital ratios of 6.41%,
13.03% and 14.28%, respectively. The Bank met the regulatory capital
requirements to be categorized as a "well capitalized" institution at September
30, 1998.
During the third quarter of 1998, Webster repurchased 433,600 shares of
Webster common stock under the repurchase plan announced in June 1998.
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 September 30, 1998, residential and consumer loans
comprised approximately 86% 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.
13
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of September 30, 1998 and
December 31, 1997 follows (in thousands):
September 30, 1998 December 31, 1997
------------------ -----------------
Residential Mortgage Loans $3,793,405 $3,871,438
Commercial Real Estate Loans 386,138 386,837
Commercial Loans 314,868 243,302
Consumer Loans (Including Home Equity) 494,474 556,134
---------- -----------
Total Loans 4,988,885 5,057,711
Allowance for Loan Losses (57,000) (62,141)
----------- ----------
Loans Receivable, Net $4,931,885 $4,995,570
=========== ===========
Included above at September 30, 1998 and December 31, 1997 were loans held
for sale of $3.8 million and $3.5 million, respectively.
The following table details the nonaccrual assets at September 30, 1998 and
December 31, 1997 (in thousands):
September 30, 1998 December 31, 1997
------------------ -----------------
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $11,812 $26,640
Commercial 15,014 12,229
Consumer 2,753 3,274
-------- --------
Total Nonaccrual Loans 29,579 42,143
Foreclosed Properties:
Residential and Consumer 3,551 7,711
Commercial 2,602 4,513
-------- --------
Total Nonaccrual Assets $35,732 $54,367
======= =======
The net decrease in nonaccrual assets of $18.6 million at September 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 September 30, 1998, Webster's allowance for losses on loans of $57.0
million represented 192.7% of nonaccrual loans and its total allowances for
losses on nonaccrual assets of $57.3 million amounted to 160.0% of nonaccrual
assets. Included in the loan charge-offs for the nine months ended September 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 nine months ended September 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 5,300 285 5,585
Losses Charged to Allowances (12,593) (1,379) (13,972)
Recoveries Credited to Allowances 2,172 120 2,292
Fiscal Year Adjustment (20) 66 46
-------- -------- --------
Balance at September 30, 1998 $ 57,000 $ 314 $ 57,314
======== ======== ========
14
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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 net
present 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 operations 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, floors 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.
15
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 Webster's Capital Trust II 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
September 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 $137.5 million,
non-mortgage commitments of $73.6 million, unused home equity credit lines of
$312.8 million and commercial lines and letters of credit of $221.7 million at
September 30, 1998.
16
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL
Net income for the three month period ended September 30, 1998 was $20.1
million, or $0.52 per diluted share compared to $13.8 million or $.35 per
diluted share, adjusted for acquisition expenses, for the same period in 1997.
Net income for the nine month period ended September 30, 1998 was $62.4 million,
or $1.61 per diluted share, adjusted for acquisition expenses, compared to $45.3
million or $1.17 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 $49.2 million or
$1.27 per diluted share for the first nine months of 1998. 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, $5.0 million
related to Webster's acquisition of People's Savings Financial Corporation on
July 31, 1997 and $3.4 million related to Eagle's acquisition of MidConn Bank
("MidConn") on May 31, 1997, Webster reported net income of $5.4 million or
$0.14 per diluted share for the third quarter of 1997 and $21.8 million for the
first nine 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 nine month periods ended September
30, 1998 amounted to $59.6 million and $182.7 million, respectively, compared to
$65.1 million and $187.0 million for the respective periods in 1997. The
decrease is primarily attributable to an increase in average securities at a
lower yield and an increased volume of average borrowings at a higher cost. The
net interest rate spread for the three and nine month periods ended September
30, 1998 was 2.61% and 2.59%, respectively, compared to 2.98% and 3.05% for the
same periods in 1997. The decrease in interest rate spread for the nine months
ended September 30, 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.
INTEREST INCOME
Interest income for the three and nine months ended September 30, 1998
amounted to $152.3 million and $471.1 million, respectively, compared to $150.5
million and $423.7 million, respectively, for the comparable periods in 1997.
The increases for both periods are due primarily to a higher balance of average
interest-earning assets, which were $8.6 billion and $8.9 billion, respectively,
for the 1998 periods and $8.1 billion and $7.7 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
nine months ended September 30, 1998 was 7.04% and 7.07%, respectively, compared
to 7.39% and 7.36%, respectively, for the same periods the previous year.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 1998
amounted to $92.6 million and $288.4 million, respectively, compared to $85.4
million and $236.6 million, respectively, for the same periods in 1997. This
increase is due primarily to an increase in average borrowings, which were $2.6
billion and $2.7 billion, respectively, for the 1998 periods as compared to $2.1
billion and $1.6 billion, respectively, for the 1997 periods. The cost of
interest-bearing liabilities increased to 4.43% and 4.48%, respectively, for the
1998 periods compared to 4.41% and 4.31%, respectively, for the same periods in
1997. Interest expense on borrowings for the three and nine months ended
September 30, 1998 amounted to $37.2 million and $119.3 million, respectively,
as compared to $29.8 million and $68.5 million, respectively, for the same
periods in 1997.
17
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 SEPTEMBER 30, 1998 1997
- ------------------------------- ------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------------------------------- ---------------------------------
ASSETS:
INTEREST EARNING ASSETS:
Loans $4,982,028 $95,056 7.60% $4,973,522 $97,957 7.85%
Securities 3,651,738 57,227 6.27 3,150,578 52,551 6.67
---------- ------- ---- ---------- ------- ----
TOTAL INTEREST EARNING ASSETS 8,633,766 152,283 7.04 8,124,100 150,508 7.39
------- -------
Noninterest Earning Assets 483,426 387,940
----------- ------------
TOTAL ASSETS $9,117,192 $8,512,040
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Deposits $5,719,662 55,465 3.87 $5,714,450 55,614 3.88
Borrowings 2,555,550 37,175 5.70 2,069,916 29,830 5.66
---------- ------- ---- ---------- ------- ----
TOTAL INTEREST BEARING LIABILITIES 8,275,212 92,640 4.43 7,784,366 85,444 4.41
---------- ------- ---------- -------
Noninterest Bearing Liabilities 95,042 86,519
---------- ----------
TOTAL LIABILITIES 8,370,254 7,870,885
Capital Securities and Preferred Stock of
Subsidiary Corporation 199,577 148,970
SHAREHOLDERS' EQUITY 547,361 492,185
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,117,192 $8,512,040
========== ==========
NET INTEREST INCOME $59,643 $65,064
======= =======
INTEREST RATE SPREAD 2.61% 2.98%
===== =====
NET YIELD ON AVERAGE INTEREST EARNING ASSETS 2.79% 3.21%
===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ------------------------------- ------------------------------- ---------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------------------------------- ---------------------------------
ASSETS:
INTEREST EARNING ASSETS:
Loans $4,843,275 $287,949 7.92% $4,937,553 $288,469 7.78%
Securities 4,031,668 183,161 6.06 2,724,636 135,201 6.61
---------- -------- ---- ---------- -------- ----
TOTAL INTEREST EARNING ASSETS 8,874,943 471,110 7.07 7,662,189 423,670 7.36
-------- -------
Noninterest Earning Assets 477,399 358,915
---------- ----------
TOTAL ASSETS $9,352,342 $8,021,104
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST BEARING LIABILITIES:
Deposits $5,770,880 169,158 3.90 $5,749,971 168,148 3.89
Borrowings 2,747,636 119,261 5.73 1,592,488 68,479 5.67
---------- -------- ---- ---------- -------- ----
TOTAL INTEREST BEARING LIABILITIES 8,518,516 288,419 4.48 7,342,459 236,627 4.31
---------- -------- ---------- --------
Noninterest Bearing Liabilities 122,983 93,040
---------- ----------
TOTAL LIABILITIES 8,641,499 7,435,499
Capital Securities and Preferred Stock of
Subsidiary Corporation 183,277 106,067
SHAREHOLDERS' EQUITY 527,566 479,538
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,352,342 $8,021,104
========== ==========
NET INTEREST INCOME $182,691 $187,043
======== ========
INTEREST RATE SPREAD 2.59% 3.05%
==== =====
NET YIELD ON AVERAGE INTEREST EARNING ASSETS 2.76% 3.27%
==== =====
18
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 $1.5 million and $5.3 million for
the three and nine month periods ended September 30, 1998, respectively,
compared to $10.8 million and $22.1 million for the respective periods in 1997.
Included in the provision for the nine month period ended September 30, 1998 was
a $1.5 million provision related to loans acquired in the Eagle acquisition.
Included in the provision for the nine month period ended September 30, 1997 was
a $5.6 million provision related to loans acquired in the Derby acquisition.
Included in the provision for the three and nine month periods ended September
30, 1997 was a $1.5 million provision related to loans acquired in the People's
acquisition and a $2.7 million provision related to loans acquired in the
MidConn acquisition. At September 30, 1998, the allowance for loan losses was
$57.0 million and represented 192.7% of nonaccrual loans, compared to $64.8
million and 152.4%, respectively, a year earlier.
NONINTEREST INCOME
- ------------------
Noninterest income for the three and nine month periods ended September 30,
1998 amounted to $16.4 million and $53.5 million, respectively, compared to
$10.9 million and $30.1 million, respectively, for the same periods in 1997.
Fees and service charges increased to $12.0 million and $31.1 million,
respectively, for the three and nine months ended September 30, 1998 from $8.3
million and $23.4 million, respectively, for the same periods in 1997. Damman
Insurance Associates, which Webster acquired in 1998, contributed $1.6 million
in fee income during the third quarter of 1998. Additionally, deposit related
fees and charges increased due to expanded product offerings to Webster's
growing customer base.
Additionally, noninterest income increased in the nine month period ended
September 30, 1998 due 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 $14.1 million of net gains on sales of securities and
loans for the nine months ended September 30, 1998 compared to $2.4 million for
the same period in 1997. Included in the 1998 period is the gain of $2.1 million
on the sale of the credit card portfolio.
NONINTEREST EXPENSES
- --------------------
Noninterest expenses for the three and nine months ended September 30, 1998
amounted to $46.0 million and $154.3 million, respectively, compared to $55.4
million and $159.3 million for the same respective periods in 1997. Included in
noninterest expenses for the current nine month period are $17.4 million of
acquisition expenses related to the Eagle acquisition. Included in noninterest
expenses for the 1997 nine month period are $29.8 million in acquisition
expenses related to the Derby, People's and MidConn acquisitions, of which $9.9
million is included in the three month period ending September 30, 1997.
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 a decrease in
foreclosed property expenses for the three and nine month periods.
INCOME TAXES
- ------------
Total income tax expense for the three and nine month periods ended
September 30, 1998 amounted to $8.5 million and $27.4 million, respectively,
compared to $4.4 million and $13.8 million, respectively, for the same periods
in 1997. During the quarter ended September 30, 1998, Webster recorded a $2.5
million reduction in income tax expense related to benefits from a prior
acquisition and was offset by the higher income before taxes as compared to the
year earlier period. Income taxes for the three and nine months ended September
30, 1998 increased due to higher levels of income before taxes before
acquisition expenses compared to the same periods in 1997.
19
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 September 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 $ 97,849 $ 97,849 $ (829) $ (652)
Non-Trading 8,277,561 8,412,805 116,371 (143,047)
Interest-Sensitive Liabilities 8,492,345 8,508,931 (132,048) 129,457
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $285.8
million (See Note 2 to Consolidated Financial Statements) and nonaccrual loans
of $29.6 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 September 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 increase net
interest income over the next twelve months by about 1.3% and an instantaneous
100 basis point decline in interest rates would decrease net interest income
over the next twelve months by about 3.3%. The above estimated market values are
subject to factors that could cause actual results to differ from such
projections and estimates.
FORWARD LOOKING STATEMENTS
Statements in the sections captioned "Management's Discussion and Analysis
of Consolidated Financial Statements," Quantitative and Qualitative Disclosures
about Market Risk" and "Year 2000 Impact" are forward-looking statements within
the meaning of the Securities and Exchange Act of 1934, as amended. Actual
results could differ materially from those management expectations, projections
and estimates. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local tax authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of Webster's loan
and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic, competitive, governmental and technological
factors affecting Webster's operations, markets, products services and prices.
Such developments could have an adverse impact on Webster's financial position
and results of operations.
20
Webster Financial Corporation and Subsidiaries
YEAR 2000 IMPACT
- --------------------------------------------------------------------------------
The "Year 2000" issue refers to the potential impact of the failure of
computer programs and equipment to give proper recognition of dates beyond
December 31, 1999 and other issues related to the Year 2000 century date change.
The Corporation has completed its assessment of Year 2000 issues and has
determined that, if not addressed, the consequences of Year 2000 issues would
have a material effect on business operations. The following discussion
addresses the Corporation's Year 2000 preparedness and will focus on four
categories of information: I. The Corporation's state of readiness, II. The
costs to address the Corporation's Year 2000 issues, III. Year 2000 risks to the
Corporation and IV. The Corporation's contingency plans.
I. THE CORPORATION'S STATE OF READINESS
In accordance with guidelines provided by the Federal Financial
Institutions Examination Council (FFIEC), the Corporation has developed a Year
2000 plan that is broken into phases. Plan phases are: Awareness, Assessment,
Renovation, Validation, and Implementation. Descriptions of each phase,
including excerpts of the FFIEC phase definitions, are as follows: AWARENESS
FFIEC requires the Corporation to 1) define the Year 2000 problem as it
relates to its particular circumstances and gain executive support for the
resources necessary to perform compliance work, 2) establish a Year 2000 program
team and 3) develop an overall strategy that encompasses in-house systems,
service bureaus for systems that are outsourced, vendors, auditors, customers,
and suppliers (including correspondents).
The Corporation has completed activities related to the Awareness phase.
The Corporation has formed a Year 2000 Task Force, headed by a senior technology
officer. The Task Force has developed and implemented a strategy to minimize the
impact of Year 2000 technology problems. The Corporation's strategic plan
incorporates the FFIEC recommended guidelines and includes regular reporting of
progress to the Corporation's Board of Directors and Executive Management. In
addition to addressing the Corporation's technology issues, the strategy
includes a community awareness program. The Corporation has held seminars for
the business community and placed information on its web site to address the
Corporation's preparedness and share Year 2000 experiences and will continue to
do so as it approaches the new century.
ASSESSMENT
FFIEC requires the Corporation to assess the size and complexity of the
problem and detail the magnitude of the effort necessary to address Year 2000
issues. During this phase, the Corporation must identify all hardware, software,
networks, automated teller machines, other various processing platforms, and
customer and vendor dependencies affected by the Year 2000 date change. The
assessment must go beyond information systems and include environment systems
that are dependent on embedded microchips, such as security systems, elevators,
and vaults.
The Corporation has completed activities related to the Assessment phase.
The assessment included inventorying all Information Technology (IT) and non-IT
systems, including vaults, security, and environmental systems. Inventoried
items were then prioritized by their impact on the Corporation's business. A
determination was made as to whether failure to remediate for the Year 2000 date
change would adversely impact customers, shareholders, or employees. Systems
meeting this criteria were labeled Mission Critical. During this assessment, 25%
of the Corporation's IT system applications and services were classified as
Mission Critical, requiring testing and validation. Examination of non-IT
systems indicated that no significant replacements are required for Year 2000
readiness. Security systems have already been upgraded, automated teller
machines (ATM's) are being upgraded by each respective vendor or manufacturer
and are anticipated to be Year 2000 ready by the first quarter of 1999. Vaults
do not have date related issues, and therefore no remediation is required.
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Webster Financial Corporation and Subsidiaries
YEAR 2000 IMPACT
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RENOVATION
FFIEC requirements for this phase include code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes. Work should be prioritized based on information gathered
during the assessment phase. For institutions relying on outside servicers or
third-party software providers, ongoing discussions and monitoring of vendor
progress is necessary.
The Corporation has significantly completed activities related to the
Renovation phase. The majority of mission critical applications are expected to
be Year 2000 ready by December 31, 1998, with the remainder targeted for
completion by the second quarter of 1999. Most of the Corporation's systems are
vendor supplied and are being remediated by the vendor. The vendor for the
Corporation's primary system of record has provided us with a Year 2000 ready
release which has been installed. This release is currently being validated by
the Year 2000 task force for future date processing accuracy.
VALIDATION
This phase focuses on the actual testing of the project plan. FFIEC states
that "Testing is a multifaceted process that is critical to the Year 2000
project and inherent in each phase of the project management plan. This process
includes testing of incremental changes to hardware and software components. In
addition to testing upgraded components, connections with other systems must be
verified, and all changes should be accepted by internal and external users."
Vendor supplied updates, subject to regulatory review, are tested by the
vendor prior to their release. The Corporation's focus is to perform validation
and testing for Year 2000 readiness of the release on its systems. The
Corporation has a team of Year 2000 Task Force members, responsible for testing
the primary systems of record and all mission critical server-based applications
for Year 2000 readiness. The Corporation has created a Test Lab with all
necessary hardware and software that simulates live production. Test scripts are
being developed for all mission critical applications. Primary functional
transaction types such as: deposits, withdrawals, payments, maturities, interest
postings, inquiries on deposit and loan accounts, and other typical business
processes, are being tested for key date validity and accuracy. Key dates
include dates before, during, and after the century change and the century leap
year. The validation phase is anticipated to be completed for mission critical
applications by June 30, 1999. Testing will continue as needed on newly acquired
applications and new vendor upgrades.
IMPLEMENTATION
In accordance with FFIEC, "In this phase, systems should be certified as
Year 2000 compliant and be accepted by the business users. For any system
failing certification, the business effect must be assessed clearly and the
organization's Year 2000 contingency plans should be implemented."
A significant number of the Corporation's mission critical applications are
supplied by third party vendors. Remediatation of the software is performed by
the vendor, tested by the vendor, and then provided to the Corporation. The
majority of the remediated, vendor supplied software has already been installed
and is in production. The Corporation is currently in the process of validating
the software for Year 2000 readiness on its systems. At this time, the
implementation phase has not yet been completed.
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Webster Financial Corporation and Subsidiaries
YEAR 2000 IMPACT
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II. THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES
The Corporation began implementing a four year Year 2000 readiness project
plan in mid 1996. Estimated total direct costs for Year 2000 remediation during
this four year period are approximately $1 million. Estimated outlays for Year
2000 remediation are included in the Information Technology department budget.
Approximately $400,000 of direct costs have been incurred to date. Included in
these direct costs, are expenses related to the replacement or upgrade of
hardware and software that amounted to approximately $200,000 and expenses
related to consulting services for Year 2000 project management and systems
testing that amounted to approximately $200,000. During the next 18 months, the
Corporation anticipates Year 2000 readiness direct expenses to total
approximately $600,000. A significant portion of these future expenses will be
attributed to consulting fees.
III. THE RISKS OF THE CORPORATION'S YEAR 2000 ISSUES
The Corporation is in the process of identifying and evaluating potential
Year 2000 related worst case scenarios that could result from 1) the
Corporation's failure to identify, test, and validate all critical date
dependent applications and embedded microchips that affect core business
processes and 2) the failure of external forces, such as third party vendors,
the bank's business customers, and utilities, to have properly remediated their
systems.
Potential worst case scenarios being addressed, include: excessive levels
of cash withdrawals prior to and through the century date change, extended
electrical power outage, extended telephone communication outage, extended ATM
service outage, ACH and payroll deposit file transmission difficulties, and
excessive negative media coverage that could exacerbate public fear.
The Corporation has implemented a plan, in accordance with FFIEC
guidelines, to identify and evaluate potential Year 2000 risks to the
Corporation's commercial loan customers. Customers borrowing over $250,000 have
been contacted and were provided with a questionnaire. The questionnaire assists
the Corporation in evaluating the customer's state of Year 2000 readiness and
serves to raise customer awareness. At this time, all targeted customers have
been contacted. The Corporation is in the process of evaluating the responses
and will follow up with customers to monitor progress toward Year 2000
readiness. The Corporation has also implemented an enhanced small business loan
program specific to Year 2000 expenditures.
The Corporation is unable to estimate lost revenue related to Year 2000
issues due to the uncertainties of the impact and effects of external forces and
their potential extended disruptions.
IV. THE CORPORATION'S CONTINGENCY PLANS
A contingency plan is being drafted by the Corporation to address each
identified potential worst case scenario. Alternative solutions for business
resumption and approaches to minimize the impact of each scenario are being
formulated. Proposed approaches to address potential scenarios include:
increasing cash reserves, designating regional offices as emergency branch
locations with alternate power sources, identifying alternate communication
methods, increasing customer and community awareness, and having staff available
on site over the January 1, 2000 weekend and as needed.
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Webster Financial Corporation and Subsidiaries
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable
Item 5. OTHER INFORMATION - Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 September 30, 1998:
Current Report on Form 8-K filed with the SEC on July 23, 1998
(date of report July 23, 1998) (attaching Webster's Selected
Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial
Statements and other Annual Report data restated to reflect the
April 15, 1998 acquisition by Webster of Eagle Financial Corp.).
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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:November 12, 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
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27 Financial Data Tables.
26