EXHIBIT 13
FINANCIAL HIGHLIGHTS
(Dollars in thousands except share data)
AT OR FOR THE YEAR ENDED DECEMBER 31,
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1998 1997 1996
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STATEMENT OF CONDITION DATA
Total assets $9,033,917 $9,095,887 $7,368,941
Loans receivable, net 4,993,509 4,995,851 4,737,883
Securities 3,462,090 3,589,273 2,105,173
Intangible assets 78,380 78,493 81,936
Deposits 5,651,273 5,719,030 5,826,264
Shareholders' equity 554,879 517,262 472,824
OPERATING DATA
Net interest income $ 245,435 $ 251,050 $ 222,118
Provision for loan losses 6,800 24,813 13,054
Noninterest income 74,163 42,264 52,009
Noninterest expenses:
Acquisition-related expenses 17,400 29,792 500
Other noninterest expenses 180,389 171,871 173,977
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Total noninterest expenses 197,789 201,663 174,477
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Income before income taxes 115,009 66,838 86,596
Income taxes 44,544 25,725 32,602
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NET INCOME 70,465 41,113 53,994
Preferred stock dividends -- -- 1,149
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Income available to common shareholders $ 70,465 $ 41,113 $ 52,845
========== ========== ==========
SIGNIFICANT STATISTICAL DATA
Interest-rate spread 2.64% 3.00% 3.12%
Net interest margin 2.81% 3.19% 3.24%
Return on average shareholders' equity 13.16% 8.44% 11.32%
Net income per common share
Basic $ 1.86 $ 1.10 $ 1.44
Diluted $ 1.83 $ 1.07 $ 1.36
Dividends declared per common share $ 0.44 $ 0.40 $ 0.34
Noninterest expenses to average assets $ 2.13% $ 2.45% $ 2.42%
Noninterest expenses to average assets,
adjusted (a) 1.73% 1.90% 2.34%
Diluted weighted average shares 38,571 38,473 39,560
Book value per common share $ 14.87 $ 13.78 $ 12.73
Tangible book value per common share $ 12.77 $ 11.69 $ 10.48
Shareholders' equity to total assets 6.14% 5.69% 6.42%
(a) Noninterest expenses excluding foreclosed property, acquisition related,
non-recurring tax, capital securities and preferred dividend expenses divided by
average assets.
All per share data and the number of outstanding shares of common stock have
been adjusted retroactively to give effect to a stock dividend and a stock split
effected in the form of a stock dividend.
GLOSSARY OF TERMS
ALLOWANCE FOR LOAN LOSSES: A reserve for estimated loan losses at a particular
balance sheet date.
BASIC EARNINGS PER COMMON SHARE: Net income applicable to common stock (after
deducting dividends on preferred stock) divided by the weighted average number
of common shares outstanding during the period.
BOOK VALUE PER COMMON SHARE: Total common shareholders' equity divided by the
number of shares of common stock outstanding.
Capital Components and Ratios for Webster Bank:
LEVERAGE RATIO: Tier 1 capital as a percentage of adjusted total assets.
RISK-WEIGHTED ASSETS: The sum of risk-weighted assets plus the
risk-weighted credit equivalent amounts of off-balance sheet items, less
core deposit intangibles and certain other non-qualifying intangible assets
and the non-qualifying portion of the allowance for loan losses.
TIER 1 CAPITAL: The sum of common shareholders' equity (excluding net
unrealized gains or losses on available for sale securities, except for a
portion of net unrealized gains/losses on marketable equity securities)
less other non-qualifying intangible assets.
TIER 1 RISK-WEIGHTED CAPITAL RATIO: The ratio of Tier 1 capital to net
risk-weighted assets.
TOTAL CAPITAL: The sum of Tier 1 capital plus the qualifying portion of the
allowance for loan losses.
TOTAL RISK-WEIGHTED CAPITAL RATIO: The ratio of total capital to net
risk-weighted assets.
COMPREHENSIVE INCOME: The change in equity of a business enterprise during a
period from transactions and other events except from changes resulting from
investments by or distributions to owners.
CORE DEPOSIT INTANGIBLE: The excess of the purchase price over the fair value of
the tangible net assets acquired in a purchase transaction that represents the
estimated value of the deposit base.
DERIVATIVES: Interest-rate or currency swaps, futures, forwards, option
contracts, interest-rate caps and floors or other off-balance sheet financial
instruments used for asset/liability management or trading purposes. These
instruments derive their values or contractually determined cash flows from the
price of an underlying asset or liability, reference rate, index or other
security.
DILUTED EARNINGS PER COMMON SHARE: Net income divided by the weighted average
number of common shares outstanding during the period, plus common-equivalent
shares (such as stock options) and common shares issuable upon assumed
conversion of any outstanding convertible preferred stock.
EVA: Economic Value Added. A measure of financial performance to maximize
long-term growth and profitability.
FORECLOSED PROPERTIES: Real estate acquired in foreclosure or comparable
proceedings under which possession of the collateral has been taken.
INTEREST-EARNING ASSETS: The sum of loans, securities and short-term
investments.
INTEREST-BEARING LIABILITIES: The sum of interest-bearing deposits, Federal Home
Loan Bank advances, securities sold under agreements to repurchase and other
borrowings.
INTEREST-RATE SPREAD: The difference between the average yields earned on
interest-earning assets and the average rates paid on interest-bearing
liabilities.
2
NET INTEREST INCOME: The difference between interest and dividends on earning
assets and interest paid on interest-bearing liabilities, adjusted for the
effect of off-balance-sheet derivative financial instruments utilized to hedge
interest rate risk.
NET INTEREST MARGIN: Net interest income as a percentage of average
interest-earning assets.
NONACCRUAL ASSETS: The sum of nonaccrual loans plus foreclosed properties.
NONACCRUAL LOANS: The sum of loans on nonaccrual status for purposes of interest
income recognition.
RESERVE COVERAGE: Allowance for loan losses divided by nonaccrual loans.
RETURN ON AVERAGE EQUITY: Net income as a percentage of average shareholders'
equity.
3
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS (MD&A)
INTRODUCTION
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Webster Financial Corporation ("Webster" or the "Corporation"), through its
subsidiaries, Webster Bank (the "Bank") and Damman Insurance Associates
("Damman"), delivers financial services to individuals, families and businesses
throughout Connecticut. Webster emphasizes five business lines - consumer
banking, business banking, mortgage lending, trust and investment services, and
insurance services, each supported by centralized administration and operations.
Webster has grown significantly in recent years, primarily through a series of
acquisitions which have expanded and strengthened its franchise.
Assets at December 31, 1998 were $9.0 billion compared to $9.1 billion a year
earlier. Net loans receivable amounted to $5.0 billion at December 31, 1998 and
1997. Deposits were $5.7 billion at December 31, 1998 and 1997.
BUSINESS COMBINATIONS PENDING AT DECEMBER 31, 1998
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THE ACCESS ACQUISITION
Effective January 1, 1999, Webster purchased Access National Mortgage, Inc.
("Access"). Access was founded in 1996 as a privately held Internet-based
mortgage lender located in Wilmington, Massachusetts. Access will initially
continue to sell all originated mortgage loans. This acquisition was accounted
for as a purchase.
THE VILLAGE ACQUISITION
On November 11, 1998, Webster announced a definitive agreement to acquire
Village Bancorp, Inc. ("Village"), the holding company for Village Bank & Trust
Company for $23.50 per share in a tax-free, stock-for-stock exchange. At the
time of the original announcement, Village, based in Ridgefield, Connecticut,
had approximately $230 million in total assets, $152 million in loans and $215
million in deposits at six branches. Webster expects to consummate the
acquisition in the second quarter of 1999 and expects to account for this
transaction as a purchase.
THE MARITIME ACQUISITION
On November 4, 1998, Webster announced a definitive agreement to acquire
Maritime Bank & Trust Company ("Maritime") for $26.67 per share in a tax-free,
stock-for-stock exchange. At the time of the original announcement, Maritime,
based in Essex, Connecticut, had approximately $100 million in total assets and
$90 million in deposits at three branches. Webster expects to consummate the
acquisition in the second quarter of 1999 and expects to account for this
transaction as a purchase.
BUSINESS COMBINATIONS
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THE DAMMAN ACQUISITION
On June 1, 1998, Webster completed its acquisition of Damman. Damman is a full
service insurance agency, providing property-casualty, life and group coverage
to commercial and individual customers and is headquartered in Westport with an
additional office in Wallingford, Connecticut. Under the terms of the merger
agreement, Webster issued 274,609 shares of common stock and recorded goodwill
of $10 million. The transaction was accounted for as a purchase and therefore
results are reported only for the periods subsequent to the acquisition.
THE EAGLE ACQUISITION
On April 15, 1998, Webster acquired Eagle Financial Corporation ("Eagle") and
its subsidiary, Eagle Bank, a $2.1 billion savings bank with headquarters in
Bristol, Connecticut. In connection with the merger with Eagle, Webster issued
10,615,156 shares of its common stock for all the outstanding shares of Eagle
common stock. Under the terms of the agreement, each outstanding share of Eagle
common stock was converted into 1.68 shares of Webster common stock. This
acquisition was accounted for as a pooling of interests, and as such, the
Consolidated Financial Statements include Eagle's financial data as if Eagle had
been combined at the beginning of the earliest period presented. Prior to the
acquisition, Eagle's fiscal year ended on September 30. In recording the pooling
of interests business combination, Eagle's financial statements as of and for
the twelve months ended September 30, 1997, were combined with Webster's
financial statements as of and for the twelve months ended December 31, 1997.
See Note 2 to the Consolidated Financial Statements.
4
THE SACHEM ACQUISITION
On August 1, 1997, Webster acquired Sachem Trust National Association ("Sachem
Trust"), a trust company headquartered in Guilford, Connecticut with $300
million of assets under management, in a tax-free stock-for-stock exchange. This
acquisition was accounted for as a purchase and therefore results are reported
only for the periods subsequent to the acquisition.
THE PEOPLE'S ACQUISITION
On July 31, 1997, Webster acquired People's Savings Financial Corporation
("People's") and its subsidiary, People's Savings Bank & Trust, based in New
Britain, Connecticut, which had $482 million of assets. In connection with the
merger with People's, Webster issued 3,151,992 shares of its common stock for
all the outstanding shares of People's common stock. Under the terms of the
merger agreement each outstanding share of People's common stock was converted
into .85 shares of Webster common stock. This acquisition was accounted for as a
pooling of interests, and as such, the Consolidated Financial Statements include
People's financial data as if People's had been combined at the beginning of the
earliest period presented.
THE MIDCONN ACQUISITION
On May 31, 1997, Webster acquired MidConn Bank ("MidConn") as a result of its
acquisition of Eagle. In connection with the merger, Webster effectively issued
2,869,440 shares of its common stock for all the outstanding shares of MidConn
common stock after adjusting for the conversion factor related to the Eagle
Acquisition and common stock split of 1998. The acquisition was accounted for as
a pooling of interests, and as such, the Consolidated Financial Statements
include MidConn's financial data as if MidConn had been combined at the
beginning of the earliest period presented.
THE DERBY ACQUISITION
On January 31, 1997, Webster acquired DS Bancor, Inc. ("Derby") and its
subsidiary, Derby Savings Bank, based in Derby, Connecticut which had $1.2
billion of assets. In connection with the merger with Derby, Webster issued
7,002,740 shares of its common stock for all the outstanding shares of Derby
common stock. Under the terms of the merger agreement, each outstanding share of
Derby common stock was converted into 1.14158 shares of Webster common stock.
This acquisition was accounted for as a pooling of interests, and as such, the
Consolidated Financial Statements include Derby's financial data as if Derby had
been combined at the beginning of the earliest period presented.
THE SHAWMUT TRANSACTION
During the first quarter of 1996, Webster acquired 25 branches in the Greater
Hartford market from Shawmut Bank Connecticut, National Association (the
"Shawmut Transaction"), as part of a divestiture in connection with the merger
of Shawmut and Fleet Bank. In the branch purchase, Webster acquired
approximately $1.1 billion in deposits and $622 million in loans. As a result of
this transaction, Webster recorded $64.1 million as a core deposit intangible
asset. In connection with the Shawmut Transaction, Webster raised net proceeds
of $32.1 million through the sale of 2,499,200 shares of its common stock in an
underwritten public offering in December 1995. The Shawmut Transaction was
accounted for as a purchase, therefore operating results are reported only for
the periods subsequent to the consummation of the Shawmut Transaction.
5
ASSET QUALITY
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NONACCRUAL ASSETS
Webster devotes significant attention to maintaining high asset quality through
conservative underwriting standards, active servicing of loans, aggressively
managing nonaccrual assets and maintaining adequate reserve coverage on
nonaccrual assets. The aggregate amount of nonaccrual assets decreased to $28.9
million at December 31, 1998 from $54.1 million at December 31, 1997 and
declined as a percentage of total assets to .32% at December 31, 1998 from .59%
at December 31, 1997. Nonaccrual loans decreased $16.8 million in 1998 and
foreclosed properties decreased $8.4 million due primarily to the bulk sale of
$26.3 million of nonaccrual residential assets and write-downs and sales of
foreclosed properties. The allowance for loan losses at December 31, 1998 was
$55.1 million and represented 217% of nonaccrual loans. Total allowances for
nonaccrual assets of $55.3 million represented 191% of nonaccrual assets. The
following table details nonaccrual assets for the last five years.
December 31,
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(In thousands) 1998 1997 1996 1995 1994
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Nonaccrual Assets:
Loans accounted for on a nonaccrual basis:
Residential real estate $ 9,040 $ 26,640 $ 33,901 $ 39,495 $ 37,257
Commercial 14,703 12,229 15,004 21,583 22,431
Consumer 1,636 3,274 4,571 4,785 4,094
Foreclosed Properties:
Residential and Consumer 1,153 7,711 9,191 12,171 17,353
Commercial 2,373 4,232 9,407 15,000 25,635
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Total $ 28,905 $ 54,086 $ 72,074 $ 93,034 $106,770
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A summary of the activity in the allowance for loan losses for the last five
years follows:
For the Years Ended December 31,
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(Dollars in thousands) 1998 1997 1996 1995 1994
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Balance at beginning of period $ 59,518 $ 53,692 $ 59,892 $ 65,671 $ 60,513
Charge-offs:
Residential real estate (11,939) (15,309) (17,645) (11,914) (15,989)
Consumer (3,383) (4,175) (3,944) (1,260) (1,528)
Commercial (1,742) (5,310) (7,616) (5,786) (5,164)
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(17,064) (24,794) (29,205) (18,960) (22,681)
Recoveries:
Residential real estate 834 4,008 761 964 546
Consumer 239 491 335 1,033 1,827
Commercial 2,159 1,308 1,984 1,320 1,045
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Net charge-offs (13,832) (18,987) (26,125) (15,643) (19,263)
Allowances for purchase transactions -- -- 6,871 -- 17,647
Reclassification of Allowance for Segregated Asset
Losses 2,623 -- -- -- --
Provisions charged to operations 6,800 24,813 13,054 9,864 6,774
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Balance at end of period $ 55,109 $ 59,518 $ 53,692 $ 59,892 $ 65,671
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Ratio of net charge-offs to average loans outstanding 0.3% 0.4% 0.6% 0.4% 0.5%
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Net charge-offs decreased $5.2 million to $13.8 million in 1998 due primarily to
decreases in residential nonaccrual loans. Included in the 1998 and 1997
charge-offs were writedowns of $8.6 million and $5.8 million, respectively,
related to the bulk sales of $26.3 million and $17.7 million, respectively, of
primarily nonaccrual and delinquent loans. Included in the 1996 loan charge-offs
were write-downs of $6.3 million related to a bulk sale of $18.0 million of
nonaccrual residential loans and foreclosed properties. The 1998 provisions
charged to operations include $1.5 million specifically related to the
acquisition of Eagle. The 1997 provisions charged to operations include $9.9
million specifically related to the Derby, MidConn and People's acquisitions and
$3.4 million related to the sale of nonaccrual and delinquent loans. See Note 12
to the Consolidated Financial Statements for a summary of activity in the
allowance for losses on foreclosed properties. Management believes that the
allowance for loan losses at December 31, 1998 is adequate to cover expected
losses in the portfolio.
6
LIQUIDITY AND CAPITAL RESOURCES
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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 December
31, 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.
The primary sources of liquidity for Webster are net cash flows provided from
operating, investing and financing activities. Net cash flows from operating
activities primarily include net income, the sale of loans originated for sale,
trading account net changes, net changes in other assets and liabilities and
adjustments for noncash items such as depreciation, intangibles amortization,
investment securities net amortization and accretion and the provisions for loan
losses and foreclosed properties. Net cash flows from investing activities
primarily include the purchase, sale, maturity and paydowns of investment
securities and mortgage-backed securities that are classified as available for
sale or held to maturity and the net change in loans and interest-bearing
deposits. Net cash flows from financing activities primarily include proceeds
and repayments related to Federal Home Loan Bank ("FHL Bank") and other
borrowings, the net change in deposits, the issuance of debt securities and
changes in stockholders' equity generally related to stock issuances,
repurchases and dividend payments.
While scheduled loan amortization, maturing securities, short-term investments
and securities paydowns generally are predictable sources of funds, loan and
mortgage-backed securities prepayments are greatly influenced by general
interest rates, economic conditions and competition. One of the inherent risks
of investing in loans and mortgage-backed securities is the ability of such
instruments to incur prepayments of principal prior to maturity at rates
different than those estimated at the time of purchase. This generally occurs
because of changes in market interest rates. The market values of fixed-rate
loans and mortgage-backed securities are sensitive to fluctuations in market
interest rates, declining in value as interest rates rise. If interest rates
decrease, the market value of fixed-rate loans and mortgage-backed securities
generally will tend to increase with the level of prepayments also normally
increasing. Lower yields on such loans and mortgage-backed securities may be
offset by a lower cost of funds. Material changes in the level of nonaccrual
assets held also affects liquidity. The utilization of particular sources of
funds depends on comparative costs and availability. The Bank has, from time to
time, chosen not to pay rates on deposits as high as certain competitors, and
when necessary, supplements deposits with various borrowings. The Bank manages
the prices of its deposits to maintain a stable, cost-effective deposit base as
a source of liquidity.
The Bank had additional borrowing capacity from the FHL Bank of $700 million at
December 31, 1998. At that date, the Bank had FHL Bank advances outstanding of
$1.8 billion compared to $1.5 billion at December 31, 1997. See Note 8 to the
Consolidated Financial Statements.
Webster's main sources of liquidity at the holding company level are dividends
from the Bank, investment income and net proceeds from capital offerings and
borrowings, while the main outflows are purchases of available for sale
securities, 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 senior notes and capital securities. There are certain restrictions on
the payment of dividends by the Bank to Webster. See Note 14 to the Consolidated
Financial Statements. Webster also maintains $80 million in revolving lines of
credit with correspondent banks. The sale of $100 million and $50 million of
Webster's Capital Trust I Capital Securities and Webster's Capital Trust II
Capital Securities, respectively, were completed further increasing Webster's
capital resources. The Capital Trust Securities are further discussed in Note 19
to the Consolidated Financial Statements.
During 1998, Webster repurchased a total of 1,396,551 shares of its common stock
under three announced repurchase programs. The 1998 repurchases included 274,609
shares related to the Damman acquisition and 305,215 shares repurchased in
connection with the settlement of warrants previously issued to Fleet related to
the Shawmut Transaction. During 1997, Webster repurchased 260,466 shares of its
common stock of which 170,666 was related to the acquisition of Sachem Trust and
89,800 was to complete repurchases under a repurchase plan announced in November
of 1996.
7
Applicable OTS regulations require the Bank, as a federal savings bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement and risk-based capital requirements. As an OTS regulated savings
institution, the Bank is also subject to a minimum tangible capital requirement.
At December 31, 1998, the Bank was in full compliance with all applicable
capital requirements. See Note 14 to the Consolidated Financial Statements.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
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Interest-rate risk is the sensitivity of the market value of assets and
liabilities to changes in interest rates over short-term and long-term time
horizons. The market values of certain financial assets and liabilities of
Webster are sensitive to fluctuations in market interest rates. Changes in
interest rates can affect the amount of loans originated by the Bank, as well as
the value of its loans and other interest-earning assets and interest-bearing
liabilities. Also, increases in interest rates may cause depositors to shift
funds from accounts that have a comparatively lower cost such as regular savings
accounts to accounts with a higher cost such as certificates of deposit. If the
cost of interest-bearing liabilities increases at a rate that is greater than
the increase in yields on interest-earning assets, the interest-rate spread
would be negatively affected. Changes in Webster's asset and liability mix also
affects interest-rate spread. Webster is unable to predict future fluctuations
in interest rates.
The primary goals of interest-rate risk management are to control risk within
limits approved by the Board of Directors and more narrow guidelines established
by the Asset/Liability Committee while managing interest-rate risk to maximize
net interest income and net market value over time in changing interest-rate
environments. To this end, Webster's strategies for controlling 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 simulation analyses with particular emphasis on
measuring changes in the market value of portfolio equity and changes in net
interest income in different interest-rate environments. Market value is
measured as the net present value of future cash flows. 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. The key assumptions relate to the behavior of interest
rates and spreads, the fluctuations in product balances, and prepayment and
decay rates on loans and deposits. From such simulations, interest-rate risk is
quantified and appropriate strategies are formulated. The overall interest-rate
risk position is reviewed on an ongoing basis by the Asset/Liability Committee,
which includes Executive Management and has representation by members of each
major line of business. Strategies employed during 1998 to improve the
interest-rate sensitive position included, (i) promotion of adjustable-rate
mortgage loans, particularly adjustable rate mortgage loans which have lower
prepayment speeds than one-year adjustable rate mortgage loans, (ii) promotion
of prepayment protected residential mortgage loans, (iii) emphasis on the
origination of variable-rate home equity credit lines and commercial loans, (iv)
emphasis on the purchase of short duration mortgage-backed securities, (v) the
purchase of prepayment protected mortgage-backed securities, and (vi) emphasis
on deposits and borrowed funds that meet asset/liability management objectives.
Webster also uses as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. Webster utilized interest-rate financial
instruments to hedge mismatches in interest-rate maturities to reduce exposure
to movements in interest rates. These interest-rate financial instruments
involve, to varying degrees, credit risk and market risk. Credit risk is the
possibility that a loss may occur if a counterparty to a transaction fails to
perform according to the terms of the contract. Market risk is the effect of a
change in interest rates or currency rates on the value of the financial
instruments. The notional amount of interest-rate financial instruments is the
amount upon which interest and other payments under the contract are based. For
interest-rate financial instruments, the notional amount is not exchanged and
therefore, the notional amounts should not be taken as a measure of credit or
market risk. See Notes 3 and 10 to the Consolidated Financial Statements.
Webster holds short futures positions, long options positions and interest-rate
contracts to minimize the price volatility of certain adjustable-rate assets
held as Trading Securities. Changes in the market value of short futures
positions and options are recognized as a gain or loss in the Consolidated
Statements of Income in the period for which the change occurred.
8
The following table summarizes the estimated market value of Webster's
interest-sensitive assets and interest-sensitive liabilities at December 31,
1998 and 1997, and the projected change to market values if interest rates
instantaneously increase or decrease by 100 basis points.
Book Market Estimated Market Value Impact
(In thousands) Value Value -100 BP +100 BP
- - ---------------------------------------------- --------------------- -------------------- -------------------- --------------------
1998
- - ----
Interest-Sensitive Assets:
Trading $ 91,114 $ 91,114 $ (84) $ (1,236)
Non-Trading 8,187,091 8,334,598 137,345 (177,909)
Interest-Sensitive Liabilities 8,164,754 8,315,981 (131,580) 126,715
1997
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Interest-Sensitive Assets:
Trading $ 84,749 $ 84,749 $ (438) $ (399)
Non-Trading 8,398,573 8,485,329 105,605 (159,488)
Interest-Sensitive Liabilities 8,492,402 8,512,618 (45,929) 46,918
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The tables above exclude interest-earning assets that are not directly impacted
by changes in interest rates. These assets include equity securities of $214.4
million at December 31, 1998 and $224.0 million at December 31, 1997 (See Note 3
to Consolidated Financial Statements) and nonaccrual loans of $25.4 million at
December 31, 1998 and $42.1 million at December 31, 1997 (See "Asset Quality"
within the MD&A). Values for mortgage servicing rights have been included in the
tables above as movements in interest rates affect the valuation of the
servicing rights. Equity securities and nonaccrual assets not included in the
above tables are however, subject to fluctuations in market value based on other
risks.
Interest-sensitive assets, net of interest-sensitive liabilities, when impacted
by a minus 100 basis point rate change, results in a favorable $5.7 million
change in net market values for 1998 compared to a $59.2 million favorable net
market value change in 1997. A plus 100 basis point rate change results in a
unfavorable $52.4 million change in net market values for 1998 compared to a
$113.0 million unfavorable net market value change in 1997.
Based on Webster's asset/liability mix at December 31, 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 an estimated 2.6% compared to an
estimated 3.2% decrease at December 31, 1997. A instantaneous 100 basis point
decline in interest rates would decrease net interest income over the next
twelve months by less than 2.0% compared to less than 1.0% at December 31, 1997.
The estimated market values in the preceding tables are subject to factors that
could cause actual results to differ from such projections and estimates.
Management believes that Webster's interest-rate risk position at December 31,
1998, represents a reasonable level of risk.
9
COMPARISON OF 1998 AND 1997 YEARS
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GENERAL. For 1998, Webster reported net income of $70.5 million, or $1.83 per
share on a diluted basis. Included in the 1998 results are acquisition related
expenses of $17.4 million and provisions for loan losses of $1.5 million
specifically related to the Eagle acquisition. Also, included in the 1998
results is a non-recurring net tax expense of $3.2 million. Excluding the effect
of acquisition related expenses and provisions for loan losses and non-recurring
net tax expense, net income for the 1998 year would have been $86.9 million or
$2.25 per diluted share. Net income for 1997 amounted to $41.1 million, or $1.07
per share on a diluted basis. Included in the 1997 results are acquisition
related expenses of $29.8 million and provisions for loan losses of $9.9 million
specifically related to the Derby, MidConn and People's acquisitions. Excluding
the effect of acquisition related expenses and provisions for loan losses, net
income for the 1997 year would have been $64.5 million or $1.68 per diluted
share.
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $5.7 million in 1998 to $245.4 million from $251.1 million in 1997.
The decrease is primarily attributable to a reduction of the yield on
interest-earning assets mainly related to a lower return on investment
securities. The cost of interest-bearing liabilities was higher in 1998 due
primarily to a higher volume of borrowings. Interest-rate spread for the 1998
year decreased to 2.64% compared to 3.00% in 1997 due primarily to a higher
level of average interest-earning assets that yielded a return that was
approximately twenty-eight basis points lower than realized in 1997. The average
balance for investment securities was $3.9 billion with a yield of 6.17% for the
1998 year compared to $2.8 billion with a yield of 6.62% for 1997.
INTEREST INCOME. Total interest income for 1998 amounted to $622.5 million, an
increase of $43.6 million, or 7.5% compared to $578.9 million in 1997. The
higher interest income was due primarily to an increase in the average volume of
securities partially offset by decreases in net loans and interest-bearing
deposits.
INTEREST EXPENSE. Interest expense for 1998 totaled $377.0 million, an increase
of $49.2 million compared to $327.8 million in 1997. The higher interest expense
was due primarily to an increase in the average volume of borrowings in 1998
compared to 1997.
10
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned or paid by Webster.
YEARS ENDED DECEMBER 31,
- - -------------------------- ------------ ------------ -------- ----------- ------------ --------- ------------ ----------- ----------
1998 1997 1996
---- ---- ----
(Dollars in thousands) Average Average Average Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Loans, net (a) $4,883,585 $382,906(b) 7.84% $4,949,366 $386,416(b) 7.81% $4,706,292 $367,003(b) 7.80%
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Securities and
Interest-Bearing 3,904,203 239,547 6.14(c) 2,920,303 192,438 6.59(c) 2,148,770 140,023 6.52(c)
Deposits
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Total Interest-Earning 8,787,788 622,453 7.07 7,869,669 578,854 7.35 6,855,062 507,026 7.40
Assets
Other Assets 499,692 372,883 357,571
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Total Assets $9,287,480 $8,242,552 $7,212,633
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Savings and Escrow $1,245,658 $ 31,046 2.49% $1,238,203 $ 29,61529,615 2.39% $1,222,830 $26,975 2.21%
Money Market Savings,
NOW and DDA 1,124,502 12,807 1.14 1,100,750 14,572 1.32 1,175,046 20,245 1.72
Time Deposits 3,367,975 177,435 5.27 3,398,843 179,292 5.28 3,343,197 182,003 5.44
FHL Bank Advances 1,654,533 94,825 5.73 1,171,612 67,904 5.80 685,268 40,808 5.96
Repurchase Agreements
and Other Borrowings 1,017,470 57,245 5.63 593,029 32,761 5.52 197,083 11,217 5.69
Senior Notes 40,000 3,660 9.15 40,000 3,660 9.15 40,000 3,660 9.15
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Total Interest-Bearing 8,450,138 377,018 4.43 7,542,437 327,804 4.35 6,663,424 284,908 4.28
Liabilities 301,721 212,953 72,087
Other Liabilities 535,621 487,162 477,122
Shareholders' Equity
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Net Interest Income and
Interest-Rate Spread $245,435 2.64% $251,050 3.00% $222,118 3.12%
- - -------------------------- ------------ ------------ -------- ----------- ------------ ---------- ----------- ------------ ---------
Total Liabilities and
Shareholders' $9,287,480 $8,242,552 $7,212,633
Equity
- - -------------------------- ------------ ------------ -------- ----------- ------------ --------- ------------ ------------ ---------
Net Interest Margin 2.81% 3.19% 3.24%
- - -------------------------- ------------ ------------ -------- ----------- ------------ --------- ------------ ------------ ---------
(a) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(b) Includes amortization of net deferred loan costs and premiums (net of
discounts) of: $ 1.7 million, $3.9 million and $939,000 in 1998, 1997 and 1996,
respectively.
(c) Yields are adjusted to a fully tax equivalent basis.
11
Net interest income also can be analyzed in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected Webster's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in
rates (changes in rates multiplied by prior volume) and (iii) the net change.
The change attributable to the combined impact of volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.
Years Ended December 31, Years Ended December 31,
1998 v.1997 1997 v. 1996
- - --------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
(In thousands) Rate Volume Total Rate Volume Total
- - --------------------------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
Loans $ 1,658 $ (5,168) $ (3,510) $ 436 $ 18,977 $ 19,413
Securities (12,111) 59,220 47,109 1,591 50,824 52,415
- - --------------------------------------------------------------------------------------------------------------------------------
Total (10,453) 54,052 43,599 2,027 69,801 71,828
- - --------------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (2,204) 13 (2,191) (7,884) 2,140 (5,744)
FHL Bank advances and other
borrowings (719) 52,124 51,405 (2,259) 50,899 48,640
- - --------------------------------------------------------------------------------------------------------------------------------
Total (2,923) 52,137 49,214 (10,143) 53,039 42,896
- - --------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ (7,530) $ 1,915 $ (5,615) $12,170 $16,762 $28,932
- - --------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES. The provision for loan losses for 1998 was $6.8
million compared to $24.8 million in 1997. The decrease for 1998 is attributable
to approximately $8.4 million less in provisions related to acquisitions and an
overall reduction in nonaccrual loans. The provision for loan losses for 1997
included additional provisions of $9.9 million related to the acquisitions of
Derby, MidConn and People's. The allowance for losses on loans totaled $55.1
million and represented 217% of nonaccrual loans at December 31, 1998 versus
$59.5 million or 141% of nonaccrual loans at December 31, 1997.
NONINTEREST INCOME. Noninterest income for 1998 totaled $74.2 million, compared
to $42.3 million in 1997. Fees and service charges were $43.2 million in 1998,
an increase of $11.2 million, or 35% from 1997 due primarily to an increase in
the customer base and fees generated as a result of the Damman and Sachem Trust
acquisitions. Gains on the sale of loans and mortgage loan servicing rights
increased to $3.3 million in 1998 compared to $793,000 in 1997, due primarily to
the sale of the credit card portfolio. Gains on the sale of securities amounted
to $15.4 million in 1998 compared to $3.1 million in 1997. Other noninterest
income was $12.3 million, an increase of $5.6 million from $6.7 million in 1997
due primarily to the implementation of a life insurance program.
NONINTEREST EXPENSES. Noninterest expenses for 1998 were $197.8 million compared
to $201.7 million in 1997. Included in the 1998 total are acquisition related
expenses totaling $17.4 million for the Eagle acquisition. The 1997 results also
include acquisition related expenses totaling $29.8 million which include: $19.9
million related to the Derby acquisition, $7.2 million related to the People's
acquisition and $2.7 million related to the MidConn acquisition. Excluding
acquisition related expenses, noninterest expenses for 1998 increased $8.5
million compared to 1997. Increases in salaries and benefits, furniture and
equipment, intangible amortization, and capital securities expenses were
partially offset by lower expenses for occupancy, federal deposit insurance,
foreclosed property, marketing, and other expenses. Salaries and benefits
expenses included a $1.5 million reduction in expenses related to the
consolidation of the Eagle pension and post-retirement benefits other than
pension plans into Webster's plans.
INCOME TAXES. Income tax expense for 1998 increased to $44.5 million from $25.7
million in 1997. The increase in income tax expense is due primarily to a $48.2
million increase in income before taxes and a $3.2 million non-recurring net tax
expense related primarily to the planned formation of a Connecticut Passive
Investment Company, see "Tax Legislation".
12
COMPARISON OF 1997 AND 1996 YEARS
- - --------------------------------------------------------------------------------
GENERAL. For 1997, Webster reported net income of $41.1 million, or $1.07 per
share on a diluted basis. Included in the 1997 results are acquisition related
expenses of $29.8 million and provisions for loan losses of $9.9 million
specifically related to the Derby, People's and MidConn acquisitions. Excluding
the effect of acquisition related expenses and additional provisions for loan
losses, net income for the 1997 year would have been $64.5 million or $1.68 per
diluted share. Net income for 1996 amounted to $54.0 million, or $1.36 per share
on a diluted basis. Included in the 1996 results are expenses of $10.1 million
related to a special assessment associated with the recapitalization of the
Savings Association Insurance Fund ("SAIF"), $500,000 of acquisition related
charges for the Shawmut Transaction and a $15.9 million gain on the sale of
deposits resulting from Eagle's sale of seven Danbury, CT region branch offices.
Excluding the effects of these items, net income for the 1996 year would have
been $50.9 million or $1.29 per diluted share. Results for the Shawmut
Transaction are included in the accompanying Consolidated Financial Statements
from the date of acquisition on February 16, 1996.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $28.9 million in 1997 to $251.0 million from $222.1 million in 1996.
The increase is primarily attributable to an increased volume of average
interest-earning assets and interest-bearing liabilities as a result of balance
sheet growth. The balance sheet growth was due in part to the utilization of the
proceeds of the Capital Trust I and II Capital Securities offerings in 1997,
which supported increases in interest-earning assets and interest-bearing
liabilities. See Note 19 to the Consolidated Financial Statements. The
interest-rate spread for the 1997 year decreased to 3.00% compared to 3.12% in
1996 due primarily to the change in mix of interest-earning assets and
interest-bearing liabilities. During 1997, the average balance of securities
increased $771.9 million and the average balance of borrowings increased $882.3
million from the year earlier period.
INTEREST INCOME. Total interest income for 1997 amounted to $578.9 million, an
increase of $71.8 million, or 14.2% compared to $507.0 million in 1996. This
improvement was due primarily to an increase in the average volume of loans and
securities offset by a decrease in the average yield on all interest-earning
assets to 7.35% in 1997 from 7.40% in 1996.
INTEREST EXPENSE. Interest expense for 1997 totaled $327.8 million, an increase
of $42.9 million compared to $284.9 million in 1996. The higher interest expense
was due primarily to an increase in the average volume of borrowings and an
increase in the average cost of funds on all interest-bearing liabilities to
4.35% in 1997 from 4.28% in 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses for 1997 was $24.8
million compared to $13.1 million in 1996. The increase for 1997 is attributable
to $9.9 million in provisions made at the time of the acquisitions of Derby,
MidConn and People's and $3.4 million related to the sale of nonaccrual and
delinquent loans. The allowance for losses on loans totaled $59.5 million and
represented 141% of nonaccrual loans at December 31, 1997 versus $53.7 million
or 100% of nonaccrual loans at December 31, 1996.
NONINTEREST INCOME. Noninterest income for 1997 totaled $42.3 million, compared
to $52.0 million in 1996. Included in the 1996 results is a $15.9 million gain
on the sale of deposits resulting from the sale of seven Danbury, CT region
branch offices. Fees and service charges were $32.0 million in 1997, an increase
of $5.9 million, or 22.8% from 1996 due primarily to an increase in the customer
base. Gains on the sale of loans and mortgage loan servicing rights amounted to
$793,000 in 1997 compared to a loss of $705,000 in 1996. Gains on the sale of
securities amounted to $3.1 million in 1997 compared to $3.7 million in 1996.
Other noninterest income was $6.7 million for 1997 and $7.1 million for 1996.
Also included as a charge to noninterest income in the 1997 period was a loss on
disposal of premises and equipment of $915,000.
NONINTEREST EXPENSES. Noninterest expenses for 1997 were $201.7 million compared
to $174.5 million in 1996. Included in the 1997 results are acquisition related
expenses totaling $29.8 million which include: $19.9 million related to the
Derby acquisition, $7.2 million related to the People's acquisition and $2.7
million related to the MidConn acquisition. Other components of the increase
were higher occupancy, furniture and equipment, intangible amortization and
Capital Securities expenses. Offsetting such increases were lower salaries and
employee benefits due to decreases in pension and post-retirement benefits and
decreased foreclosed property expenses and provisions due to fewer foreclosed
properties. Included in the 1996 results are expenses of $10.1 million related
to a special assessment associated with the recapitalization of the SAIF and
$500,000 related to the Shawmut Transaction.
13
INCOME TAXES. Income tax expense for 1997 decreased to $25.7 million from $32.6
million in 1996. The decrease in income tax expense is due primarily to lower
pre-tax income and to lower state income tax rates.
IMPACT OF INFLATION AND CHANGING PRICES
- - --------------------------------------------------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a banking institution are monetary in nature. As a result, interest rates have a
more significant impact on a banking institution's performance than the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services.
RECENT FINANCIAL 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 embedded 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. 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. Management is in
the process of evaluating the impact of this statement on its financial position
and results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits". 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. Webster implemented this statement for the year ended
December 31, 1998. See Note 16.
TAX LEGISLATION
- - --------------------------------------------------------------------------------
Federal tax law changes were enacted in August 1996 to eliminate the "thrift bad
debt" method of calculating bad debt deductions for tax years after 1995 and to
impose a requirement to recapture into taxable income (over a six-year period)
all bad debt reserves accumulated after 1987. Since Webster previously recorded
a deferred tax liability with respect to these post 1987 reserves, its total
income tax expense for financial reporting purposes will not be affected by the
recapture requirement. The tax law changes also provide that taxes associated
with the recapture of pre-1988 bad debt reserves would become payable under more
limited circumstances than under prior law. Under the tax laws, as amended,
events that would result in recapture of the pre-1988 bad debt reserves include
stock and cash distributions to the holding company from the Bank in excess of
specified amounts. Webster does not expect such reserves to be recaptured into
taxable income.
The State of Connecticut enacted tax law changes in May 1998, allowing for the
formation of a Passive Investment Company ("PIC") by financial institutions.
This new legislation exempts Passive Investment Companies from state income
taxation in Connecticut, and exempts from inclusion in Connecticut taxable
income the dividends paid from a passive investment company to a related
financial institution. Webster Bank qualifies as a financial institution under
the new statute, and has taken steps to organize a PIC that will begin
operations in the first quarter of 1999. The legislation is effective for tax
years beginning on or after January 1, 1999. Webster's formation of a PIC is
expected to reduce its Connecticut tax liability beginning in 1999 and, as a
result, a deferred tax charge was taken in the fourth quarter of 1998.
YEAR 2000 READINESS DISCLOSURE STATEMENT
- - --------------------------------------------------------------------------------
14
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 focuses on four categories of
information: I. The Corporation's state of readiness, II. The costs to address
the Corporation's Year 2000 issues, III. The risks of the Corporation's Year
2000 issues 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 developed a five phase Year 2000
plan. 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 the Awareness phase. The Corporation formed a
Year 2000 Task Force, headed by a senior technology officer. The Task Force
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 sent an informational pamphlet to all retail
customers. The Corporation has also placed information on its web site to
address the Corporation's preparedness and related Year 2000 issues and
will continue to do so throughout 1999.
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
environmental systems that are dependent on embedded microchips, such as
security systems, elevators, and vaults.
The Corporation has completed 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 end of the first quarter of 1999. Vaults do not have date related
issues, and therefore no remediation is required.
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 systems were Year 2000
ready by December 31, 1998. The remainder of systems, both mission critical
and essential, are targeted for completion by the end of the second quarter
of 1999. Most of the Corporation's systems are vendor supplied and are being
remediated by the vendors. The vendor for the Corporation's primary system
of records has provided the Corporation with a Year 2000 ready release which
has been installed. This release has been 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".
15
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 were 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, were
tested for key date validity and accuracy. Key dates include dates before,
during, and after the century change and the century leap year. As of
December 31, 1998, future date testing on mission critical systems has been
successfully completed. The Corporation anticipates that this process will
be substantially completed for other essential systems 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. Remediation 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 continuing the process
of validating the software for Year 2000 readiness on its systems.
Validation of the majority of core functionality on mission critical
applications was completed by December 31, 1998, with the remainder
targeted for completion by the end of the first quarter of 1999.
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 $560,000 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 $136,000 and expenses
related to consulting services for Year 2000 project management and systems
testing that amounted to approximately $410,000. During the next 12 months, the
Corporation anticipates Year 2000 readiness direct expenses to total
approximately $460,000. 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 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 Corporation's business
customers, and utilities, to have properly remediated their systems.
Planning 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 more than $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
The Corporation is proactively addressing each critical core business area in
terms of developing contingency plans which cover alternate processing means
should problems arise. In compliance with regulatory guidance, it is expected
that all such plans will be developed and in place by the end of the first
quarter, 1999. The Corporation will utilize the remainder of 1999 to refine the
contingency plans and preplan actions to be taken before, during, and after the
century date change. The contingency plans now under development address most
likely scenarios related to a Year 2000 technological fault. 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
16
power sources, identifying alternate communication methods, increasing customer
and community awareness, and having staff available over the January 1, 2000
weekend and as needed.
FORWARD LOOKING STATEMENTS
This annual report contains 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, deposits 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.
17
CONSOLIDATED STATEMENTS OF CONDITION
- - --------------------------------------------------------------------------------
(Dollars in thousands, except share data)
December 31,
- - -----------------------------------------------------------------------------------------------------------------------------
1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Depository Institutions $ 173,863 $ 151,322
Interest-bearing Deposits 3,560 77,104
Securities: (Note 3)
Trading, at Fair Value 91,114 84,749
Available for Sale, at Fair Value 2,969,822 3,092,287
Held to Maturity, (Fair Value: $404,365 in 1998; $412,061 in 1997) 401,154 412,237
Loans Receivable, Net (Note 4) 4,993,509 4,995,851
Accrued Interest Receivable 55,012 52,658
Premises and Equipment, Net (Note 5) 79,324 71,887
Foreclosed Properties, Net (Note 12) 3,526 11,943
Intangible Assets (Note 2) 78,380 78,493
Cash Surrender Value of Life Insurance 141,059 12,750
Prepaid Expenses and Other Assets (Note 6) 43,594 54,606
- - -----------------------------------------------------------------------------------------------------------------------------
Total Assets $9,033,917 $9,095,887
- - -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------------------
Deposits (Note 7) $ 5,651,273 $5,719,030
Federal Home Loan Bank Advances (Note 8) 1,774,560 1,516,634
Reverse Repurchase Agreements and Other Borrowings (Note 9) 738,921 1,032,963
Advance Payments by Borrowers for Taxes and Insurance 32,293 30,570
Accrued Expenses and Other Liabilities 82,414 84,851
- - -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 8,279,461 $8,384,048
- - -----------------------------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts (Note 19) 150,000 145,000
Preferred Stock of Subsidiary Corporation (Note 20) 49,577 49,577
SHAREHOLDERS' EQUITY: (NOTES 14, 15 AND 16)
- - -----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value:
Authorized - 50,000,000 shares;
Issued - 38,353,424 shares at December 31, 1998 and 37,574,177 shares in 1997 384 376
Paid-in Capital 249,819 241,552
Retained Earnings 314,791 257,954
Less Treasury Stock at cost, 1,026,770 shares at December 31, 1998 and 45,916 shares
at December 31, 1997 (27,914) (1,116)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,339) (1,971)
Accumulated Other Comprehensive Income 19,138 20,467
- - -----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 554,879 517,262
- - -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 5 and 21)
Total Liabilities and Shareholders' Equity $9,033,917 $9,095,887
- - -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 382,906 $ 386,416 $ 367,004
Securities and Interest-bearing Deposits 239,547 192,438 140,022
- - ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 622,453 578,854 507,026
- - ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 7) 221,288 223,479 229,223
Borrowings 155,730 104,325 55,685
- - ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 377,018 327,804 284,908
- - ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 245,435 251,050 222,118
Provision for Loan Losses (Note 4) 6,800 24,813 13,054
- - ------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 238,635 226,237 209,064
- - ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Fees and Service Charges 43,181 32,013 26,060
Gain (Loss) on Sale of Loans and Loan Servicing, Net 3,290 793 (705)
Gain on Sale of Securities, Net (Note 3) 15,351 3,142 3,670
Gain on Sale of Deposits -- 546 15,904
Other Noninterest Income 12,341 5,770 7,080
- - ------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 74,163 42,264 52,009
- - ------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 76,861 74,369 77,676
Occupancy Expense of Premises 16,295 16,408 15,393
Furniture and Equipment Expenses 17,363 14,030 12,995
Federal Deposit Insurance Premiums 1,317 1,657 3,366
SAIF Recapitalization Expense -- -- 10,128
Foreclosed Property Expenses and Provisions, Net (Note 12) 576 4,184 5,158
Intangible Amortization 9,642 9,249 8,102
Marketing Expenses 6,604 7,576 7,740
Acquisition-related Expenses (Note 17) 17,400 29,792 500
Capital Securities Expense (Note 19) 14,708 11,368 --
Dividends on Preferred Stock of Subsidiary Corporation (Note 20) 4,151 85 --
Other Operating Expenses 32,872 32,945 33,419
- - ------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 197,789 201,663 174,477
- - ------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 115,009 66,838 86,596
Income Taxes (Note 13) 44,544 25,725 32,602
- - ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 70,465 $ 41,113 $ 53,994
Preferred Stock Dividends -- -- 1,149
- - ------------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 70,465 $ 41,113 $ 52,845
- - ------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (NOTE 15):
Basic $ 1.86 $ 1.10 $ 1.44
Diluted 1.83 1.07 1.36
- - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
- - --------------------------------------------------------------------------------------------------------------------------------
Employee
Stock
Ownership Accumulated
Plan Shares Other
Preferred Common Paid-In Retained Treasury Purchased Comprehensive
Stock Stock Capital Earnings Stock With Debt Income Total
- - --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2 $374 $273,554 $190,318 $(3,290) $(3,301) $3,134 $460,791
- - --------------------------------------------------------------------------------------------------------------------------------
Net Income for 1996 -- -- -- 53,994 -- -- -- 53,994
Dividends Paid:
$.34 Per Common Share -- -- -- (5,546) -- -- -- (5,546)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (7,741) -- -- -- (7,741)
Dividends Paid or Accrued:
Preferred Series B -- -- -- (1,149) -- -- -- (1,149)
Allocation of ESOP Shares -- -- 94 -- -- 727 -- 821
Exercise of Stock Options -- 4 1,468 (2) 3,351 -- -- 4,821
Conversion of Preferred
Series B to Common Stock (1) -- (8,724) -- 8,725 -- -- --
Common Stock Repurchased -- -- -- -- (27,611) -- -- (27,611)
Pooling Adjustments, Net -- (3) (3,215) 2 -- -- (1,365) (4,581)
Net Unrealized Loss on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- (1,549) (1,549)
Other, Net -- -- 550 -- 24 -- -- 574
- - -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1 $ 375 $ 263,727 $ 229,876 $ (18,801) $ (2,574) $ 220 $ 472,824
- - -----------------------------------------------------------------------------------------------------------------------------
Net Income for 1997 -- -- -- 41,113 -- -- -- 41,113
Dividends Paid:
$.40 Per Common Share -- -- -- (9,037) -- -- -- (9,037)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (6,846) -- -- -- (6,846)
Allocation of ESOP Shares -- -- 166 -- -- 603 -- 769
Exercise of Stock Options -- 8 264 (4) 5,058 -- -- 5,326
Conversion of Preferred
Series B to Common Stock (1) -- (18,499) -- 18,500 -- -- --
Common Stock Repurchased -- -- -- -- (6,020) -- -- (6,020)
Common Stock Issued in
Consideration for Acquisitions -- 2 3,971 (1) -- -- -- 3,972
Pooling Adjustments, Net -- (5) (8,833) 2,913 -- -- (4,020) (9,945)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- 24,615 24,615
Other, Net -- (4) 756 (60) 147 -- (348) 491
- - -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ -- $ 376 $ 241,552 $257,954 $ (1,116) $ (1,971) $ 20,467 $ 517,262
- - -----------------------------------------------------------------------------------------------------------------------------
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(In thousands, except per share data)
- - --------------------------------------------------------------------------------------------------------------------------------
Employee
Stock
Ownership Accumulated
Plan Shares Other
Preferred Common Paid-In Retained Treasury Purchased Comprehensive
Stock Stock Capital Earnings Stock With Debt Income Total
- - --------------------------------------------------------------------------------------------------------------------------------
Net Income for 1998 $ -- $ -- $ -- $ 70,465 $ -- $ -- $ -- $ 70,465
Dividends Paid
$.43 Per Common Share -- -- -- (15,299) -- -- -- (15,299)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (3,226) -- -- -- (3,226)
Allocation of ESOP Shares -- -- 411 -- -- 632 -- 1,043
Exercise of Stock Options -- 3 7,687 -- 3,778 -- -- 11,468
Common Stock Repurchased -- -- (12) -- (39,873) -- -- (39,885)
Common Stock Issued in
Consideration for Acquisitions -- -- 185 -- 9,083 -- -- 9,268
Net Unrealized Loss on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- (1,329) (1,329)
Adjustment for the Effect of the
Change of Eagle's Fiscal Year
End (Note 2) -- -- -- 4,898 -- -- -- 4,898
Other, Net -- 5 (4) (1) 214 -- -- 214
- - --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ -- $384 $249,819 $ 314,791 $(27,914) $(1,339) $ 19,138 $554,879
- - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(Dollars in thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 70,465 $ 41,113 $ 53,994
Other Comprehensive Income (Loss), Net of Tax
Unrealized Gains (Losses) on Securities Available for Sale:
Unrealized Holding Gain (Loss) Arising During Year
(Net of Income Taxes (Benefit) of $5,231, $13,516 and
($981) for 1998, 1997 and 1996, respectively) 7,631 21,591 (1,626)
Less: Reclassification Adjustment for Net Gains
Included in Net Income (Net of Income Tax Expense
of ($5,664), ($841) and ($778) for 1998, 1997 and 1996, respectively) 8,960 1,344 1,288
- - --------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) (1,329) 20,247 (2,914)
- - --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 69,136 $ 61,360 $ 51,080
- - --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $70,465 $ 41,113 $ 53,994
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 6,800 24,813 13,054
Provision for Foreclosed Property Losses 330 1,637 2,523
Provision for Depreciation and Amortization 12,789 11,298 9,441
Amortization (Accretion) of Securities Premiums, Net 3,704 (1,700) 5,067
Amortization and Write-down of Intangibles 9,642 9,249 8,102
Amortization of Hedging Costs, Net 4,669 2,985 780
Amortization of Mortgage Servicing Rights 1,949 1,215 615
Gains on Sale of Deposits -- (546) (15,904)
Gains on Sale of Foreclosed Properties, Net (908) (1,274) (1,650)
Gains on Sale of Loans and Securities, Net (19,408) (3,706) (2,050)
Losses (Gains) on Sale of Trading Securities, Net 767 (229) (915)
Loss on Disposal of Premises and Equipment -- 915 --
(Increase) Decrease in Trading Securities (2,278) (40,952) 24,539
Loans Originated for Sale (101,401) (59,543) (136,814)
Sale of Loans, Originated for Sale 100,952 70,372 112,370
(Increase) Decrease in Interest Receivable (2,109) (6,019) 194
Decrease (Increase) in Prepaid Expenses and Other Assets 21,967 (2,668) (15,242)
Increase (Decrease) in Interest Payable 2,890 18,389 (866)
(Decrease) Increase in Accrued Expenses and Other Liabilities (51,018 9,310 (12,736)
Increase in Cash Surrender Value of Life Insurance (3,396) -- --
Adjustment to Conform Eagle's Fiscal Year End 7,860 -- --
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 64,266 74,659 44,502
- - --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (2,398,584) (2,139,050) (945,317)
Purchases of Securities, Held to Maturity (151,988) (24,213) (162,564)
Principal Collected on Mortgage-Backed Securities 1,110,411 368,000 302,037
Investment in Subsidiaries (11,068) (4,069) --
Maturities of Securities 193,342 210,682 207,689
Proceeds from Sales of Securities, Available for Sale 1,501,680 156,203 473,753
Net Decrease (Increase) in Interest-bearing Deposits 71,109 (41,045) 57,513
Purchase of Loans (66,173) (191,078) (113,582)
Net Increase in Loans 53,476 (58,119) (20,679)
Proceeds from Sale of Foreclosed Properties 13,529 38,487 26,694
Purchases of Life Insurance (124,913) (12,750) --
Purchase of Premises and Equipment, Net (19,802) (11,436) (14,041)
Proceeds from Sales of Premises and Equipment -- -- 735
Net Cash and Cash Equivalents Received in Bank Acquisition -- -- 310,336
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 171,019 (1,708,388) 122,574
- - --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net Decrease in Deposits (84,671) (96,929) (55,141)
Sale of Deposits -- (9,179) (168,506)
Repayment of FHL Bank Advances (4,422,636) (5,167,029) (2,093,849)
Proceeds from FHL Bank Advances 4,638,265 5,906,775 2,288,661
Repayment of Reverse Repurchase Agreements and Other Borrowings (18,404,261) (4,448,386) (1,631,765)
Proceeds from Reverse Repurchase Agreements and Other Borrowings 18,111,564 5,301,170 1,561,053
Net Proceeds from Issuance of Capital Securities -- 141,327 --
Net Proceeds from Preferred Stock of Subsidiary Corporation -- 49,577 --
Cash Dividends to Common and Preferred Shareholders (18,524) (15,883) (14,436)
Net (Decrease) Increase in Advance Payments for Taxes and Insurance (4,089) (7,747) 2,429
Exercise of Stock Options 11,468 5,808 5,476
Common Stock Repurchased (39,860) (6,020) (27,611)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities $(212,744) $ 1,653,484 $(133,689)
- - --------------------------------------------------------------------------------------------------------------------------------
22
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31,
--------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 22,541 19,755 33,387
Cash and Cash Equivalents at Beginning of Period 151,322 131,567 98,180
- - ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 173,863 $ 151,322 $ 131,567
- - ------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 35,205 $ 27,662 $ 40,202
Interest Paid 373,238 315,293 282,699
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 13,963 29,552 25,015
Transfer of Securities from Held to Maturity to Available for Sale -- 109,329 90,858
Securitization of Loans into Mortgage-Backed Securities Available for Sale -- -- 83
Securitization of Loans into Trading Mortgage-Backed Securities -- -- 16,888
Assets acquired and liabilities assumed in 1996 purchase business combinations
were as follows:
Year Ended
(In thousands) December 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------
ASSETS ACQUIRED:
Loans $ 621,955
Premises and Equipment 8,008
Other Assets 3,059
- - ------------------------------------------------------------------------------------------------------------------------------
Total Assets Acquired 633,022
- - ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES ASSUMED:
Deposits 1,099,551
Less Deposits Exchanged (95,163)
- - ------------------------------------------------------------------------------------------------------------------------------
Net Deposits Assumed 1,004,388
Other Liabilities 1,883
- - ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities Assumed 1,006,271
- - ------------------------------------------------------------------------------------------------------------------------------
Net Liabilities Assumed 373,249
Net Premium Paid for Deposits (62,913)
- - ------------------------------------------------------------------------------------------------------------------------------
Net Cash and Cash Equivalents Received in Bank Acquisition $ 310,336
- - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
A) BUSINESS
Webster Financial Corporation ("Webster"), through its subsidiaries, Webster
Bank and Damman Insurance Associates, delivers financial services to
individuals, families and businesses throughout Connecticut. Webster emphasizes
five business lines - consumer banking, business banking, mortgage lending,
trust and investment services and insurance services and each is supported by
centralized administration and operations. Webster Bank was founded in 1935 and
converted from a federal mutual to a federal stock institution in 1986.
B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The Consolidated Financial Statements include the accounts of Webster and its
subsidiaries. The Consolidated Financial Statements and notes hereto have been
retroactively restated to include the accounts of Eagle Financial Corp.
("Eagle") acquired on April 15, 1998, People's Savings Financial Corp.
("People's") acquired on July 31, 1997, MidConn Bank ("MidConn") acquired on May
31, 1997 (through Webster's acquisition of Eagle), and DS Bancor, Inc. ("Derby")
acquired on January 31, 1997 as if the mergers had occurred at the beginning of
the earliest period presented (See Note 2). The number of common shares have
been retroactively restated for stock dividends and stock splits (See Note 14).
The financial statements have been prepared in conformity with generally
accepted accounting principles and all significant intercompany transactions
have been eliminated in consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported assets and liabilities as of the date
of the balance sheets and revenues and expenses for the periods presented. The
actual results of Webster could differ from those estimates. Material estimates
that are susceptible to near-term changes include the determination of the
allowance for loan losses and the valuation allowance for the deferred tax
asset.
C) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses. Effective January 1,
1995, Webster adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No.
118. Under this standard, commercial and commercial real estate loans are
considered impaired when it is probable that Webster will not collect all
amounts due in accordance with the contractual terms of the loan. Certain loans
are exempt from the provisions of SFAS No. 114, including large groups of
smaller balance homogenous loans that are collectively evaluated for impairment,
such as consumer and residential mortgage loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Webster's allowance for loan
losses. Such agencies may require Webster to recognize additions to the
allowance for loan losses based on judgments different from those of management.
D) FORECLOSED PROPERTIES
Foreclosed properties are acquired through foreclosure proceedings or acceptance
of a deed in lieu of foreclosure. Foreclosed properties are reported at the
lower of fair value less estimated selling expenses or cost with an allowance
for losses to provide for declines in value. Operating expenses are charged to
current period earnings and gains and losses upon disposition are reflected in
the Consolidated Statements of Income when realized.
E) LOANS
Loans are stated at the principal amounts outstanding. Interest on loans is
credited to income as earned based on the rate applied to principal amounts
outstanding. Interest which is more than 90 days past due is not accrued. Such
interest ultimately collected, if any, is credited to income in the period
received. Loan origination fees, net of certain direct origination costs and
premiums and discounts on loans purchased, are recognized in interest income
over the lives of the loans using a method approximating the
24
interest method. Loans held for sale are carried at the lower of cost or market
value in aggregate. Net unrealized losses on loans held for sale, if any, are
recognized in a valuation allowance by charges to income.
F) SECURITIES
Securities are classified into one of three categories. Securities with fixed
maturities that management has the intent and ability to hold to maturity are
classified as Held to Maturity and are carried at cost, adjusted for
amortization of premiums and accretion of discounts over the estimated terms of
the securities using a method which approximates the level yield method.
Securities that management intends to hold for indefinite periods of time,
including securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, the need to increase regulatory capital or
other similar factors, are classified as Available for Sale. All Equity
Securities are classified as Available for Sale. Securities Available for Sale
are carried at fair value with unrealized gains and losses recorded as
adjustments to shareholders' equity on a tax-effected basis. Securities
classified as Trading Securities are carried at fair value with unrealized gains
and losses included in earnings. Gains and losses on the sales of securities are
recorded using the specific identification method.
Mortgage-backed securities, which include collateralized mortgage obligations
("CMOs"), are either U.S. Government Agency securities or are rated in at least
the top two ratings categories by at least one of the major rating agencies at
the time of purchase. One of the risks inherent when investing in
mortgage-backed securities and CMOs is the ability of such instruments to incur
prepayments of principal prior to maturity. Because of prepayments, the
weighted-average yield of these securities may also change, which could affect
earnings.
G) INTEREST-RATE INSTRUMENTS
Webster uses as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. Webster holds short futures and long options
positions to minimize the price volatility of certain adjustable rate assets
held as Trading Securities. Changes in the market value of short futures
positions 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 unmatched 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 assets
are marked to fair value monthly with adjustments to shareholders' equity on a
tax-effected basis.
H) INTEREST-BEARING DEPOSITS
Interest-bearing deposits consist primarily of deposits in the Federal Home Loan
Bank ("FHL Bank") or other short-term overnight investments. These deposits are
carried at cost which approximates market value.
I) PREMISES AND EQUIPMENT
Depreciation of premises and equipment is accumulated on a straight-line basis
over the estimated useful lives of the related assets. Estimated lives are 15 to
40 years for buildings and improvements and 3 to 20 years for furniture,
fixtures and equipment. Amortization of leasehold improvements is calculated on
a straight-line basis over the terms of the related leases.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and
equipment retired or otherwise disposed of are eliminated from the accounts and
any resulting gains and losses are credited or charged to income.
25
J) INTANGIBLE ASSETS
Intangible assets consist of core deposit intangibles and goodwill. The core
deposit intangibles are the excess of the purchase price over the fair value of
the tangible net assets acquired in bank acquisitions accounted for using the
purchase method of accounting and allocated to deposits. The core deposit
intangibles are being amortized on a straight-line basis over a period of ten
years from the acquisition dates. On a periodic basis, management assesses the
recoverability of the core deposit intangibles. Such assessments encompass a
projection of future earnings from the deposit base as compared to the original
expectations, based upon a discounted cash flow analysis. If an assessment of
the core deposit intangibles indicates that they are impaired, a charge to
income for the most recent period is recorded for the amount of the impairment.
Goodwill is the excess of cost over the fair value of tangible net assets
acquired in bank acquisitions accounted for using the purchase method of
accounting and not allocated to any specific asset or liability category.
Goodwill is being amortized on a straight-line basis over periods up to fifteen
years from the acquisition date. The Corporation also reviews goodwill on a
periodic basis for events or changes in circumstances that may indicate that the
carrying amount of goodwill may not be recoverable.
K) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance has been provided
for a portion of the deferred tax asset that may not be realized. The valuation
allowance is adjusted as facts and circumstances warrant.
L) EMPLOYEE BENEFIT PLANS
The Bank has a noncontributory pension plan covering substantially all
employees. Pension costs are accrued in accordance with generally accepted
accounting principles and are funded in accordance with the requirements of the
Employee Retirement Income Security Act ("ERISA"). The Bank also accrues costs
related to post-retirement benefits. The provisions of SFAS No. 132, "Employers'
Disclosure about Pensions and Other Post-retirement Benefits", were adopted on
December 31, 1998. SFAS No. 132 revised disclosures about pension and other
post-retirement benefit plans; it did not change the measurement or recognition
of these plans. Prior period disclosures have been revised to conform with SFAS
No. 132.
M) NET INCOME PER COMMON 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 diluted common shares, including the effect of
common stock equivalents and for 1996 the hypothetical conversion into common
stock of the Series B cumulative convertible preferred stock. The common stock
equivalents consist of common stock options and warrants.
N) STOCK COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages all companies
to adopt a new fair value based method of accounting for stock-based employee
compensation plans. Under the provisions of this statement, Webster has elected
to continue to measure compensation for its stock option plans using the
accounting method prescribed by Accounting Principal Board Opinion No. 25 ("APB
No. 25") "Accounting for Stock Issued to Employees." Entities electing to
maintain accounting standards under APB No. 25 must make pro forma disclosures
for net income and earnings per share as if the fair value based method of
accounting had been applied. See Note 16.
O) STATEMENTS OF CASH FLOWS
For the purposes of the Statements of Cash Flows, Webster considers cash on hand
and in banks to be cash equivalents.
P) LOAN SALES AND SERVICING SALES
Gains or losses on sales of loans are recognized at the time of sale. During the
1995 second quarter, Webster elected early adoption of SFAS No. 122 "Accounting
for Mortgage Servicing Rights", that was superseded by SFAS No. 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS No. 122 required, and SFAS No. 125 continues to require that
a mortgage banking entity recognize as a separate asset the value of the right
to service mortgage loans for others, regardless of how those servicing rights
are acquired. Fair values are estimated considering loan prepayment predictions,
historical prepayment rates, interest rates, and other economic factors. For
purposes of impairment evaluation and measurement, Webster
26
stratifies mortgage servicing rights based on predominate risk characteristics
of the underlying loans including loan type, interest rate and amortization type
(fixed or adjustable). To the extent that the carrying value of mortgage
servicing rights exceeds fair value by individual stratum, a valuation allowance
is established. The allowance may be adjusted for changes in fair value. The
cost basis of mortgage servicing rights is amortized into noninterest income
over the estimated period of servicing revenue. See Note 6.
Q) CASH SURRENDER VALUE OF LIFE INSURANCE
The investment in life insurance represents the cash surrender value of life
insurance policies on officers of the Bank. Increases in the cash surrender
value are recorded as other noninterest income.
R) COMPREHENSIVE INCOME
The provisions of 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. Comprehensive income
includes net income and any changes in equity from non-owner sources that bypass
the statements of income (such as changes in net unrealized gains and losses on
securities available for sale). 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. The adoption of SFAS No.
130 resulted in a change in financial statement disclosures only and had no
effect on Webster's financial position or results.
S) RECLASSIFICATIONS
Certain financial statement balances as previously reported have been
reclassified to conform to the 1998 Consolidated Financial Statements
presentation.
NOTE 2: BUSINESS COMBINATIONS
- - --------------------------------------------------------------------------------
POOLING OF INTERESTS TRANSACTIONS
All acquisitions accounted for under the pooling of interests method include
financial data as if the combination occurred at the beginning of the earliest
period presented.
THE EAGLE ACQUISITION
On April 15, 1998, Webster acquired Eagle and its subsidiary, Eagle Bank, a $2.1
billion savings bank, headquartered in Bristol, Connecticut. In connection with
the merger with Eagle, Webster issued 10,615,156 shares of its common shares for
all of the outstanding shares of Eagle common stock. Under the terms of the
agreement, each outstanding share of Eagle common stock was converted into 1.68
shares of Webster common stock. Prior to the acquisition, Eagle's fiscal year
ended on September 30. In recording the pooling of interests combination,
Eagle's financial statements as of and for the twelve months ended September 30,
1997 were combined with Webster's financial statements as of and for the twelve
months ended December 31, 1997. An adjustment has been made to shareholders'
equity as of December 31, 1998 to include Eagle's unaudited results of
operations for the period October 1, 1997 to December 31, 1997 as the results of
this period, which included net interest income of $15.7 million and net income
of $4.9 million, are not included in the results of operations of the combined
entity for the year ended December 31, 1998.
THE PEOPLE'S ACQUISITION
On July 31, 1997, Webster acquired People's and its subsidiary, People's Savings
Bank & Trust, a $482 million savings bank headquartered in New Britain,
Connecticut. In connection with the merger with People's, Webster issued
3,151,992 shares of its common stock for all the outstanding shares of People's
common stock. Under the terms of the agreement, each outstanding share of
People's common stock was converted into .85 shares of Webster common stock.
THE MIDCONN ACQUISITION
On May 31, 1997, Webster acquired MidConn as a result of its acquisition of
Eagle. In connection with the merger, Webster effectively issued 2,869,440
shares of its common stock for all the outstanding shares of MidConn common
stock after adjusting for the conversion factor related to the Eagle Acquisition
and subsequent common stock split.
THE DERBY ACQUISITION
27
On January 31, 1997, Webster acquired Derby and its subsidiary, Derby Savings
Bank, a $1.2 billion savings bank headquartered in Derby, Connecticut. In
connection with the merger with Derby, Webster issued 7,002,740 shares of its
common stock for all the outstanding shares of Derby common stock. Under the
terms of the agreement, each outstanding share of Derby common stock was
converted into 1.14158 shares of Webster common stock.
PURCHASE TRANSACTIONS PENDING CONSUMMATION AT DECEMBER 31,1998 (UNAUDITED)
THE ACCESS ACQUISITION
In January 1999, Webster announced the purchase of Access National Mortgage,
Inc. ("Access"). Access was founded in 1996 as a privately held Internet-based
mortgage lender located in Wilmington, Massachusetts. Access is currently able
to originate mortgages in 44 states and will initially continue to sell all
originated mortgages. The Access principals continue as senior officers and as
minority owners of Access National Mortgage, L.L.C., which is a subsidiary of
Webster Bank.
THE VILLAGE ACQUISITION
In November 1998, Webster announced a definitive agreement to acquire Village
Bancorp, Inc. ("Village"), the holding company for Village Bank & Trust Company
for $23.50 per share in a tax-free, stock-for-stock exchange. At the time of the
original announcement, Village had approximately $230 million in total assets,
$152 million in loans and $215 million in deposits at 6 branches. Webster
expects to consummate the acquisition and complete the conversion in the second
quarter of 1999.
THE MARITIME ACQUISITION
In November 1998, Webster announced a definitive agreement to acquire Maritime
Bank & Trust Company ("Maritime") for $26.67 per share in a tax-free,
stock-for-stock exchange. At the time of the original announcement, Maritime had
approximately $100 million in total assets and $90 million in deposits at 3
branches. Webster expects to consummate the acquisition and complete the
conversion in the second quarter of 1999.
PURCHASE TRANSACTIONS
The following acquisitions were accounted for as purchase transactions, and as
such, results of operations are included in the Consolidated Financial
Statements subsequent to acquisition.
THE DAMMAN ACQUISITION
On June 1, 1998, Webster completed its acquisition of Damman Insurance
Associates ("Damman"). Damman is a full service Westport-based insurance
company, providing property-casualty, life and group coverage to commercial and
individual customers. Damman has offices in Westport and Wallingford and
approximately 50 employees. During 1998, Webster began offering a full array of
insurance services to its consumer and commercial customer base.
THE SACHEM ACQUISITION
On August 1, 1997, Webster acquired Sachem Trust National Association ("Sachem
Trust"), a trust company headquartered in Guilford, Connecticut which had
approximately $300 million of trust assets under management, in a tax-free
stock-for-stock exchange.
THE SHAWMUT TRANSACTION
In the first quarter of 1996, Webster Bank acquired 25 branches in the Hartford
market from Shawmut Bank Connecticut, National Association, as part of a
divestiture in connection with the merger of Shawmut and Fleet Bank (the
"Shawmut Transaction"). In the branch purchase, Webster Bank acquired
approximately $1.1 billion in deposits and $622 million in loans. As a result of
this transaction, Webster recorded $64.1 million as a core deposit intangible
asset. In connection with the Shawmut Transaction, Webster raised net proceeds
of $32.1 million through the sale of 2,499,200 shares of its common stock in an
underwritten public offering in December 1995.
NOTE 3: SECURITIES
- - --------------------------------------------------------------------------------
28
A summary of securities follows:
December 31,
----------------------------------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated Amortized Unrealized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- - ------------------------------------------------------------------------------------------------------------------------------------
Trading Securities:
Mortgage - Backed Securities $ 91,114(a) $ -- $ -- $ 91,114 $84,749(a) $ -- $ -- $84,749
- - ------------------------------------------------------------------------------------------------------------------------------------
91,114 -- -- 91,114 84,749 -- -- 84,749
- - ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale Portfolio:
U.S. Treasury Notes 13,514 123 -- 13,637 19,522 37 (8) 19,551
U.S. Government Agency 16,501 278 -- 16,779 50,229 220 (24) 50,425
Municipal Bonds and Notes 14,688 516 -- 15,204 14,685 -- (126) 14,559
Corporate Bonds and Notes 81,452 454 (2,148) 79,758 10,045 33 (227) 9,851
Equity Securities (b) 211,871 7,241 (4,664) 214,448 210,041 1 4,983 (1,049) 223,975
Mortgage-Backed Securities 2,582,759 39,937 (5,248) 2,617,448 2,737,522 3 6,307 (7,720) 2,766,109
Purchased Interest-Rate
Contracts (Note 10) 15,985 -- (3,437) 12,548 15,079 - (7,262) 7,817
- - ------------------------------------------------------------------------------------------------------------------------------------
2,936,770 48,549 (15,497) 2,969,822 3,057,123 5 1,580 (16,416) 3,092,287
- - ------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 2,455 12 -- 2,467 2,447 28 -- 2,475
U.S. Government Agency 6,000 15 -- 6,015 32,274 14 (65) 32,223
Municipal Bonds and Notes 12,500 347 -- 12,847 12,500 93 (1) 12,592
Corporate Bonds and Notes 151,536 2,626 (1,171) 152,991 1,199 3 -- 1,202
Money Market Preferred Stock -- -- -- -- 1,000 -- -- 1,000
Mortgage-Backed Securities 228,663 2,426 (1,044) 230,045 362,817 2,533 (2,781) 362,569
- - ------------------------------------------------------------------------------------------------------------------------------------
401,154 5,426 (2,215) 404,365 412,237 2,671 (2,847) 412,061
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $3,429,038 $ 53,975 $(17,712) $ 3,465,301 $3,554,109 $54,251 $(19,263) $3,589,097
- - ------------------------------------------------------------------------------------------------------------------------------------
(a) Stated at fair value.
(b) Equity securities at December 31, 1998, consisted of FHL Bank stock of $97.6
million, mutual funds of $35.1 million, preferred stock of $36.0 million and
common stock of $45.7 million. At December 31, 1997, equity securities consisted
of FHL Bank stock of $87.1 million, mutual funds of $37.5 million, preferred
stock of $55.6 million and common stock of $43.8 million.
29
A summary of realized gains and losses follows:
Years Ended December 31,
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Gains Losses Net Gains Losses Net Gains Losses Net
- - ----------------------------------------------------------------------------------------------------------------------------------
Trading Securities:
Mortgage-Backed Securities $ 4,789 $ (3,548) $ 1,241 $ 4,052 $ (2,647) $ 1,405 $ 3,033 $ (2,719) $ 314
Futures and Options Contracts 8,015 (10,023) (2,008) 7,318 (8,494) (1,176) 10,704 (10,434) 270
Equity Securities -- -- -- -- -- -- 366 (35) 331
- - ----------------------------------------------------------------------------------------------------------------------------------
12,804 (13,571) (767) 11,370 (11,141) 229 14,103 (13,188) 915
- - ----------------------------------------------------------------------------------------------------------------------------------
Available for Sale:
Mortgage-Backed Securities 7,148 (222) 6,926 566 (119) 447 2,401 (1,652) 749
U.S. Treasury Notes -- -- -- 6 -- 6 5 (7) (2)
U.S. Government Agencies -- -- -- 18 (45) (27) 11 (39) (28)
Corporate Debt -- -- -- 77 -- 77 4 (364) (360)
Mutual Funds 1,156 -- 1,156 1,210 (58) 1,152 227 (463) (236)
Other Equity Securities 7,966 (867) 7,099 945 (21) 924 2,773 (197) 2,576
Other 982 (45) 937 920 (586) 334 56 -- 56
- - ----------------------------------------------------------------------------------------------------------------------------------
17,252 (1,134) 16,118 3,742 (829) 2,913 5,477 (2,722) 2,755
- - ----------------------------------------------------------------------------------------------------------------------------------
Total $30,056 $(14,705) $15,351 $ 15,112 $(11,970) $ 3,142 $ 19,580 $(15,910) $3,670
- - ----------------------------------------------------------------------------------------------------------------------------------
There were no sales of securities from the Held to Maturity portfolio for the
years ended December 31, 1998, 1997 and 1996.
On June 30, 1997, Eagle transferred securities with a book value of $109.3
million from the Held to Maturity portfolio to the Available for Sale portfolio.
The transfer resulted in an unrealized gain of approximately $299,000 which is
net of income taxes 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 the merger with MidConn.
Webster enters into short futures and long options positions to minimize the
price volatility of certain adjustable-rate assets held as Trading Securities.
At December 31, 1998, Webster had 216 short positions in Eurodollar futures
contracts ($216.0 million notional amount) and 220 short positions in 5 and 10
year Treasury note futures ($22.0 million notional amount). Changes in the
market value of short futures positions are recognized as a gain or loss in the
period for which the change occurred. All gains and losses resulting from short
futures positions are reflected in gains (losses) on sale of securities, net in
the Consolidated Statements of Income.
30
The following table sets forth the contractual maturities of the Bank's
securities and mortgage-backed securities at December 31, 1998 and the
weighted-average yields of such securities (based upon the financial statement
carrying amount of such securities).
Due After One, Due After
Due Within But Within Five, But Due
One Year Five Years Within 10 Years After 10 Years Total
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- - ------------------------------------------------------------------------------------------------------------------------------------
Available For Sale Portfolio:
U.S. Treasury Notes $ 13,111 5.90 % $ 526 6.25 % $ -- --% $ -- --% $ 13,637 5.92%
U.S. Government Agency -- -- 10,670 6.67 6,109 7.19 -- -- 16,779 6.86
Municipal Bonds and Notes (a) -- -- -- -- -- -- 15,204 5.31 15,204 5.31
Corporate Bonds and Notes 2,019 6.88 -- -- 1,833 6.16 75,906 8.79 79,758 8.68
Equity Securities 214,448 4.45 -- -- -- -- -- -- 214,448 4.45
Mortgage-Backed Securities 1,128 6.22 43,910 6.15 397,520 6.71 2,174,890 6.71 2,617,448 6.70
Purchased Interest-Rate Contracts -- -- 9,485 -- 3,063 -- -- -- 12,548 --
- - ------------------------------------------------------------------------------------------------------------------------------------
230,706 4.56% 64,591 5.34% 408,525 6.66% 2,266,000 6.77% 2,969,822 6.56%
- - ------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 2,455 6.02 -- -- -- -- -- -- 2,455 6.02
U.S. Government Agency 6,000 5.46 -- -- -- -- -- -- 6,000 5.46
Municipal Bonds and Notes (a) -- -- -- -- 12,500 6.68 -- -- 12,500 6.68
Corporate Bonds and Notes 350 6.54 -- -- 100 6.29 151,086 7.38 151,536 7.38
Mortgage-Backed Securities 4,229 6.11 27,489 6.08 26,703 6.70 170,242 7.20 228,663 6.98
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 13,034 5.80% 27,489 6.08% $ 39,303 6.69% $ 321,328 7.28% $ 401,154 7.10%
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $ 243,740 5.61% $ 92,080 5.56% $447,828 6.66% $2,587,328 6.83% $3,370,976 6.62%
(a) Yield is adjusted to a fully tax equivalent basis.
The above table shows contractual maturities of securities. At December 31, 1998
the duration of the Available for Sale and Held to Maturity portfolios, are
approximately 2.5 years and 3.0 years, respectively.
31
NOTE 4: LOANS RECEIVABLE, NET
- - --------------------------------------------------------------------------------
A summary of loans receivable, net follows:
December 31,
--------------------------------------------------------
(Dollars in thousands) 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Amount % Amount %
------ - ------ -
Loans Secured by Mortgages on Real Estate:
Conventional, VA and FHA $ 3,479,388 69.7% $3,744,766 75.7%
Conventional, VA and FHA Loans Held for Sale 1,688 -- 3,515 0.1
Residential Participation 55,820 1.1 12,244 0.2
Residential Construction 294,542 5.9 151,275 3.0
Commercial Construction 43,855 0.9 34,974 0.7
Other Commercial 371,358 7.5 309,966 6.2
- - -------------------------------------------------------------------------------------------------------------------------------
4,246,651 85.1 4,256,740 85.9
- - -------------------------------------------------------------------------------------------------------------------------------
Consumer Loans:
Home Equity Loans 436,139 8.7 471,872 9.5
Other Consumer Loans 41,874 0.9 47,479 1.0
Credit Cards -- -- 33,112 0.7
- - -------------------------------------------------------------------------------------------------------------------------------
478,013 9.6 552,463 11.2
- - -------------------------------------------------------------------------------------------------------------------------------
Commercial Non-Mortgage Loans 403,411 8.1 239,826 4.8
- - -------------------------------------------------------------------------------------------------------------------------------
Gross Loans Receivable 5,128,075 102.6 5,049,029 101.9
Less:
Loans in Process 96,646 1.9 51,263 1.0
Allowance for Losses on Loans 55,109 1.1 59,518 1.2
Premiums on Loans Purchased, Deferred Loan Fees
and Unearned Discounts, Net (17,189) (0.4) (16,565) (0.3)
- - -------------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net Excluding Segregated Assets $ 4,993,509 100.0% $4,954,813 98.2%
Segregated Assets, Net -- -- 41,038 0.8
- - -------------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net $ 4,993,509 100.0% $4,995,851 100.0%
- - -------------------------------------------------------------------------------------------------------------------------------
The segregated assets disclosed in 1997 are certain loans purchased from the
Federal Deposit Insurance Corporation ("FDIC") in the First Constitution
acquisition. In 1998, these loans are included in commercial mortgage and
non-mortgage loans. Also in 1998, Webster sold credit card receivables of $31.4
million.
Webster adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan,"
on January 1, 1995 as amended by SFAS No. 118, with no impact on its results of
operations. At December 31, 1998, Webster had $16.1 million of impaired loans,
of which $5.8 million were measured based upon the fair value of the underlying
collateral and $10.3 million were measured based upon the expected future cash
flows of the impaired loans. The $5.8 million of impaired loans have an
allowance for loan losses of $1.5 million and the $10.3 million of impaired
loans had no related specific allowance for loan losses. At December 31, 1997,
there were $7.3 million of impaired loans with an allowance of $1.1 million and
$9.6 million of impaired loans for which there was no related allowance for loan
losses. In 1998, 1997 and 1996, the average balance of impaired loans was $14.8
million, $29.0 million and $35.0 million, respectively.
Webster's policy with regard to the recognition of interest income on impaired
loans includes an individual assessment of each loan. Interest which is more
than 90 days past due is not accrued. When payments on impaired loans are
received, interest income is recorded on a cash basis or is applied to principal
based on an individual assessment of each loan. Cash basis interest income
recognized on impaired loans for the years ended December 31, 1998, 1997 and
1996 amounted to $598,000, $724,000 and $520,000, respectively.
32
A detail of the changes in the allowances for loan losses for the three years
follows:
December 31,
----------------------------------------------------------
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
(In thousands)
- - -------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 59,518 $ 53,692 $ 59,892
Provisions Charged to Operations 6,800 24,813 13,054
Acquired Allowance for Purchased Loans -- -- 6,871
Reclassification of Allowance for Segregated Asset Losses 2,623 -- --
Charge-offs (17,064) (24,794) (29,205)
Recoveries 3,232 5,807 3,080
- - -------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 55,109 $ 59,518 $ 53,692
- - -------------------------------------------------------------------------------------------------------------------
Webster is a party to financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments included commitments
to extend credit and commitments to sell residential first mortgage loans. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized on the Consolidated Statements of
Condition.
The estimated fair value of commitments to extend credit is considered
insignificant at December 31, 1998 and 1997. Future loan commitments represent
residential mortgage loan commitments, letters of credit, standby letters of
credit, as well as unused credit card lines and home equity and commercial
credit lines. Rates for these loans are generally established shortly before
closing. The rates on home equity lines of credit generally vary with the prime
rate.
At December 31, 1998 and 1997, residential mortgage commitments outstanding
totaled $104.9 million and $91.6 million, respectively. Residential commitments
outstanding at December 31, 1998 consisted of adjustable-rate and fixed-rate
mortgages of $43.0 million and $61.9 million, respectively, at rates ranging
from 5.7% to 10.5%. Commitments to originate loans generally expire within 60
days. In addition, at December 31, 1998 and 1997, there were unused portions of
home equity credit lines extended of $336.9 million and $312.9 million,
respectively. Unused commercial lines of credit, letters of credit, standby
letters of credit and outstanding commercial new loan commitments totaled $269.5
million and $129.2 million at December 31, 1998 and 1997, respectively. Unused
credit card lines were $102.3 million at December 31, 1997.
Webster uses forward commitments to sell residential first mortgage loans which
are entered into for the purpose of reducing the market risk associated with
originating loans held for sale. The types of risk that may arise are from the
possible inability of Webster or the other party to fulfill the contracts. At
December 31, 1998 and 1997, Webster had forward commitments to sell loans
totaling $1.7 million and $5.5 million, respectively, at rates between 5.9% and
7.5% and 5.8% and 8.3%, respectively. The estimated fair value of commitments to
sell loans is considered insignificant at December 31, 1998 and 1997.
At December 31, 1998, 1997 and 1996, Webster serviced, for the benefit of
others, mortgage loans aggregating approximately $1.3 billion, $1.3 billion and
$1.5 billion, respectively.
- - --------------------------------------------------------------------------------
NOTE 5: PREMISES AND EQUIPMENT, NET
A summary of premises and equipment, net follows:
December 31,
---------------------------------------
(In thousands) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
Land $ 10,433 $ 10,431
Buildings and Improvements 57,983 52,149
Leasehold Improvements 4,864 6,273
Furniture, Fixtures and Equipment 71,935 55,774
- - ------------------------------------------------------------------------------------------------------------------------------
Total Premises and Equipment 145,215 124,627
Accumulated Depreciation and Amortization 65,891 52,740
- - ------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net $ 79,324 $ 71,887
- - ------------------------------------------------------------------------------------------------------------------------------
33
At December 31, 1998, Webster was obligated under various non-cancelable
operating leases for properties used as branch office facilities. The leases
contain renewal options and escalation clauses which provide for increased
rental expense based primarily upon increases in real estate taxes over a base
year. Rental expense under leases was $4.8 million, $4.6 million and $4.3
million in 1998, 1997 and 1996, respectively. Webster is also entitled to rental
income under various non-cancelable operating leases for properties owned.
Rental income under these leases was $2.8 million, $2.0 million and $1.9 million
in 1998, 1997 and 1996, respectively.
The following is a schedule of future minimum rental payments and receipts
required under these leases as of December 31, 1998:
- - -------------------------------------------------------------------------------------------------------------------
(In thousands) Payments Receipts
- - -------------------------------------------------------------------------------------------------------------------
Years ending December 31:
1999 $ 4,882 $ 756
2000 4,268 507
2001 3,723 392
2002 3,261 264
2003 2,785 176
Later years 20,835 872
- - -------------------------------------------------------------------------------------------------------------------
Total $ 39,754 $ 2,967
- - -------------------------------------------------------------------------------------------------------------------
NOTE 6: PREPAID EXPENSES AND OTHER ASSETS
- - --------------------------------------------------------------------------------
A summary of prepaid expenses and other assets follows:
December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
Due from FDIC $ 769 $ 1,660
Income Taxes Receivable 3,260 4,866
Deferred Tax Asset, Net (Note 13) 14,737 24,569
Mortgage Servicing Rights, Net 4,686 5,906
Other Assets 20,142 17,605
- - ------------------------------------------------------------------------------------------------------------------------------
Prepaid Expenses and Other Assets $ 43,594 $ 54,606
- - ------------------------------------------------------------------------------------------------------------------------------
The $769,000 due from the FDIC at December 31, 1998, is net of a $366,000
payable amount that represents the FDIC's 80% reimbursement for fourth quarter
1998 recoveries less certain permitted expenses on Segregated Assets which will
be paid in the first quarter of 1999. The $1.1 million receivable balance
represents the additional 15% net reimbursement for charge-offs and expenses
less the 15% reimbursement payable on recoveries, which Webster will receive at
the end of 1999.
During 1998 and 1997, Webster capitalized mortgage servicing assets of $571,000
and $981,000, respectively, related to originating loans and selling them
servicing retained. Also, during 1996, Webster purchased mortgage loan servicing
assets with a principal balance of $272.5 million and recorded a mortgage loan
servicing asset of $2.8 million. Amortization of mortgage servicing rights was
$1.1 million, $911,000 and $615,000 for the years ended December 31, 1998, 1997
and 1996, respectively. In 1996, Webster established an allowance to provide for
the decrease in value of mortgage servicing rights due to declining interest
rates and an increased rate of prepayments. At December 31, 1998 and 1997, the
allowance totaled $1.2 million and $458,000, respectively. During 1998 and 1997,
provisions to this allowance totaled $712,000 and $363,000, respectively.
34
NOTE 7: DEPOSITS
- - --------------------------------------------------------------------------------
Deposits categories are summarized as follows:
December 31,
-------------------------------------------------------------------
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average % of Average % of
(Dollars in thousands) Rate Balance Total Rate Balance Total
- - ---------------------------------------------------------------------------------------------------------------------------------
Demand Deposits and NOW Accounts 1.23% $ 1,070,814 18.9% 1.19% $ 948,589 16.6%
Regular Savings and Money Market Deposit Accounts 2.55 1,429,271 25.3 2.47 1,400,325 24.5
Time Deposits 5.04 3,151,188 55.8 5.35 3,370,116 58.9
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits 3.59% $ 5,651,273 100.0% 3.86% $5,719,030 100.0%
- - ---------------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is summarized as follows:
Years Ended December 31,
- - -------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
NOW Accounts $ 11,642 $ 9,385 $ 7,132
Regular Savings and Money Market Deposit Accounts 32,211 34,802 40,016
Time Deposits 177,435 179,292 182,075
- - -------------------------------------------------------------------------------------------------------------------
Total $221,288 $223,479 $229,223
- - -------------------------------------------------------------------------------------------------------------------
Time deposits of $100,000 or more amounted to $302.1 million and represented
5.35% of total deposits at December 31, 1998. The following table presents the
amount of these deposits maturing during the periods indicated:
(In thousands)
- - -------------------------------------------------------------------------------------------------------------------
Maturing Amount
- - -------------------------------------------------------------------------------------------------------------------
January 1, 1999 to March 31, 1999 $ 56,153
April 1, 1999 to June 30, 1999 84,843
July 1, 1999 to December 31, 1999 105,281
January 1, 2000 and beyond 55,866
- - -------------------------------------------------------------------------------------------------------------------
Total $ 302,143
- - -------------------------------------------------------------------------------------------------------------------
NOTE 8: FEDERAL HOME LOAN BANK ADVANCES
- - --------------------------------------------------------------------------------
Advances payable to the FHL Bank are summarized as follows:
December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
Fixed Rate:
4.99% to 8.19% Due in 1998 $ -- $ 1,099,700
4.54% to 8.86% Due in 1999 1,316,027 62,862
4.75% to 9.16% Due in 2000 227,360 31,570
5.52% to 8.20% Due in 2001 27,405 7,845
6.87% Due in 2002 2,000 2,000
5.69% to 6.14% Due in 2003 28,346 4,157
6.01% Due in 2004 -- 80,000
5.25% Due in 2005 10,000 --
6.31% Due in 2006 3,169 3,577
6.98% Due in 2007 2,592 2,675
4.99% Due in 2008 25,000 --
6.60% Due in 2011 2,661 2,828
- - ---------------------------------------------------------------------------------------------------------------------------
$ 1,644,560 $ 1,297,214
- - ------------------------------------------------------------------------------------------------------------------------------
Variable Rate:
- - ------------------------------------------------------------------------------------------------------------------------------
5.65% Due in 1998 $ -- $ 219,420
5.07% to 5.09% Due in 1999 50,000 --
5.76% Due in 2004 80,000 --
- - ------------------------------------------------------------------------------------------------------------------------------
Total Federal Home Loan Bank Advances $ 1,774,560 $ 1,516,634
- - ------------------------------------------------------------------------------------------------------------------------------
35
The following table sets forth certain information as to the Bank's FHL Bank
short-term borrowings at the dates and for the years indicated.
December 31,
--------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the period $ 1,654,533 $ 954,306 $ 452,018
Amount outstanding at end of period 1,366,027 1,319,120 559,345
Highest month end balance 1,824,729 1,319,120 573,948
Weighted-average interest rate at end of period 5.33% 5.74% 5.68%
Weighted-average interest rate during the period 4.93% 5.65% 5.61%
At December 31, 1998, the Bank had additional borrowing capacity of $700 million
from the FHL Bank, including a line of credit of approximately $41.3 million.
Advances are secured by the Bank's investment in FHL Bank stock and a blanket
security agreement. This agreement requires the Bank to maintain as collateral
certain qualifying assets, principally mortgage loans and securities. At
December 31, 1998 and 1997, the Bank was in compliance with the FHL Bank
collateral requirements.
NOTE 9: REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
- - --------------------------------------------------------------------------------
The following table summarizes reverse repurchase agreements and other
borrowings:
December 31,
-------------------------------------------
(In thousands) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements $ 669,374 $ 980,835
Senior Notes 40,000 40,000
Bank Lines of Credit 17,180 10,000
ESOP Borrowings 1,367 1,978
Federal Funds Purchased 11,000 --
Other Borrowings -- 150
- - ---------------------------------------------------------------------------------------------------------------------------
Total $ 738,921 $1,032,963
- - ---------------------------------------------------------------------------------------------------------------------------
The weighted-average rates on these borrowings were 5.69% and 5.75% at December
31, 1998 and 1997, respectively.
During 1998, reverse repurchase agreement transactions inclusive of dollar roll
transactions were the primary source of borrowed funds with the exception of FHL
Bank advance borrowings (See Note 8). The average balance and weighted- average
rate for reverse repurchase agreements for 1998 were $975.2 million and 5.23% as
compared to $557.2 million and 5.65% for 1997. Securities underlying the reverse
repurchase transactions held as collateral are primarily U.S. government agency
securities consisting of FNMA, GNMA and FHLMC securities. Securities for reverse
repurchase agreements related to Webster's funding operations are delivered to
broker-dealers who arrange the transactions. Webster also enters into reverse
repurchase agreement transactions directly with commercial and municipal
customers through its money desk operations.
Information concerning short-term and long-term borrowings under reverse
repurchase agreements as of the end of the current period is summarized below:
(Dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance at Weighted-Average Weighted-Average Book Value Market Value
December 31, 1998 Rate Maturity of Collateral of Collateral
- - ---------------------------------------------------------------------------------------------------------------------------
$669,374 5.18% 8.2 months $664,873 $676,000
While the Bank used several types of short-term borrowings as part of funding
its daily operations, only reverse repurchase agreement transactions within the
other borrowing catergory had an average balance that was 30% or more of the
Bank's total equity at the end of the 1998 and 1997 periods. The following table
sets forth certain information as to the Bank's reverse repurchase agreement
short-term borrowings at the dates and for the years indicated.
36
December 31,
-----------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the period $ 931,112 $ 557,199 $ 184,966
Amount outstanding at end of period 589,374 900,836 113,755
Highest month end balance 1,189,927 901,156 287,404
Weighted-average interest rate at end of period 5.06% 5.70% 5.48%
Weighted-average interest rate during the period 5.08% 5.65% 5.63%
During 1998, Webster at times also used variable-rate lines of credit through
correspondent banks and purchased federal funds. Webster has established various
sources of funding and uses the most favorable source in conjunction with asset
and liability management strategies. The Employee Stock Ownership Plan ("ESOP")
borrowings are from a correspondent bank at a floating rate based on the
correspondent bank's base (prime) rate and the weighted rates at December 31,
1998 and 1997 were 7.75% and 7.90% respectively. The terms of the loan
agreements call for the ESOP to make annual scheduled principal repayments
through the year 2004. Interest is paid quarterly and the borrowings are
guaranteed and secured by unallocated shares of Webster common stock under the
ESOP Plan.
In 1993, Webster completed a registered offering of $40 million of 8 3/4% Senior
Notes due 2000 (the "Senior Notes"). Webster used $18.25 million from the net
proceeds of the offering to redeem the remaining shares of Series A Stock issued
by Webster to the FDIC in connection with the First Constitution acquisition.
The Senior Notes may not be redeemed by Webster prior to the maturity date of
June 30, 2000, and are not exchangeable for any shares of Webster's common
stock.
NOTE 10: INTEREST-RATE FINANCIAL INSTRUMENTS
- - --------------------------------------------------------------------------------
Webster employs as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. See Note 3 for disclosures on futures
positions. Webster uses interest-rate financial instruments to hedge mismatches
in interest-rate maturities to reduce exposure to movements in interest rates.
These interest-rate financial instruments involve, to varying degrees, credit
risk and market risk. Credit risk is the possibility that a loss may occur if a
counterparty to a transaction fails to perform according to the terms of the
contract. Market risk is the effect of a change in interest rates or currency
rates on the value of the financial instrument. The notional amount of
interest-rate financial instruments is the amount upon which interest and other
payments under the contract are based. For interest-rate financial instruments,
the notional amount is not exchanged and therefore, the notional amounts should
not be taken as a measure of credit or market risk.
The fair value, which approximates the cost to replace the contract at the
current market rates, is generally representative of market risk. Credit risk
related to the interest-rate swaps, interest-rate caps and floors at December
31, 1998 is not considered to be significant due to counterparty ratings. In the
event of a default by a counterparty, the cost to Webster, if any, would be the
replacement cost of the contract at the current market rate.
Interest-rate financial instruments are summarized as follows:
- - -----------------------------------------------------------------------------------------------------------------------------
Fair Market
Notional Amount Value Amortized Cost
- - -----------------------------------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
- - -----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-rate swap agreements $ 25,000 $ 75,000 $ (219) $ 291 $ -- $ --
Interest-rate floor agreements 500,000 100,000 8,501 954 4,148 1,138
Interest-rate cap agreements 451,000 501,000 4,047 7,226 11,837 14,630
- - -----------------------------------------------------------------------------------------------------------------------------
Total $ 976,000 $ 676,000 $ 12,329 $ 8,471 $ 15,985 $ 15,768
- - -------------------------------------------------------------------------------------------------------------------
Interest-rate swap agreements involve the exchange of fixed and variable
interest payments based upon notional amounts paid to a maturity date. At
December 31, 1998, Webster had one interest-rate swap agreement, hedging $25
million of brokered certificates of deposit, in which Webster receives a fixed
rate of 6.65% and pays a variable rate based on LIBOR. For the year ended
December 31, 1998, net income recorded on the deposit swap was $263,000.
37
Interest-rate cap agreements will result in cash payments to be received by
Webster only if current interest rates rise above a predetermined interest rate.
At December 31, 1998, Webster had five outstanding cap agreements with notional
amounts of $410 million related to the available for sale securities portfolio
with interest-rate caps ranging from 6.00% to 9.00%. The amount paid for
entering into the interest-rate cap is amortized over the life of the agreement
as an adjustment to mortgage-backed securities available for sale interest
income. At December 31, 1998, this portfolio had $11.3 million of unamortized
interest-rate cap balances and during the 1998 period amortized $3.5 million as
a reduction of interest income. Similarly, interest-rate floor agreements will
result in cash payments to be received by Webster only if current interest rates
fall below a predetermined interest rate. At December 31, 1998, Webster had two
outstanding interest-rate floor agreements with notional amounts of $500 million
and interest rate floors of 5.25% and 5.75%. The amount paid for entering into
an interest-rate floor agreement is amortized over the life of the agreement as
an adjustment to mortgage-backed securities available for sale interest income.
At December 31, 1998, Webster had $4.1 million of unamortized floor income costs
and during the 1998 period amortized $396,000 as a reduction of available for
sale interest income. In August 1997, Webster purchased a separate interest-rate
cap contract with a notional amount of $41 million, a cap rate of 7.00% and a
termination date of August 19, 2002. The cost of the interest rate cap contract
was $713,400. The interest rate cap contract is matched against two fixed-rate
borrowings with maturities of one and two years, respectively, and a five year
fixed-rate borrowing that is callable after three years.
NOTE 11: SUMMARY OF ESTIMATED FAIR VALUES
- - --------------------------------------------------------------------------------
A summary of estimated fair values consisted of the following:
December 31,
---------------------------------------------------------------
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- - ------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and Due from Depository Institutions $ 173,863 $ 173,863 $ 151,322 $ 151,322
Interest-bearing Deposits 3,560 3,560 77,104 77,104
Securities 3,449,542 3,452,753 3,581,456 3,581,280
Residential Loans 3,749,152 3,881,160 3,855,489 3,927,674
Consumer Loans 42,122 43,884 81,139 81,774
Home Equity Loans 439,369 458,727 474,995 490,352
Commercial Loans 817,975 814,075 602,708 599,716
Less Allowance for Loan Losses 55,109 -- 59,518 --
Segregated Assets, Net -- -- 41,038 42,417
Interest-rate Contracts 12,548 12,548 7,817 7,817
Mortgage Servicing Rights, Net 4,686 6,322 5,906 8,379
Liabilities:
Deposits Other than Certificates $2,500,085 $2,500,085 $2,348,914 $2,348,914
Time Deposits:
Maturing in Less than One Year 2,642,908 2,643,754 2,483,946 2,490,362
Maturing in One Year and Beyond 508,280 517,717 886,170 888,803
Federal Home Loan Bank Advances 1,774,560 1,781,391 1,516,634 1,517,263
Reverse Repurchase Agreements and Other Borrowings 738,921 741,697 1,032,963 1,033,503
Capital Securities and Preferred Stock of Subsidiary Corp. 199,577 215,326 194,577 201,001
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires all entities to disclose the fair value
of financial instruments, including both assets and liabilities recognized and
not recognized in the statement of condition, for which it is practicable to
estimate fair value.
The carrying amounts for interest-bearing deposits approximate fair value since
they mature in 90 days or less and do not present unanticipated credit concerns.
The fair value of securities (See Note 3) is estimated based on prices published
in financial newspapers or quotations received from securities dealers or
pricing services. The fair value of interest-rate contracts was based on the
amount Webster could receive or pay to terminate the agreements. FHL Bank stock
has no active market and is required to be held by member banks. The estimated
fair value of FHL Bank stock equals the carrying amount.
38
In estimating the fair value of loans, portfolios with similar financial
characteristics were classified by type. Loans were segmented into four generic
types: residential, consumer, home equity and commercial. Residential loans were
further segmented into 15 and 30 year fixed-rate contractual maturities, with
the remaining classified as variable-rate loans. The fair value of each category
is calculated by discounting scheduled cash flows through estimated maturity
using market discount rates. Adjustments were made to reflect credit and rate
risks inherent in the portfolio.
The estimated fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, regular savings, NOW accounts and money
market accounts, is equal to the amount payable on demand. The estimated fair
values of time deposits, FHL Bank advances, and other borrowings were calculated
using the discounted cash flow method. The discount rate is estimated using
rates currently offered for deposits and FHL Bank advances of similar remaining
maturities. The discount rate used for the Senior Notes was calculated using a
spread over treasury notes consistent with the spread used to price the Senior
Notes at their inception. The discount rates used for the capital securities and
minority interest liabilities were calculated using market rates for current
instruments with similar terms.
The calculation of fair value estimates of financial instruments is dependent
upon certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or settlement
are not reflected in the amounts disclosed. Fair value estimates are not
intended to reflect the liquidation value of the financial instruments.
NOTE 12: FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET AND ALLOWANCE FOR
LOSSES ON FORECLOSED PROPERTIES
- - --------------------------------------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as follows:
Years Ended December 31,
- - ----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Foreclosed Properties
Acquired in Settlement of Loans, Net $ (908) $ (1,274) $ (1,650)
Provision for Losses on Foreclosed Properties 330 1,637 2,523
Rental Income (146) (202) (369)
Foreclosed Property Expenses 1,300 4,023 4,654
- - ----------------------------------------------------------------------------------------------------------------------------
Total $ 576 $ 4,184 $ 5,158
- - ----------------------------------------------------------------------------------------------------------------------------
Webster has an allowance for losses on foreclosed properties. A detail of the
changes in the allowance follows:
Years Ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 1,222 $ 819 $ 1,511
Provisions 330 1,637 2,523
Losses Charged to Allowance (1,466) (1,355) (3,359)
Recoveries Credited to Allowance 121 121 144
- - ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 207 $ 1,222 $ 819
- - ------------------------------------------------------------------------------------------------------------------------------
39
NOTE 13: INCOME TAXES
- - --------------------------------------------------------------------------------
Charges for income taxes in the Consolidated Statements of Income are comprised
of the following:
Years Ended December 31,
---------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 32,953 $ 28,980 $ 22,974
State 975 5,112 5,777
- - ------------------------------------------------------------------------------------------------------------------------------------
33,928 34,092 28,751
- - ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 13 (6,894) 2,063
State 10,603 (1,473) 1,788
- - ------------------------------------------------------------------------------------------------------------------------------------
10,616 (8,367) 3,851
- - ------------------------------------------------------------------------------------------------------------------------------------
Total:
Federal 32,966 22,086 25,037
State 11,578 3,639 7,565
- - ------------------------------------------------------------------------------------------------------------------------------------
$ 44,544 $ 25,725 $ 32,602
- - ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense of $44.5 million, $25.7 million and $32.6 million for the
years ended December 31, 1998, 1997 and 1996, respectively, differed from the
amounts computed by applying the Federal income tax rate of 35% in 1998, 1997
and 1996 to pre-tax income as a result of the following:
Years Ended December 31,
-----------------------------------------------
(In thousands) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
Computed "Expected" Tax Expense $ 40,253 $ 23,394 $ 30,309
Increase (Decrease) in Income Taxes Resulting From:
Dividends Received Deduction (653) (364) (603)
State Income Taxes, Net of Federal Income Tax Benefit
Including Change in Valuation Allowance and Rate 7,526 2,365 5,243
Acquisition Related Expenses 1,208 1,225 --
Increase in Bank Owned Life Insurance Value (1,963) -- --
Other, Net (1,827) (895) (2,347)
- - ---------------------------------------------------------------------------------------------------------------------------------
Income Taxes $ 44,544 $ 25,725 $ 32,602
- - ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998, Webster had a net deferred tax asset of $14.7 million. In
order to fully realize the net deferred tax asset, Webster must either generate
future taxable income or incur tax losses to carryback. Based on Webster's
historical and current taxable earnings, management believes that Webster will
realize the net deferred tax asset. There can be no assurance, however, that
Webster will generate taxable earnings or a specific level of continuing taxable
earnings in the future.
A deferred tax valuation allowance has been established for the state portion of
temporary differences that may not be realized due to tax minimization
strategies.
40
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below.
December 31,
- - --------------------------------------------------------------------------------------------------------------------------------
(In thousands ) 1998 1997
- - --------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Loan Loss Allowances and Other Allowances, Net $ 22,906 $ 30,363
Accrued Compensation and Pensions 5,488 4,632
Deferred Expenses 3,438 3,671
Intangibles 5,812 5,231
Other 1,318 2,480
- - --------------------------------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 38,962 46,377
Less State Valuation Allowance, Net of Federal Benefit (5,000) --
- - --------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Asset after Valuation Allowance 33,962 46,377
- - --------------------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Loan Discount 2,829 4,062
Premises and Equipment -- 1,309
Unrealized Gain on Securities 13,913 14,697
Other 2,483 1,740
- - --------------------------------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 19,225 21,808
- - --------------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 14,737 $ 24,569
- - --------------------------------------------------------------------------------------------------------------------------------
NOTE 14: SHAREHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
Shareholders' equity increased $37.6 million to $554.9 million at December 31,
1998 from $517.3 million at December 31, 1997 due primarily to net income of
$70.5 million partially offset by common stock repurchases, net of reissuances,
of $30.6 million, the effect of option exercises and common stock dividend
payments. During 1998, Webster repurchased a total of 1,396,551 shares of its
common stock.
On June 1, 1998, Webster acquired Damman Insurance Associates (see Note 2). In
connection with the acquisition, Webster issued 274,609 shares of its common
stock for 100% ownership interest of Damman.
In May of 1998, Webster repurchased 305,215 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 former Shawmut Bank branches divested following the Fleet-Shawmut
merger. The repurchase was accounted for as a reduction of shareholders' equity.
On April 15, 1998, Webster acquired Eagle (see Note 2). In connection with the
acquisition, Webster issued 10,615,156 shares of its common stock for all the
outstanding shares of Eagle's common stock. Under the terms of the agreement,
Eagle's shareholders received 1.68 shares of Webster common stock after giving
effect to a two-for-one stock split in a tax free exchange for each of their
shares of Eagle's common stock.
On April 6, 1998, Webster's common stock split two-for-one; the stock split was
effected in the form of a stock dividend. Basic and diluted common shares have
been restated for all periods presented as if the stock split took place at the
beginning of the earliest period shown. Also, shareholders' equity accounts for
all periods presented have been restated to give retroactive recognition of the
stock split.
On July 31, 1997, Webster acquired People's (see Note 2). In connection with the
acquisition, Webster issued 3,151,992 shares of its common stock for all the
outstanding shares of People's common stock. Under the terms of the agreement,
People's shareholders received .85 shares of Webster common stock in a tax-free
exchange for each of their shares of People's common stock.
41
On May 31, 1997, Webster acquired MidConn (see Note 2) as a result of the Eagle
acquisition. In connection with the acquisition, Webster effectively issued
2,869,440 shares of its common stock for all the outstanding common shares of
MidConn.
On January 31, 1997, Webster acquired Derby (see Note 2). In connection with the
acquisition, Webster issued 7,002,740 shares of its common stock for all the
outstanding shares of Derby common stock. Under the terms of the agreement,
Derby shareholders received 1.14158 shares of Webster common stock in a tax-free
exchange for each of their shares of Derby common stock.
Retained earnings at December 31, 1998 included $41.0 million of earnings of the
Bank appropriated to bad debt reserves (pre-1988), which were deducted for
federal income tax purposes. Tax law changes were enacted in August 1996 to
eliminate the "thrift bad debt" method of calculating bad debt deductions for
tax years after 1995 and to impose a requirement to recapture into taxable
income (over a six-year period) all bad debt reserves accumulated after 1987.
Since Webster previously recorded a deferred tax liability with respect to these
post-1987 reserves, its total income tax expense for financial reporting
purposes will not be affected by the recapture requirement. The tax law changes
also provide that taxes associated with the recapture of pre-1988 bad debt
reserves would become payable under more limited circumstances than under prior
law. Under the tax laws, as amended, events that would result in recapture of
the pre-1988 bad debt reserves include stock and cash distributions to the
holding company from the Bank in excess of specified amounts. Webster does not
expect such reserves to be recaptured into taxable income.
Applicable Office of Thrift Supervision ("OTS") regulations require federal
savings banks such as the Bank, to satisfy certain minimum capital requirements,
including a leverage capital requirement (expressed as a ratio of core or Tier 1
capital to adjusted total assets) and risk-based capital requirements (expressed
as a ratio of core or Tier 1 capital and total capital to total risk-weighted
assets). As an OTS regulated institution, the Bank is also subject to a minimum
tangible capital requirement (expressed as a ratio of tangible capital to
adjusted total assets). At December 31, 1998 and 1997, the Bank exceeded all OTS
regulatory capital requirements and met the FDIC requirements for a "well
capitalized" institution. In order to be considered "well capitalized" a
depository institution must have a ratio of Tier 1 capital to adjusted total
assets of 5%, a ratio of Tier 1 capital to risk-weighted assets of 6% and a
ratio of total capital to risk-weighted assets of 10%. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Webster's Consolidated Financial Statements. Webster's
capital amounts and classifications are also subject to qualitative judgments by
the OTS about components, risk weightings, and other factors.
At December 31, 1998 and 1997, the Bank was in full compliance with all
applicable capital requirements as detailed below:
- - -----------------------------------------------------------------------------------------------------------------------
OTS
Minimum Capital Well
Actual Requirements Capitalized
- - -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- - -----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1998
Total Capital (to Risk-Weighted Assets) $560,712 12.58% $356,435 8.00% $445,543 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 507,778 11.40 178,217 4.00 267,326 6.00
Tier 1 Capital (to Adjusted Total Assets) 507,778 5.79 262,933 3.00 438,221 5.00
Tangible Capital (to Adjusted Total Assets) 502,602 5.74 131,389 1.50 No Requirement
AT DECEMBER 31, 1997
Total Capital (to Risk-Weighted Assets) $591,066 14.42% $328,015 8.00% $410,019 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 542,149 13.22 164,007 4.00 246,011 6.00
Tier 1 Capital (to Adjusted Total Assets) 542,149 6.07 268,115 3.00 446,858 5.00
Tangible Capital (to Adjusted Total Assets) 537,446 6.02 133,987 1.50 No Requirement
At the time of the respective conversions of the Bank and certain predecessors
from mutual to stock form, each institution established a liquidation account
for the benefit of eligible depositors who continue to maintain their deposit
accounts after
42
conversion. In the event of a complete liquidation of the Bank, each eligible
depositor will be entitled to receive a liquidation distribution from the
liquidation account. The Bank may not declare or pay a cash dividend on or
repurchase any of its capital stock if the effect thereof would cause its
regulatory capital to be reduced below applicable regulatory capital
requirements or the amount required for its liquidation accounts.
The OTS capital distribution regulations establish three tiers of institutions
for purposes of determining the level of dividends that can be paid. Since the
Bank's capital levels exceeded all fully phased-in OTS capital requirements at
December 31, 1998, it is considered a Tier 1 Institution. Tier 1 Institutions
generally are able to pay dividends up to an amount equal to one-half of their
excess capital at the beginning of the year plus all income for the calendar
year. In accordance with the OTS capital distribution regulations, the Bank must
provide a 30 day notice prior to the payment of any dividends to Webster. As of
December 31, 1998, the Bank had $114.8 million available for the payment of
dividends under the OTS capital distribution regulations. The Bank has paid
dividends and made distributions to Webster amounting to $127.2 million and
$45.6 million for 1998 and 1997, respectively. Under the prompt corrective
action regulations adopted by the OTS and the FDIC, the Bank is precluded from
paying any dividends if such action would cause it to fail to comply with
applicable minimum capital requirements.
The Bank has an ESOP that invests in Webster common stock as discussed in Notes
9 and 16. Since Webster has secured and guaranteed the ESOP debt, the
outstanding ESOP loan balance which is considered unearned compensation expense
and is recorded as a reduction of shareholders' equity. Both the loan obligation
and the unearned compensation expense are reduced by the amount of any loan
repayments made by the ESOP. Principal repayments totaled $420,000, $568,000 and
$677,000 during the years ended December 31, 1998, 1997 and 1996, respectively.
In February 1996, Webster's Board of Directors adopted a stockholders' rights
plan in which preferred stock purchase rights have been granted as a dividend at
the rate of one right for each share of common stock held of record as of the
close of business on February 16, 1996. The plan is designed to protect all
Webster shareholders against hostile acquirers who may seek to take advantage of
Webster and its shareholders through coercive or unfair tactics aimed at gaining
control of Webster without paying all shareholders a fair price. Each right
initially would entitle the holder thereof to purchase under certain
circumstances one 1/1,000th of a share of a new Series C Preferred Stock at an
exercise price of $100 per share. The rights will expire in February 2006. The
rights will be exercisable only if a person or group in the future becomes the
beneficial owner of 15% or more of the common stock, or announces a tender or
exchange offer which would result in its ownership of 15% or more of the common
stock, or if the Board declares any person or group to be an "adverse person"
upon a determination that such person or group has acquired beneficial ownership
of 10% or more and that such ownership is not in the best interests of the
company.
43
NOTE 15: EARNINGS PER SHARE
- - --------------------------------------------------------------------------------
The following tables reconcile the components of basic and diluted earnings per
share.
Years Ended December 31,
--------------------------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
BASIC EPS:
Net income $ 70,465 $ 41,113 $ 53,994
Preferred stock dividends -- -- 1,149
- - -------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders $ 70,465 $ 41,113 $ 52,845
- - -------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 37,899,897 37,445,418 36,810,846
- - -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.86 $ 1.10 $ 1.44
- - -------------------------------------------------------------------------------------------------------------------------
DILUTED EPS:
Net income $ 70,465 $ 41,113 $ 53,994
- - --------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 37,899,897 37,445,418 36,810,846
Dilutive common stock equivalents:
Effect of conversion of preferred stock series B -- 34,106 1,776,172
Common stock equivalents due to dilutive effect
of options 670,656 799,584 903,124
Common stock equivalents due to dilutive effect
of warrant -- 194,088 69,388
- - --------------------------------------------------------------------------------------------------------------------------
Total weighted-average diluted shares 38,570,553 38,473,196 39,559,530
- - --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.83 $ 1.07 $ 1.36
- - --------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 and 1997, options to purchase 664,423 and 239,400 shares of
common stock at exercise prices between $31.75 and $35.38 and $24.82 and $32.25
respectively, were not included in the computation of diluted earnings per share
since the options' exercise prices were greater than the average market price of
Webster common shares for 1998 and 1997, respectively.
NOTE 16: EMPLOYEE BENEFIT AND STOCK OPTION PLANS
- - --------------------------------------------------------------------------------
The Bank has an employee investment plan under section 401(k) of the Internal
Revenue Code. Under the savings plan, the Bank will match $.50 for every $1.00
of the employee's contribution up to 6% of the employee's annual compensation.
Operations were charged with $1.2 million, $1.2 million and $1.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively, for contributions to
the investment plan.
The Bank's ESOP, which is noncontributory by employees, is designed to invest in
Webster common stock on behalf of employees of the Bank who meet certain minimum
age and service requirements. The Bank may make contributions to the ESOP in
such amounts as the Board of Directors may determine on an annual basis. To the
extent that the Bank's contributions are used to repay the ESOP loan, Webster
common stock is allocated to the accounts of participants in the ESOP. Stock and
other amounts allocated to a participant's account become fully vested after the
participant has completed five years of participation service under the ESOP.
Total principal paydown on the ESOP loan during 1998 totaled $610,900.
Operations were charged with $1.2 million for each of the years ended December
31, 1998 and 1997, and $1.3 million for the year ended December 31, 1996 for
costs related to the ESOP. The 1998 ESOP charge includes $420,000 for principal
payments, $36,093 of interest payments (net of $80,404 of dividends on
unallocated ESOP shares) and $79,946 of administrative costs. As required under
the Accounting Standards Executive Committee's Statement of Position 93-6,
"Employers Accounting for Stock Ownership Plans", the 1998 ESOP charge also
includes an additional $622,749 in order to measure compensation expense based
on the fair value of the shares allocated during the year.
44
The Bank maintains a noncontributory pension plan for employees who meet certain
minimum service and age requirements. Pension benefits are based upon earnings
of covered employees during the period of credited service. The following tables
set forth changes in benefit obligation, changes in plan assets and the funded
status of the Bank's pension plan and amounts recognized in Webster's
Consolidated Statements of Condition at December 31, 1998 and 1997.
December 31,
--------------------------------------
(In thousands) 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Projected Benefit Obligation-Beginning of Year $ 20,829 $ 24,023
Service Cost 2,257 2,027
Interest Cost 1,536 1,554
Plan Amendment 114 1,033
Actuarial Loss (Gain) 3,675 (152)
Acquisition-related 651 --
Benefits Paid (2,007) (2,979)
Curtailment Adjustments (304) (4,677)
- - ----------------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation-End of Year $ 26,751 $ 20,829
- - ----------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Plan Assets at Fair Value-Beginning of Year $ 24,351 $ 21,119
Actual Return on Plan Assets 2,982 6,223
Contributions 624 1,010
Acquisition-related 651 --
Benefits Paid (2,007) (2,979)
Settlements -- (1,022)
- - ---------------------------------------------------------------------------------------------------------------------------
Plan Assets at Fair Value-End of Year $ 26,601 $ 24,351
- - ---------------------------------------------------------------------------------------------------------------------------
Funded Status $ (150) $ 3,522
Unrecognized Prior Service Cost (1,207) (1,403)
Unrecognized Net Gain (362) (3,531)
Unrecognized Net Asset (112) (121)
- - ----------------------------------------------------------------------------------------------------------------------------
Accrued Pension (Liability) $ (1,831) $ (1,533)
- - ----------------------------------------------------------------------------------------------------------------------------
The pension plan held, in its asset portfolio, 62,000 and 88,000 shares of
Webster common stock as of December 31, 1998 and 1997, respectively.
The discount rate, the rate of increase of future compensation levels and the
expected long-term rate of return on assets used in determining the actuarial
present value of the projected benefit obligation were 6.25%, 4.50% and 9.00%,
respectively for 1998, and 7.00%, 4.75% and 9.00%, respectively for 1997.
Net pension expense for 1998, 1997 and 1996 included the following components.
Years Ended December 31
-----------------------------------------------------------
(In thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
Service Cost-Benefits Earned During the Period $ 2,257 $ 2,027 $ 2,260
Interest Cost on Projected Benefit Obligations 1,536 1,554 1,623
Expected Return on Plan Assets (2,242) (2,476) (2,229)
Amortization and Deferral (630) 516 384
- - -------------------------------------------------------------------------------------------------------------------
Total $ 921 $ 1,621 $ 2,038
- - -------------------------------------------------------------------------------------------------------------------
45
The Bank also provides other post-retirement benefits to certain retired
employees. The following tables set forth the changes in benefit obligation and
the funded status of the plan at December 31, 1998 and 1997:
Years Ended December 31,
-------------------------------------
(In thousands) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Accumulated Benefit Obligation-Beginning of year $ 3,655 $ 5,837
Service Cost 11 58
Interest Cost 277 249
Actuarial Loss 443 291
Benefits Paid (231) (180)
Curtailment Adjustments (412) (2,600)
- - ------------------------------------------------------------------------------------------------------------------------------
Accumulated Benefit Obligation-End of Year $ 3,743 $ 3,655
- - ------------------------------------------------------------------------------------------------------------------------------
Fair Value of Plan Assets $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------
Fund Status $ (3,743) $ (3,655)
Unrecognized Prior Service -- (331)
Unrecognized Net (Gain) Loss 359 (184)
- - ------------------------------------------------------------------------------------------------------------------------------
Accrued Post-Retirement (Liability) $ (3,384) $ (4,170)
- - ------------------------------------------------------------------------------------------------------------------------------
The discount rate used in determining the accumulated other post-retirement
benefit obligation was 6.25% and 7.00% for 1998 and 1997, respectively. The
assumed healthcare cost-trend rate is 6.50% for 1999, decreasing 0.5% per year
to 5.0% for 2002 and thereafter. An increase of 1% in the assumed healthcare
cost-trend rate would increase net periodic post-retirement benefit cost by
$17,800 and increase the accumulated benefit obligation by $318,900. A decrease
of 1% in the assumed healthcare cost trend rate would decrease net periodic
post-retirement cost by $15,400 and decrease the accumulated benefit obligation
by $275,800.
The components of post-retirement benefits cost were as follows:
Years Ended December 31,
-------------------------------------------------
(In thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 11 $ 58 $ 329
Interest Cost 277 249 425
Amortization 112 (49) 33
- - -------------------------------------------------------------------------------------------------------------------------------
Net Periodic Post-Retirement Benefit Cost $ 400 $ 258 $ 787
- - -------------------------------------------------------------------------------------------------------------------------------
Webster maintains stock option plans (the "Option Plans") for the benefit of its
directors and officers. Webster applies the provisions of APB Opinion No. 25 and
related interpretations in accounting for fixed stock option plans. Accordingly,
no compensation cost has been recognized for its fixed stock option plans in the
Consolidated Statements of Income. Had compensation cost for Webster's stock
option based compensation plans been determined consistent with SFAS No. 123 and
recorded in the Consolidated Statements of Income, Webster's net income and
earnings per share would have been reduced to the pro forma amounts indicated as
follows:
46
Years Ended December 31,
---------------------------------------
(In thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
Net Income:
As Reported $ 70,465 $ 41,113 $ 53,994
Pro Forma 66,693 39,518 53,057
Basic Earnings Per Share:
As Reported $ 1.86 $ 1.10 $ 1.44
Pro Forma 1.76 1.06 1.40
Diluted Earnings Per Share:
As Reported $ 1.83 $ 1.07 $ 1.36
Pro Forma 1.72 1.03 1.34
Webster had five active fixed stock option plans at December 31, 1998. Three of
the option plans were acquired through the Eagle, People's and Derby
acquisitions. The acquired plans had options outstanding of 413,900, 118,776 and
66,944 respectively, at December 31, 1998. The 1992 option plan was amended in
1994, 1996 and 1998. Stock appreciation rights ("SARS") were granted in tandem
with stock options issued under the Derby option plan. In accordance with
generally accepted accounting principles, compensation expense for the SARS is
recorded when the market value of Webster's common stock exceeds the SARS'
strike price. Compensation expense recorded for 1998, 1997 and 1996 was $89,695,
$229,000 and $18,800, respectively. During the years ended December 31, 1998,
1997 and 1996, the number of SARS exercised for each respective period were
4,612, 1,050 and 2,204, respectively. Under the terms of the plans, the exercise
price of each option granted equals the approximate market price of Webster's
stock on the date of grant and each option has a maximum contractual life of ten
years.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes Option-Pricing Model with the following weighted-average
assumptions used for grants issued during 1998: expected option term 8.7 years,
expected dividend yield 1.70%, expected volatility 31.19%, expected forfeiture
rate 2.13%, and risk-free interest rate of 4.96%, the following weighted-average
assumptions were used for grants issued during 1997: 8.6 years, 1.85%, 25.14%,
2.23% and 5.83%, respectively; and for 1996 were 10 years, 1.91%, 21.0%, 1.14%
and 6.42%, respectively.
A summary of the status of Webster's fixed stock option plans at December 31,
1998, 1997, and 1996 and changes during the years then ended is presented below:
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- - ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding at Beginning of Year 2,471,748 $ 13.61 2,487,791 $ 10.02 3,316,310 $ 8.38
Granted 627,350 31.92 548,358 24.86 467,780 15.33
Exercised (614,111) 12.26 (532,043) 8.25 (1,269,303) 7.71
Forfeited/Canceled (38,163) 25.88 (32,358) 16.08 (26,996) 9.63
- - ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding at End of Year 2,446,824 $ 18.46 2,471,748 $ 13.61 2,487,791 $ 10.02
- - ---------------------------------------------------------------------------------------------------------------------------------
Options Exercisable at Year End 1,912,138 1,763,608 1,793,383
Weighted-Average Per Share Fair Value
of Options Granted During the Year $ 12.30 $8.73 $ 5.60
47
The following table summarizes information about Webster's fixed stock option
plans by price range for options outstanding and exercisable at December 31,
1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - -------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (In years) Price Exercisable Price
- - -------------------------------------------------------------------------------------------------------------------
$ 3.54 and under 25,960 1.9 $ 2.27 25,960 $ 2.27
$ 3.55 - $ 7.08 226,213 1.8 4.96 226,213 4.96
$ 7.09 - $10.61 558,831 5.0 9.62 558,831 9.62
$ 10.62 - $14.15 466,069 5.8 12.35 461,469 12.33
$14.16 - $ 17.69 31,888 7.4 15.79 16,800 15.98
$ 17.70 - $21.23 261,690 7.8 18.84 167,082 18.71
$ 21.24 - $24.76 55,400 3.4 23.56 35,960 23.66
$ 24.77 - $28.30 163,350 9.3 26.39 10,000 25.00
$28.31 - $ 31.84 188,423 8.9 31.75 1,823 31.75
$31.85 - $ 35.38 469,000 9.4 33.77 408,000 33.84
- - ----------------------------------------------------------------------------------------------------------------
2,446,824 6.5 $ 18.46 1,912,138 $16.01
- - -------------------------------------------------------------------------------------------------------------------
Webster also has two restricted stock plans consisting of a Director Fee
Retainer Restricted Stock Plan, which was established in 1996 and a Restricted
Stock Plan, which was established in 1992. Under the Director Fee Restricted
Stock Plan, a total of 6,480 shares were issued to fifteen directors in 1998
with each receiving 432 shares. These restricted shares were reissued from
treasury stock and the cost was measured as of the grant date using the fair
market value of Webster's stock as of the grant date. There were no shares
granted in 1998, 1997 and 1996 under the Restricted Stock Plan. The cost of all
restricted shares is amortized to compensation expense over the contractual
service period and such expense is reflected in Webster's Consolidated
Statements of Income.
NOTE 17: ACQUISITION RELATED EXPENSES
- - --------------------------------------------------------------------------------
A summary of acquisition related expenses follows:
Years Ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Shawmut Transaction $ -- $ -- $ 500
Derby -- 19,858 --
People's -- 7,200 --
MidConn -- 2,734 --
Eagle 17,400 -- --
- - ------------------------------------------------------------------------------------------------------------------------------
Total $ 17,400 $ 29,792 $ 500
- - ------------------------------------------------------------------------------------------------------------------------------
In connection with the acquisition of Eagle, which was completed on April
15,1998, Webster recorded approximately $17.4 million of acquisition related
expenses during 1998. In addition, in 1998 Webster recorded an increase of $1.5
million to the provision for loan losses related to the acquisition of Eagle for
conformity to Webster's credit policies. In connection with the acquisitions of
Derby, MidConn and People's, which were completed on January 31, 1997, May 31,
1997 and July 31, 1997, respectively, Webster recorded approximately $29.8
million of acquisition related expenses.
48
The following table presents a summary of the acquisition related accrued
liabilities:
(In thousands) Derby People's MidConn Eagle
- - ------------------------------------------------------------------------------------------------------------------------------
Balance of acquisition-related accrued liabilities at December 31, 1996 $ -- $ -- $ -- $ --
Additions/Provisions 19,900 7,200 2,700 --
Payments and charges against the liabilities:
Compensation (severance and related costs) (6,700) (2,400) (800) --
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) (1,700) --
Acquisition-related and miscellaneous expenses (2,800) (1,100) (200) --
- - ------------------------------------------------------------------------------------------------------------------------------
Balance of acquisition-related accrued liabilities at December 31, 1997 $ 5,400 $ 2,400 $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------
Additions/Provisions -- -- -- 17,400
Payments and charges against the liabilities:
Compensation (severance and related costs) (400) (300) -- (7,800)
Data processing contract termination (600) -- -- --
Transaction costs (including investment bankers,
attorneys and accountants) -- -- -- (4,100)
Acquisition-related and miscellaneous expenses (600) (500) -- (4,100)
- - ------------------------------------------------------------------------------------------------------------------------------
Balance of acquisition-related accrued liabilities at December 31, 1998 $ 3,800 $ 1,600 $ -- $1,400
- - ------------------------------------------------------------------------------------------------------------------------------
The remaining total accrued liability of $6.8 million at December 31, 1998
represents, for the most part, an accrual for data processing contract
termination costs payable over future periods and the estimated loss on sale of
excess fixed assets due to consolidation of overlapping branch locations.
NOTE 18: BUSINESS SEGMENTS
- - --------------------------------------------------------------------------------
Webster has four segments for business segment reporting purposes. These
segments include consumer banking, business banking, mortgage lending and
treasury. The accounting policies of the segments are consistent with those
described in the summary of significant accounting policies. The organizational
hierarchies that define the business segments are periodically reviewed and
revised. Results may be restated in future periods to reflect changes in
methodologies and organizational structure. The following table presents the
Statement of Operations for Webster's reportable segments.
Operating income and total assets by business segment are as follows:
Year Ended December 31, 1998
---------------------------------------------------------------------------------------------
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
- - ------------------------------ ---------------- --------------- --------------- --------------- --------------- ---------------
Net Interest Income $ 128,762 $ 26,285 $ 76,165 $ 13,905 $ 318 $ 245,435
Provision for Loan Losses 1,097 1,151 4,552 -- -- 6,800
- - ------------------------------ ---------------- --------------- --------------- --------------- --------------- ---------------
Net Interest Income
After Provision 127,665 25,134 71,613 13,905 318 238,635
Noninterest Income 32,421 1,379 7,802 17,945 7,402 66,949
Noninterest Expense 115,567 11,521 21,683 7,774 9,137 165,682
- - ------------------------------ ---------------- --------------- --------------- --------------- --------------- ---------------
Income (Loss) Before
Income Taxes 44,519 14,992 57,732 24,076 (1,417) 139,902
Income Taxes 16,472 5,547 21,361 8,907 (525) 51,762
- - ------------------------------ ---------------- --------------- --------------- --------------- --------------- ---------------
Net Income (Loss) $ 28,047 $ 9,445 $ 36,371 $ 15,169 $ (892) $ 88,140
- - ------------------------------ ---------------- --------------- --------------- --------------- --------------- ---------------
Total Assets $ 720,703 $ 666,947 $ 3,636,046 $ 3,847,654 $ 21,508 $ 8,892,858
49
Management allocates expenses not directly incurred to its business segments.
These expenses include administration, finance, operations and other support
related functions. In addition, the effects of intersegment lending and
borrowing activities are allocated based upon whether the respective segments
provide or use funds in the course of business activities. Net income after
income taxes for the segments do not include certain income and expense
categories, totaling $17.7 million, that do not directly relate to the segments.
The major categories on a before tax basis include interest expense of $14.7
million on debt reflected as capital at the segment level, $17.4 million of
acquisition-related expenses and other income not related to the segments of
$7.2 million.
The consumer banking segment includes consumer lending and the Bank's deposit
generation and direct banking activities, which include the operation of
automated teller machines and telebanking customer support, sales and small
business lending. The business banking segment includes the Bank's investment in
commercial and industrial loans and commercial real estate loans. The business
banking segment also includes deposit and cash management activities for
business banking. The mortgage lending segment includes the Bank's investment in
residential real estate loans and the Bank's residential real estate loan
origination, servicing and secondary marketing activities. The treasury segment
includes the Bank's investment in assets and liabilities managed by the treasury
department and includes interest-bearing deposits, securities, FHL Bank
advances, reverse repurchase agreements and other borrowings. All other includes
the results of Webster's trust and investment and insurance subsidiaries, which
offer products to both consumer and business customers.
NOTE 19: CAPITAL SECURITIES OF SUBSIDIARY TRUSTS
- - --------------------------------------------------------------------------------
During 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Corporation. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is the $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997.
On April 1, 1997, Eagle Financial Capital Trust I, subsequently renamed Webster
Capital Trust II ("Trust II"), completed a $50 million private placement of
10.00% capital securities. Proceeds from the issue were invested by Trust II in
junior subordinated deferrable debentures issued by Eagle due in 2027. These
debentures represent the sole assets of Webster Capital Trust II.
At December 31, 1997, Webster owned $5.0 million of Trust II Securities which
were eliminated as a result of the pooling of interests. Subsequent to December
31, 1997 and prior to Webster's acquisition of Eagle, these securities were sold
to a third party and were outstanding at December 31, 1998.
The subordinated debt securities are unsecured obligations of Webster and are
subordinate and junior in right of payment to all present and future senior
indebtedness of Webster. Webster has entered into a guarantee, which together
with Webster's obligations under the subordinated debt securities and the
declaration of trust governing Trust I and Trust II, including its obligations
to pay costs, expenses, debts and liabilities (other than trust securities),
provides a full and unconditional guarantee of amounts on the capital
securities.
NOTE 20: PREFERRED STOCK OF SUBSIDIARY CORPORATION
- - --------------------------------------------------------------------------------
The Bank formed and incorporated Webster Preferred Capital Corporation ("WPCC")
in March 1997. WPCC was formed to provide a cost-effective means of raising
funds, including capital, on a consolidated basis for the Bank. WPCC's strategy
is to acquire, hold and manage real estate mortgage assets.
In December 1997, WPCC raised $50.0 million in a public offering in which $40
million was issued as Series A 7.375% cumulative redeemable preferred stock and
$10.0 million was issued as Series B 8.625% cumulative redeemable preferred
stock that is quoted under NASDAQ listing (WBSTP). All of WPCC's common stock is
owned by the Bank. The preferred shares are not exchangeable into common stock
or any other securities of the Bank or Webster, and will not constitute
regulatory capital of either the Bank or Webster .
50
NOTE 21: LEGAL PROCEEDINGS
- - --------------------------------------------------------------------------------
Webster is party to various legal proceedings normally incident to the kind of
business conducted. Management believes that no material liability will result
from such proceedings.
NOTE 22: PARENT COMPANY CONDENSED FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
The Statements of Condition for 1998 and 1997 and the Statements of Income and
Cash Flows for the three-year period ended December 31, 1998 (parent only) are
presented below.
STATEMENTS OF CONDITION
December 31,
------------------------------------
(In thousands) 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
Assets:
Cash and Due from Depository Institutions $ 915 $ 1,830
Interest-Bearing Deposits -- 2,893
Securities Available for Sale 148,218 68,641
Investment in Subsidiaries 607,072 631,164
Due from Subsidiaries 22 --
Accrued Interest Receivable 1,191 251
- - -------------------------------------------------------------------------------------------------------------------
Other Assets 4,992 9,813
Total Assets $ 762,410 $ 714,592
- - -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity:
Senior Notes due 2000 $ 40,000 $ 40,000
Lines of Credit 10,000 --
ESOP Borrowings 1,367 1,978
Due to Subsidiaries -- 2,578
Other Liabilities 6,164 7,774
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trusts 150,000 145,000
Shareholders' Equity 554,879 517,262
- - -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 762,410 $ 714,592
- - -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Dividends from Subsidiary $ 77,230 $ 45,571 $ 24,726
Interest on Securities 5,726 2,067 1,012
Gain on Sale of Securities 7,141 937 1,520
Other Noninterest Income 17 11 139
Interest Expense on Borrowings 5,018 3,812 3,780
Capital Securities Expense 14,708 11,368 -
Other Noninterest Expenses 6,538 6,720 3,996
Income Before Income Taxes and
Equity in Undistributed Earnings of Subsidiaries 63,850 26,686 19,621
Income Tax Benefit 4,000 7,227 1,950
- - ------------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed
Earnings of Subsidiaries 67,850 33,913 21,571
Equity in Undistributed Earnings of Subsidiaries 2,615 7,200 32,423
- - ------------------------------------------------------------------------------------------------------------------------------
Net Income 70,465 41,113 53,994
Preferred Stock Dividends -- - 1,149
- - ------------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ 70,465 $ 41,113 $ 52,845
- - ------------------------------------------------------------------------------------------------------------------------------
51
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------------------
(In thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 70,465 $ 41,113 $ 53,994
(Increase) Decrease in Interest Receivable (940) (186) 42
Decrease (Increase) in Other Assets 11,428 (3,483) (828)
Gains on Sale of Securities (7,141) (937) (1,520)
Equity in Undistributed Earnings of Subsidiaries (2,615) (7,200) (32,423)
Other, Net (801) 11,978 2,861
- - -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 70,396 41,285 22,126
- - -------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of Securities Available for Sale (265,132) (114,640) (35,076)
Decrease (Increase) in Interest-Bearing Deposits 2,893 (2,088) 149
Sales and Maturities of Securities Available for Sale 175,411 61,986 76,465
Investment in Insurance Subsidiary (11,068) -- --
- - ------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (97,896) (54,742) 41,538
- - -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of Borrowings (85,611) (28,400) (7,584)
Proceeds from Borrowings 95,000 10,000 25,400
Net Proceeds from Issuance of Capital Securities 4,846 141,327 --
Common Stock Issued for Purchase Acquisition 9,268 -- --
Exercise of Stock Options 11,468 5,808 5,476
Cash Dividends to Shareholders (18,525) (15,883) (14,436)
Common Stock Repurchases (39,861) (6,020) (27,611)
Distribution from (Investment in) Bank Subsidiary 50,000 (93,793) (44,000)
- - -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 26,585 13,039 (62,755)
- - -------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (915) (418) 909
Cash and Cash Equivalents at Beginning of Year 1,830 2,248 1,339
- - -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 915 $ 1,830 $ 2,248
- - -------------------------------------------------------------------------------------------------------------------------------
NOTE 23: SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
- - --------------------------------------------------------------------------------
Selected quarterly data for 1998 and 1997 follows:
- - --------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- - -------------------------------------------------------------------------------------------------------------------------------
1998:
Interest Income $ 159,199 $ 159,628 $ 152,283 $ 151,343
Interest Expense 95,802 99,977 92,640 88,599
- - -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 63,397 59,651 59,643 62,744
Provision for Loan Losses 1,900 1,900 1,500 1,500
Gain on Sale of Loans, Loan Servicing and Securities, Net 3,364 9,327 1,378 4,572
Other Noninterest Income 11,962 12,483 15,016 16,061
Noninterest Expenses 45,463 62,848 45,980 43,498
- - -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 31,360 16,713 28,557 38,379
Income Taxes 11,639 7,313 8,474 17,118
- - -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 19,721 $ 9,400 $ 20,083 $ 21,261
- - -------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 0.52 $ 0.25 $ 0.53 $ 0.56
- - -------------------------------------------------------------------------------------------------------------------------------
Diluted 0.51 0.24 0.52 0.56
- - -------------------------------------------------------------------------------------------------------------------------------
The quarter ended June 30, 1998 includes $1.5 million of provision for loan
losses and $17.4 million of Eagle acquisition related expenses.
52
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------------------------------------------
1997:
Interest Income $ 131,807 $ 141,355 $ 150,508 $ 155,184
Interest Expense 72,631 78,552 85,444 91,177
- - --------------------------------------------------------------------------------------------------------------------
Net Interest Income 59,176 62,803 65,064 64,007
Provision for Loan Losses 7,990 3,320 10,828 2,675
Gain on Sale of Loans, Loan Servicing and Securities, Net 562 471 1,363 1,539
Other Noninterest Income 8,932 9,217 9,532 10,648
Noninterest Expenses 62,059 41,898 55,370 42,336
- - --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (1,379) 27,273 9,761 31,183
Income Taxes (1,076) 10,504 4,386 11,911
- - --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (303) $ 16,769 $ 5,375 $ 19,272
- - --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Per Common Share:
Basic $ (0.01) $ 0.45 $ 0.14 $ 0.52
- - -------------------------------------------------------------------------------------------------------------------
Diluted (0.01) 0.43 0.14 0.50
- - --------------------------------------------------------------------------------------------------------------------
The quarter ended March 31, 1997 includes $5.7 million of provision for loan
losses and $19.9 million of Derby acquisition related expenses. The quarter
ended September 30, 1997 includes $1.5 million of provision for loan losses and
$7.2 million of People's acquisition related expenses.
All periods presented have been retroactively restated to reflect the inclusion
of the results of Eagle, People's, MidConn and Derby, which were acquired on
April 15, 1998, July 31, 1997, May 31, 1997, and January 31, 1997, respectively,
and were accounted for using the pooling of interests method.
53
MANAGEMENT'S REPORT
- - --------------------------------------------------------------------------------
To Our Shareholders:
The management of Webster is responsible for the integrity and objectivity of
the financial and operating information contained in this annual report,
including the consolidated financial statements covered by the Independent
Auditors' Report. These statements were prepared in conformity with generally
accepted accounting principles and include amounts that are based on the best
estimates and judgments of management.
Webster has internal controls which provide management with reasonable assurance
that transactions are recorded and executed in accordance with its
authorizations, that assets are properly safeguarded and accounted for, and that
financial records are maintained so as to permit preparation of financial
statements in accordance with generally accepted accounting principles. The
internal control components include formal procedures, an organizational
structure that segregates duties, and a comprehensive program of periodic audits
by the internal auditors. Webster has also instituted policies which require
employees to maintain the highest level of ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with management, the internal auditors and
the independent auditors to review internal controls, audit results and
accounting principles and practices, and annually recommends to the Board of
Directors the selection of independent auditors.
/s/ James C. Smith /s/ John V. Brennan
- - ------------------ -------------------
James C. Smith John V. Brennan
Chairman and Chief Executive Officer Executive Vice President,
Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
- - --------------------------------------------------------------------------------
The Board of Directors and Shareholders of
Webster Financial Corporation
Waterbury, Connecticut
We have audited the accompanying consolidated statements of condition of Webster
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Webster Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- - ---------------------
KPMG LLP
Hartford, Connecticut
January 21, 1999
54
SHAREHOLDER INFORMATION
- - --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS
Webster Financial Corporation and Webster Bank
Webster Plaza
Waterbury, CT 06702
(203) 753-2921
www.websterbank.com
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co.
Shareholder Services
40 Wall Street
New York, NY 10005
1-800-937-5449
Dividend Reinvestment and Stock Purchase Plan
Stockholders wishing to receive a prospectus for the Dividend Reinvestment and
Stock Purchase Plan are invited to write to American Stock Transfer & Trust Co.
at the address listed above, or call 1-800-278-4353.
Stock Listing Information
The common stock of Webster is traded over-the-counter on the NASDAQ National
Market System under the symbol "WBST."
INVESTOR RELATIONS CONTACT: James M. Sitro, CPA, Vice President,
Investor Relations (203) 578-2399
jsitro@websterbank.com
FORM 10-K AND OTHER REPORTS
Our annual report to the Securities and Exchange Commission (Form 10K),
additional copies of this report, and quarterly reports may be obtained free of
charge by accessing our website (www.websterbank.com) or by contacting James M.
Sitro, CPA, Vice President, Investor Relations, Webster Plaza, Waterbury, CT
06702.
55
Common Stock Dividends and Market Prices
The following table shows dividends declared and the market price per share by
quarter for 1998 and 1997.
- - --------------------------------------------------------------------------------
Common Stock (Per Share)
Cash
Dividends Market Price End of
1998 Declared Low High Period
- - --------------------------------------------------------------------------------
Fourth $ .11 $18 7/8 $ 28 1/8 $27 7/16
Third .11 20 5/8 34 5/8 24 3/8
Second .11 31 7/16 36 1/4 33 1/4
First .11 28 9/16 35 34 3/4
Cash
Dividends End of
1997 Declared Low High Period
- - --------------------------------------------------------------------------------
Fourth $ .10 $28 1/2 $33 7/8 $ 33 1/4
Third .10 21 11/16 29 7/8 29 3/8
Second .10 17 5/16 22 7/8 22 3/4
First .10 17 9/16 20 11/16 17 9/16
- - --------------------------------------------------------------------------------
MARKET MAKERS:
Advest, Inc.
Brean Murray, Foster Secs Inc.
First Albany Corporation
Fox-Pitt, Kelton, Inc.
Friedman, Billings, Ramsey & Co., Inc.
Herzog, Heine, Geduld, Inc.
Island System Corporation
Jeffries & Company, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities, L.P.
Legg Mason Wood Walker Inc.
Lehman Brothers Inc.
MacAllister Pitfield MacKay
Mayer & Schweitzer Inc.
Merrill Lynch, Pierce, Fenner
Paine Webber Inc.
Rom-Bo Trading Co.
Ryan Beck & Co., Inc.
Sandler O'Neil & Partners
Sherwood Securities Corp.
Solomon Smith Barney Inc.
Troster Singer Corp.
Tucker Anthony Incorporated
USCC Trading, Div. Fleet Secs
56
ELECTRONIC COMMUNICATIONS NETWORK:
B-Trade Services
The Brass Utility, L.L.C.
Instinet Corporation
Island System Corporation
Spear, Leeds & Kellogg
Strike Technologies
Terra Nova Trading, L.L.C.
RESEARCH COVERAGE:
Advest, Inc.
BT Alex, Brown
Duff & Phelps Credit Rating Co.
First Albany Corporation
Fitch IBCA, Inc.
Fox-Pitt, Kelton, Inc.
Friedman, Billings Ramsey & Co., Inc.
Keefe, Bruyette & Woods, Inc.
Josephthal & Co.
JW Genesis Capital Markets
Lehman Brothers, Inc.
Merrill Lynch, Pierce, Fenner
Sandler O'Neil & Partners
Standard and Poor's
Tucker Anthony Incorporated
Value Line
ANNUAL MEETING
The annual meeting of shareholders of Webster Financial Corporation will be held
on April 22, 1999 at 4:00P.M. at the Courtyard by Marriott, 63 Grand Street,
Waterbury, Connecticut. As of February 28, 1999, there were 36,056,462 shares of
common stock outstanding and approximately 6,997 shareholders of record.
WEBSTER BANK INFORMATION
For more information on Webster Bank products and services, call 1-800-325-2424,
or write:
Webster Bank
Telebanking Center
P.O. Box 191
CH420
Waterbury, Connecticut 06720-0191
Worldwide Web Site
www.websterbank.com