UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ending JUNE 30, 1999
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
-------------------- ----------------------
Commission File Number: 0-15213
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WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1187536
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Webster Plaza, Waterbury, Connecticut 06720
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(Address of principal executive offices) (Zip Code)
(203) 753-2921
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock (par value $ .01) 38,064,716 SHARES
- ---------------------------------- -------------------------------------------
Class Issued and Outstanding at August 5, 1999
1
Webster Financial Corporation and Subsidiaries
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INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 5
Condensed Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Consolidated Financial Statements 16
Quantitative and Qualitative Disclosures about Market Risk 23
Forward Looking Statements 23
Year 2000 Readiness Disclosure Statement 24
PART II - OTHER INFORMATION 25
SIGNATURES 27
EXHIBIT INDEX 28
2
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1999 1998
------ ------
ASSETS
Cash and Due from Depository Institutions $ 161,332 $ 173,863
Interest-bearing Deposits 6,658 3,560
Securities: (Note 2)
Trading, at Fair Value 70,561 91,114
Available for Sale, at Fair Value 2,693,847 2,969,822
Held to Maturity, (Fair Value: $338,802 in 1999;
$404,365 in 1998) 346,826 401,154
Loans Receivable, Net 5,278,808 4,993,509
Accrued Interest Receivable 55,883 55,012
Premises and Equipment, Net 85,883 79,324
Foreclosed Properties, Net 3,939 3,526
Intangible Assets 139,338 78,380
Cash Surrender Value of Life Insurance 144,788 141,059
Prepaid Expenses and Other Assets 69,127 43,594
--------- ---------
TOTAL ASSETS $ 9,056,990 $ 9,033,917
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 5,719,866 $ 5,651,273
Federal Home Loan Bank Advances 1,394,404 1,774,560
Reverse Repurchase Agreements and Other Borrowings (Note 6) 1,082,045 738,921
Advance Payments by Borrowers for Taxes and Insurance 10,976 32,293
Accrued Expenses and Other Liabilities 84,684 82,414
--------- ---------
TOTAL LIABILITIES 8,291,975 8,279,461
--------- ---------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trusts Holding Solely Junior Subordinated
Debentures of the Corporation (Note 12) 150,000 150,000
Preferred Stock of Subsidiary Corporation 49,577 49,577
SHAREHOLDERS' EQUITY (NOTE 7)
Common stock, $.01 par value:
Authorized - 50,000,000 shares;
Issued - 38,479,422 shares at June 30, 1999 and
38,353,424 shares at December 31, 1998 385 384
Paid-in Capital 254,102 249,819
Retained Earnings 351,352 314,791
Less Treasury Stock at cost, 470,815 shares at June 30, 1999
and 1,026,770 shares at December 31, 1998 (13,286) (27,914)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,128) (1,339)
Accumulated Other Comprehensive (Loss) Income (25,987) 19,138
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 565,438 554,879
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,056,990 $ 9,033,917
========= =========
See accompanying notes to condensed consolidated financial statements.
3
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except share data)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME:
Loans $ 95,669 $ 95,035 $ 188,894 $ 192,893
Securities and Interest-bearing Deposits 49,844 64,593 102,528 125,934
------- ------- ------- -------
Total Interest Income 145,513 159,628 291,422 318,827
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 46,906 57,018 95,486 113,693
Borrowings 31,519 42,959 65,261 82,086
------- ------- ------- -------
Total Interest Expense 78,425 99,977 160,747 195,779
------- ------- ------- -------
NET INTEREST INCOME 67,088 59,651 130,675 123,048
Provision for Loan Losses 2,100 1,900 4,100 3,800
------- ------- ------- -------
Net Interest Income After Provision for Loan Losses 64,988 57,751 126,575 119,248
------- ------- ------- -------
NONINTEREST INCOME:
Fees and Service Charges 14,057 9,552 26,943 19,065
Gain on sale of loans and loan servicing, net 634 2,299 1,439 2,565
Gain on sale of securities, net 1,712 7,028 3,419 10,126
Other noninterest income 3,757 2,931 7,856 5,380
------- ------- ------- -------
Total noninterest income 20,160 21,810 39,657 37,136
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 21,430 19,219 42,396 38,756
Occupancy Expense of Premises 4,434 3,892 8,771 7,767
Furniture and Equipment Expenses 4,799 4,271 9,481 8,638
Intangible Amortization 3,091 2,363 5,610 4,662
Marketing Expenses 2,203 2,140 4,350 4,029
Acquisition-Related Expenses -- 17,400 -- 17,400
Capital Securities Expense 3,662 3,692 7,323 7,354
Dividends on Preferred Stock of Subsidiary Corporation 980 1,038 2,000 2,076
Other Operating Expenses (Note 5) 9,416 8,833 18,152 17,629
------- ------- ------- -------
Total Noninterest Expenses 50,015 62,848 98,083 108,311
------- ------- ------- -------
Income Before Income Taxes 35,133 16,713 68,149 48,073
Income Taxes (Note 13) 11,946 7,313 23,171 18,952
------- ------- ------- -------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 23,187 $ 9,400 $ 44,978 $ 29,121
======= ====== ======= =======
Net Income Per Common Share: (Note 3)
Basic $0.63 $0.25 $1.23 $0.77
Diluted $0.61 $0.24 $1.20 $0.75
Dividends Declared Per Common Share $0.12 $0.11 $0.23 $0.21
See accompanying notes to condensed consolidated financial statements.
4
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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Six Months Ended June 30,
1999 1998
------- --------
OPERATING ACTIVITIES:
Net Income $ 44,978 $ 29,121
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 4,100 3,800
Provision for Foreclosed Property Losses 75 245
Provision for Depreciation and Amortization 6,372 6,013
Amortization of Securities Premiums, Net 1,987 1,654
Amortization of Hedging Costs, Net 2,331 2,301
Amortization and Write-down of Intangibles 5,610 4,662
Amortization of Mortgage Servicing Rights 860 921
Gains on Sale of Foreclosed Properties, Net (319) (562)
Gains on Sale of Loans and Securities, Net (4,574) (12,502)
Gains on Trading Securities, Net (284) (189)
Decrease in Trading Securities 20,838 27,140
Loans Originated for Sale (113,640) (17,625)
Sale of Loans, Originated for Sale 111,678 79,124
Decrease (Increase) in Interest Receivable 1,134 (384)
Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 10,302 (54,596)
Increase in Cash Surrender Value of Life Insurance (3,729) (2,212)
(Decrease) Increase in Interest Payable (7,353) 2,484
Decrease in Prepaid Expenses and Other Assets, Net 6,231 2,716
Pooling Adjustments, Net -- 7,860
---------- --------
Net Cash Provided by Operating Activities 86,597 79,971
---------- --------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (529,911) (1,498,887)
Purchases of Securities, Held to Maturity (814) (49,717)
Maturities of Securities 177,420 72,420
Proceeds from Sale of Securities, Available for Sale 211,616 872,010
Proceeds from Sale of Securities, Held to Maturity 15,458 --
Principal Collected on Securities 438,079 569,909
Purchases of Life Insurance -- (87,700)
Net (Increase) Decrease in Interest-bearing Deposits (1,734) 65,664
Loans Purchased -- (66,173)
Net (Increase) Decrease in Loans (78,766) 67,110
Proceeds from Sale of Foreclosed Properties 4,067 8,197
Purchases of Premises and Equipment, Net (5,414) (11,497)
Cash Received through Purchase Acquisitions 16,706 1,688
---------- --------
Net Cash Provided (Used) by Investing Activities 246,707 (56,976)
---------- --------
FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (214,689) 430
Repayment of FHLB Advances (2,037,114) (2,645,554)
Proceeds from FHLB Advances 1,656,959 2,599,870
Repayment of Reverse Repurchase Agreements & Other Borrowings (16,246,699) (5,192,771)
Proceeds from Reverse Repurchase Agreements & Other Borrowings 16,585,065 5,218,471
Net (Decrease) Increase in Advance Payments for Taxes and Insurance (21,317) 2,522
Cash Dividends to Common and Preferred Shareholders (8,414) (10,143)
Common Stock Repurchased (65,429) (10,305)
Exercise of Stock Options 5,803 7,719
---------- --------
Net Cash Used by Financing Activities (345,835) (29,761)
---------- --------
Decrease in Cash and Cash Equivalents (12,531) (6,766)
Cash and Cash Equivalents at Beginning of Period 173,863 151,322
---------- --------
Cash and Cash Equivalents at End of Period $ 161,332 $ 144,556
========== ========
5
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------- --------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 15,069 $ 25,386
Interest Paid 166,873 192,405
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties 4,432 10,963
ASSETS ACQUIRED AND LIABILITIES ASSUMED IN PURCHASE BUSINESS COMBINATIONS WERE
AS FOLLOWS:
SIX MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1998
------------------------------ ------------------------------
Cash and cash equivalents acquired, net of cash paid $ 16,706 $ 1,688
Fair value of all other tangible and intangible assets acquired 354,666 9,648
Common stock issued (77,032) (9,268)
----------- -----------
Fair value of liabilities assumed $ 294,340 $ 2,066
See accompanying notes to condensed consolidated financial statements.
6
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All adjustments
were of a normal recurring nature. The results of operations for the three and
six month periods ended June 30, 1999 are not necessarily indicative of the
results which may be expected for the year as a whole.
Effective January 1, 1999, Webster acquired Access National Mortgage,
Inc. ("Access"). On April 21, 1999, Webster acquired Maritime Bank & Trust
Company ("Maritime") and on May 19, 1999, acquired Village Bancorp, Inc.
("Village"). Theses transactions were all accounted for as purchases and
therefore results are reported only for the periods subsequent to the
acquisition dates (see Note 7).
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Webster Financial
Corporation 1998 Annual Report to Shareholders. The consolidated financial
statements include the accounts of Webster Financial Corporation ("Webster") and
its subsidiaries, Webster Bank (the "Bank") and Damman Insurance Associates
("Damman").
NOTE 2 - SECURITIES
Securities with fixed maturities that are classified as held to maturity
are carried at cost, adjusted for amortization of premiums and accretion of
discounts over the estimated terms of the securities utilizing a method which
approximates the level yield method. Securities that management intends to hold
for indefinite periods of time (including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors) are classified as available for
sale. All equity securities are classified as available for sale. Securities
available for sale are carried at fair value with unrealized gains and losses
net of taxes included in Other Comprehensive Income (See Note 4). Securities
classified as trading securities are carried at fair value with unrealized gains
and losses included in earnings. Gains and losses on the sales of securities are
recorded using the specific identification method.
7
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SECURITIES (continued)
A summary of securities follows (in thousands):
June 30, 1999 December 31, 1998
------------------------------------------ ---------------------------------------
Gross Unrealized Gross Unrealized
Amortized ------------------- Fair Amortized ------------------ Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
TRADING SECURITIES:
Mortgage-backed Securities $ 70,561(a) $ -- $ -- $ 70,561 $ 91,114(a) $ -- $ -- $ 91,114
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 31,097 25 (140) 30,982 13,514 123 -- 13,637
U.S. Government Agency 17,959 62 (77) 17,944 16,501 278 -- 16,779
Municipal Bonds and Notes 14,689 9 (108) 14,590 14,688 516 -- 15,204
Corporate Bonds and Notes 76,026 10 (5,330) 70,706 81,452 454 (2,148) 79,758
Equity Securities 212,768 9,752 (5,299) 217,221 211,871 7,241 (4,664) 214,448
Mortgage-backed Securities 2,370,475 10,564 (47,764) 2,333,275 2,582,759 39,937 (5,248) 2,617,448
Purchased Interest-rate Contracts 13,655 -- (4,526) 9,129 15,985 -- (3,437) 12,548
--------- ------ -------- --------- --------- ------ -------- ---------
2,736,669 20,422 (63,244) 2,693,847 2,936,770 48,549 (15,497) 2,969,822
--------- ------ -------- --------- --------- ------ -------- ---------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes 10,845 -- (63) 10,782 2,455 12 -- 2,467
U.S. Government Agency 4,553 5 (5) 4,553 6,000 15 -- 6,015
Municipal Bonds and Notes 22,649 3 (391) 22,261 12,500 347 -- 12,847
Corporate Bonds and Notes 135,607 51 (6,797) 128,861 151,536 2,626 (1,171) 152,991
Mortgage-backed Securities 173,172 1,016 (2,213) 171,975 228,663 2,426 (1,044) 230,045
--------- ------ -------- --------- --------- ------ -------- ---------
346,826 1,075 (9,469) 338,432 401,154 5,426 (2,215) 404,365
--------- ------ -------- --------- --------- ------ -------- ---------
Total $ 3,154,056 $21,497 $(72,713) $3,102,840 $3,429,038 $53,975 $(17,712) $3,465,301
========= ====== ======== ========= ========= ====== ======== =========
(a) Stated at fair market value.
During the second quarter of 1999, Webster acquired Maritime and Village.
At the dates of acquisition, Maritime only held available for sale securities
that totaled $20.5 million and Village held available for sale securities that
totaled $11.4 million and held to maturity securities that totaled $26.9
million. On a combined basis, the securities portfolio increased approximately
$58.8 million due to the acquisitions.
During the first quarter of 1999, Webster sold $15.5 million of
securities classified as held to maturity, which resulted in a loss of $193,000.
The securities were sold due to a regulator's request that Webster divest of the
holdings as the securities did not meet regulatory guidelines, which were issued
subsequent to the acquisition of the securities.
NOTE 3 - NET INCOME PER COMMON SHARE
Basic net income per common 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 common share is calculated by
dividing adjusted net income by the weighted-average number of diluted common
shares, including the effect of common stock equivalents. The common stock
equivalents consist of common stock options and warrants. The weighted-average
shares used in the calculation of net income per common share have been adjusted
to reflect the two-for-one stock split which was effective for shareholders of
record as of April 6, 1998. The weighted-average number of shares used in the
computation of basic net income per common share for the three and six month
periods ended June 30, 1999 was 37,095,498 and 36,682,728, respectively, and for
the three and six month periods ending June 30, 1998 was 38,020,449 and
37,923,320, respectively. The weighted-average number of shares used in the
computation of diluted earnings per
8
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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common share for the three and six month periods ended June 30, 1999 was
37,751,574 and 37,338,282, respectively, and for the three and six month periods
ended June 30, 1998 was 38,798,872 and 38,679,191, respectively.
NOTE 4 - COMPREHENSIVE INCOME
The provisions of Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" were adopted as of January 1, 1998.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (such as changes in net unrealized
investment gains and losses). Comprehensive income includes net income and any
changes in equity from non-owner sources that bypass the income statement.
The following table summarizes comprehensive income for the three and six
month periods ended June 30, 1999 and 1998 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 23,187 $ 9,400 $ 44,978 $ 29,121
Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on investments available for sale:
Unrealized holding (losses) gains arising during period
(net of income tax (benefit) of $(14,016) and
$(22,137) for the three and six months ended June 30,
1999, respectively, and $1,837 and $3,595 for the three
and six months ended June 30, 1998, respectively) (27,207) 2,537 (42,972) 4,964
Less reclassification adjustment for gains included in net
income (net of income tax expense of $695 and $1,109 for
the three and six months ended June 30, 1999, respectively,
and $2,811 and $4,048 for the three and six months ended
June 30, 1998, respectively) 1,348 3,882 2,153 5,590
--------- -------- --------- ---------
Other comprehensive loss (28,555) (1,345) (45,125) (626)
--------- -------- --------- ---------
Comprehensive (loss) income $ (5,368) $ 8,055 $ (147) $ 28,495
========= ======== ========= ========
NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Gain on sale of foreclosed property, net $ (108) $ (67) $ (319) $ (407)
Provision for losses on foreclosed property 75 37 75 245
Rental income (17) (8) (34) (65)
Foreclosed property expenses 119 191 288 786
---- ---- ---- ----
Foreclosed property expenses and provisions, net $ 69 $ 153 $ 10 $ 559
9
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 6 - REVERSE REPURCHASE AGREEMENTS
At June 30, 1999, Webster had short-term reverse repurchase agreements
outstanding. Information concerning borrowings under reverse repurchase
agreements is summarized below (dollars in thousands):
WEIGHTED
BALANCE AT WEIGHTED AVERAGE BOOK VALUE MARKET VALUE
JUNE 30, 1999 TERM AVERAGE RATE MATURITY DATE OF COLLATERAL OF COLLATERAL
- ------------- ---- ------------ ------------- ------------- ----------------------
$ 881,549 1 to 11 months 5.24% Less than 2 months $891,908 $891,512
The securities underlying the reverse repurchase agreements are all
U.S. Agency collateral and have been delivered to broker-dealers. Webster uses
reverse repurchase agreements when the cost of such borrowings is less than
other funding sources. The average balance and the maximum amount of outstanding
short-term reverse repurchase agreements at any month-end during the 1999 second
quarter was $850.8 million and $888.7 million, respectively. The outstanding
balance at December 31, 1998 was $589.4 million.
NOTE 7 - SHAREHOLDERS' EQUITY
Webster, during the second quarter 1999 period, repurchased 441,847
shares of its common stock. The total cost of the repurchased shares was $12.8
million with an average per share cost of approximately $29.07. For the six
month period ended June 30, 1999, Webster repurchased 2.3 million shares of its
common stock at a total cost of $65.4 million with an average per share cost of
$29.04.
On May 19, 1999, Webster consummated its acquisition of Village Bancorp,
Inc. In connection with the acquisition, Webster reissued approximately 1.7
million common shares from treasury valued at $47.7 million.
On April 21, 1999, Webster consummated its acquisition of Maritime Bank &
Trust Company. In connection with the acquisition, Webster reissued
approximately 779,000 common shares from treasury valued at $22.1 million.
Effective January 1, 1999, Webster acquired Access National Mortgage,
Inc., an Internet-based residential mortgage origination company that became a
subsidiary of Webster Bank. In connection with the acquisition, Webster issued
125,998 shares of its common stock valued at approximately $3.5 million.
Net income for the current year six month period was $45.0 million and
$8.4 million has been paid in dividends to common shareholders from net
earnings.
NOTE 8 - ACQUISITION-RELATED COSTS
Webster consummated the acquisitions of Maritime and Village on April 21,
1999 and May 19, 1999, respectively. These acquisitions were accounted for as
purchases, and therefore, related acquisition costs are included in the cost of
the acquired company and have not impacted the statement of operations for the
current period.
10
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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In connection with the acquisitions of Eagle Financial Corp. ("Eagle"),
MidConn Bank ("MidConn"), People's Savings Financial Corp. ("People's"), and DS
Bancor, Inc. ("Derby") that were completed on April 15, 1998, May 31, 1997, July
31, 1997, and January 31, 1997 Webster recorded approximately $47.2 million of
acquisition-related charges. Additionally, Webster recorded an increase of $8.7
million to the provision for loan losses related to the acquisitions of Eagle,
Derby and People's during 1998 and 1997, for conformity to Webster's credit
policies. There are no further acquisition-related accrued liabilities related
to MidConn.
The following table presents a summary of the acquisition-related accrued
liabilities (in thousands):
Derby People's Eagle
----- -------- -----
Balance of acquisition-related accrued liabilities
at December 31, 1998 $ 3,800 $ 1,600 $ 1,400
----- ----- -----
Payments/Writedowns:
Compensation (severance and related costs) -- -- --
Data processing contract termination (362) -- --
Branch closure costs (64) (38) (177)
Building costs -- (145) --
Acquisition-related and miscellaneous expenses -- -- (220)
----- ----- -----
Balance of acquisition-related accrued liabilities
at June 30, 1999 $ 3,374 $ 1,417 $ 1,003
===== ===== =====
The remaining total accrued liability of $5.8 million represents, for the
most part, accruals for data processing contract termination costs payable over
a future period and the estimated loss on sale of excess fixed assets due to
consolidation of overlapping branch locations.
NOTE 9 - ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments 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, as
amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. 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.
11
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - PENDING ACQUISITIONS
On June 30, 1999, Webster announced a definitive agreement to acquire New
England Community Bancorp, Inc. ("NECB"), in a tax-free, stock-for-stock
exchange. NECB is a Connecticut based multi-bank holding company with three
subsidiary Connecticut banks, one New Hampshire subsidiary bank and a mortgage
company with offices in both states. Based on the terms of the agreement, NECB
shareholders will receive 1.06 shares of Webster common stock for each share of
NECB common stock held. Webster expects to record the transaction as a pooling
of interests and record after-tax acquisition related charges of $9.3 million.
The transaction is currently expected to close in the fourth quarter of 1999.
NOTE 11 - BUSINESS SEGMENTS
Webster has four segments for business segment reporting purposes. These
segments include consumer banking, business banking, mortgage lending and
treasury. 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 and total assets for Webster's
reportable segments.
12
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - BUSINESS SEGMENTS (continued)
Operating income and total assets by business segment are as follows:
Three Months Ended June 30, 1999
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
------- ------- ------- -------- ----- --------
Net Interest Income $ 43,476 $ 7,382 $ 14,261 $ 1,935 $ 34 $ 67,088
Provision for Loan Losses 270 873 957 -- -- 2,100
------- ------ -------- -------- ----- ---------
Net Interest Income After Provision 43,206 6,509 13,304 1,935 34 64,988
Noninterest Income 10,217 550 2,506 4,587 2,622 20,482
Noninterest Expense 31,886 3,517 511 5,344 3,094 44,352
------- ------ -------- -------- ----- ---------
Income Before Income Taxes 21,537 3,542 15,299 1,178 (438) 41,118
Income Taxes 6,998 1,127 4,618 355 (153) 12,945
------- ------ -------- -------- ----- ---------
Net Income (Loss) After Taxes $ 14,539 $ 2,415 $ 10,681 $ 823 $ (285) $ 28,173
------- ------ -------- -------- ----- ---------
Total Assets at Period End $898,284 $834,909 $3,876,014 $3,424,024 $23,759 $9,056,990
Three Months Ended June 30, 1998
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
------- ------- ------- -------- ----- --------
Net Interest Income $ 26,288 $ 8,078 $ 20,001 $ 5,088 $ 196 $ 59,651
Provision for Loan Losses 252 262 1,386 -- -- 1,900
------- ------ -------- -------- ----- ---------
Net Interest Income After Provision 26,036 7,816 18,615 5,088 196 57,751
Noninterest Income 7,745 257 1,879 8,998 1,597 20,476
Noninterest Expense 22,187 3,253 1,630 10,314 2,296 39,680
------- ------ -------- -------- ----- ---------
Income (Loss) Before Income Taxes 11,594 4,820 18,864 3,772 (503) 38,547
Income Taxes 4,289 1,783 6,980 1,396 (186) 14,262
------- ------ -------- -------- ----- ---------
Net Income (Loss) After Taxes $ 7,305 $ 3,037 $ 11,884 $ 2,376 $ (317) $ 24,285
------- ------ -------- -------- ----- ---------
Total Assets at Period End $731,897 $501,792 $3,728,328 $4,203,443 $23,683 $9,189,143
------- ------ -------- -------- ----- ---------
Six Months Ended June 30, 1999
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
------- ------- ------- -------- ----- --------
Net Interest Income $ 75,682 $ 14,224 $ 37,445 $ 3,266 $ 58 $ 130,675
Provision for Loan Losses 450 1,748 1,902 -- -- 4,100
------- ------ -------- -------- ----- ---------
Net Interest Income After Provision 75,232 12,476 35,543 3,266 58 126,575
Noninterest Income 19,135 934 5,483 6,470 5,773 37,795
Noninterest Expense 62,037 7,289 6,285 7,028 6,120 88,759
------- ------ -------- -------- ----- ---------
Income (Loss) Before Income Taxes 32,330 6,121 34,741 2,708 (289) 75,611
Income Taxes 10,991 2,081 11,812 921 (98) 25,707
------- ------ -------- -------- ----- ---------
Net Income (Loss) After Taxes $ 21,339 $ 4,040 $ 22,929 $ 1,787 $ (191) $ 49,904
------- ------ -------- -------- ----- ---------
Total Assets at Period End $898,284 $834,909 $3,876,014 $3,424,024 $23,759 $9,056,990
Six Months Ended June 30, 1998
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
------- ------- ------- -------- ----- --------
Net Interest Income $ 59,548 $ 13,120 $ 43,433 $ 6,680 $ 267 $ 123,048
Provision for Loan Losses 558 584 2,658 -- -- 3,800
------- ------ -------- -------- ----- ---------
Net Interest Income After Provision 58,990 12,536 40,775 6,680 267 119,248
Noninterest Income 15,205 542 3,491 12,706 2,367 34,311
Noninterest Expense 51,763 5,901 8,120 12,101 3,596 81,481
------- ------ -------- -------- ----- ---------
Income (Loss) Before Income Taxes 22,432 7,177 36,146 7,285 (962) 72,078
Income Taxes 8,300 2,655 13,374 2,696 (356) 26,669
------- ------ -------- -------- ----- ---------
Net Income (Loss) After Taxes $ 14,132 $ 4,522 $ 22,772 $ 4,589 $ (606) $ 45,409
------- ------ -------- -------- ----- ---------
Total Assets at Period End $731,897 $501,792 $3,728,328 $4,203,443 $23,683 $9,189,143
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
13
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
industrial loans and commercial real estate loans. The business banking segment
also includes deposits and cash management activities for business banking. The
mortgage lending segment includes the Bank's investment in 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.
Management allocates indirect expenses to its business segments. These
expenses include administration, finance, operations and other support related
functions. Net income (loss) after income taxes for the segments do not include
certain income and expense categories, that total for the three and six month
periods ended June 30, 1999, $(5.0) million and $(4.9) million, respectively,
and for the same respective periods in 1998, $(14.9) million and $(16.3)
million, respectively, that do not directly relate to segments. The major
categories not included in segments for the three and six month periods ended
June 30, 1999, were (on a before tax basis) $3.7 million and $7.3 million of
capital securities expense. For the three and six month periods ended June 30,
1998, the major categories not included in the segments were capital securities
expense of $3.7 million and $7.3 million and acquisition-related expense of
$17.4 million.
NOTE 12 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
THE CORPORATION
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 Trust II.
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 guarantees, which together
with Webster's obligations under the subordinated debt securities and the
declarations 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 13 - INCOME TAXES
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 incorporated Webster Mortgage Investment Corporation
("WMIC")
14
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to qualify as a PIC. WMIC began operations in the first quarter of 1999.
Webster's operation of a PIC subsidiary is expected to significantly reduce its
Connecticut tax liability in 1999. Webster Mortgage Investment Corporation is a
wholly owned subsidiary of Webster Bank.
15
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GENERAL
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.
CHANGES IN FINANCIAL CONDITION
Total assets were $9.1 billion at June 30, 1999, as compared to $9.0
billion at December 31, 1998. The increase of $23.1 million is primarily the
result of increases in net loans of $285.3 million, intangibles of $61.0 million
and other assets of $25.5 million partially offset by a decrease in investment
securities of $350.9 million. Total assets of $310.0 million were received
through the second quarter acquisitions of Maritime and Village that included
net loans and investment securities of $209.5 million and $58.8 million,
respectively.
During the current year six month period, total deposits increased
$68.6 million while total borrowings and escrow funds decreased $37.0 million
and $21.3 million, respectively. Total liabilities of $290.0 million, including
$284.5 million of deposits, were assumed through the second quarter acquisitions
of Maritime and Village. Total equity increased $10.6 million for the six month
period that primarily reflects net earnings of $45.0 million, a net decrease in
treasury stock of $14.6 million, and an unrealized loss on securities of $45.1
million. The net decrease in treasury stock primarily reflects $65.4 million of
common stock repurchases, $69.8 million related to shares reissued related to
the acquisitions of Maritime and Village and $9.3 million due to the exercise of
stock options. At June 30, 1999, the Bank had Tier 1 leveraged, Tier 1
risk-based, and total risk-based capital ratios of 6.09%, 11.29% and 12.54%,
respectively. The Bank met the regulatory capital requirements to be categorized
as a "well capitalized" institution at June 30, 1999.
ASSET QUALITY
Webster devotes significant attention to maintaining asset quality
through conservative underwriting standards, active servicing of loans,
aggressively managing nonaccrual assets and maintaining adequate reserve
coverage on nonaccrual assets. At June 30, 1999, residential and consumer loans
comprised approximately 80% of the loan portfolio. Securities transactions are
executed under the guidelines of internal corporate investment policy and in
adherence to applicable regulatory, federal and state regulations.
16
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of June 30, 1999 and December
31, 1998 follows (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Residential Mortgage Loans $ 3,802,376 $ 3,749,152
Commercial Real Estate Loans 510,584 416,203
Commercial Loans 534,224 401,772
Home Equity Loans 448,904 439,369
Consumer Loans 44,099 42,122
--------- ---------
Total Loans 5,340,187 5,048,618
Allowance for Loan Losses (61,379) (55,109)
--------- ---------
Loans Receivable, Net $ 5,278,808 $ 4,993,509
========= =========
Included above at June 30, 1999 and December 31, 1998 were loans held for
sale of $11.4 million and $1.7 million, respectively.
The following table details the nonaccrual assets at June 30, 1999 and
December 31, 1998 (in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Loans Accounted For on a Nonaccrual Basis:
Residential $ 11,279 $ 9,040
Commercial 18,383 14,703
Consumer 1,396 1,636
------ ------
Total Nonaccrual Loans 31,058 25,379
Foreclosed Properties:
Residential and Consumer 2,343 1,153
Commercial 1,597 2,373
------ ------
Total Nonaccrual Assets $ 34,998 $ 28,905
======= ======
At June 30, 1999, Webster's allowance for losses on loans of $61.4
million represented 197.6% of nonaccrual loans and its total allowances for
losses on nonaccrual assets of $61.6 million amounted to 174.9% of nonaccrual
assets. A detail of the changes in the allowances for losses on loans and
foreclosed property for the six months ended June 30, 1999 follows (in
thousands):
Allowances For Losses On
Foreclosed Total
Loans Properties Allowance for Losses
----- ---------- --------------------
Balance at December 31, 1998 $ 55,109 $ 207 $ 55,316
Provisions for Losses 4,100 75 4,175
Losses Charged to Allowances (2,386) (64) (2,450)
Recoveries Credited to Allowances 909 9 918
Allowances Received through Acquisitions 3,647 -- 3,647
------ -------- ------
Balance at June 30, 1999 $ 61,379 $ 227 $ 61,606
====== ======== ======
17
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The goal of Webster's asset/liability management policy is to manage
interest-rate risk so as to maximize net interest income over time in changing
interest-rate environments while maintaining acceptable levels of risk. Webster
must provide for sufficient liquidity for daily operations while maintaining
mandated regulatory liquidity levels. To this end, Webster's strategies for
managing interest-rate risk are responsive to changes in the interest-rate
environment and market demands for particular types of deposit and loan
products. Management measures interest-rate risk using 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.
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 counterpart 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.
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, floors 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.
18
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Webster's main sources of liquidity at the holding company level are
dividends received from the Bank and net proceeds from capital offerings and
borrowings, while the main outflows are the payment of dividends to preferred
and common shareholders, repurchases of Webster's common stock and the payment
of interest on borrowing lines of credit and to holders of Webster's 8 3/4%
Senior Notes, Webster's 9.36% Capital Trust I Capital Securities and Webster's
Capital Trust II 10.00% Capital Securities. There are certain restrictions on
the payment of dividends by the Bank to Webster. The Bank is required to
maintain minimum levels of liquid assets as defined by regulations adopted by
the Office of Thrift Supervision ("OTS"). This requirement, which may be varied
by the OTS, is based upon a percentage of net withdrawable deposits and
short-term borrowings. The required liquidity ratio as revised by the OTS is
currently 4.00% and the Bank's liquidity ratio at June 30, 1999 exceeded the
requirement. Webster Bank is also required by regulation to maintain sufficient
liquidity to ensure safe and sound operations. Adequate liquidity as assessed by
the OTS may vary from institution to institution depending on such factors as
the institution's overall asset/liability structure, market conditions,
competition and the requirements of the institution's deposit and loan
customers. The OTS considers both an institution's adherence to the liquidity
ratio requirement, as well as safety and soundness issues, in assessing whether
an institution has sufficient liquidity.
Webster Bank had mortgage commitments outstanding of $152.8 million,
other non-mortgage loan commitments of $33.0 million, unused home equity credit
lines of $328.3 million and commercial lines and letters of credit of $413.3
million at June 30, 1999.
19
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
GENERAL
Net income for the three month period ended June 30, 1999 was $23.2
million or $.61 per diluted share compared to $22.6 million or $.58 per diluted
share for the previous year respective period, adjusting for after tax
acquisition-related expenses of $13.2 million in 1998. Net income for the six
month period ended June 30, 1999, was $45.0 million or $1.20 per diluted share
compared to $42.3 million or $1.09 per diluted share for the previous year
respective period, adjusting for after tax acquisition-related expenses of $13.2
million. In general, higher net income for the current year three and six month
periods, was primarily the result of higher net interest income and fees and
service charges income combined with lower operating expenses.
NET INTEREST INCOME
Net interest income for the three and six month periods ended June 30,
1999 amounted to $67.1 million and $130.7 million, respectively, compared to
$59.7 million and $123.0 million for the respective periods in 1998. Total
interest income for the current year three and six month periods compared to the
same periods in 1998 decreased $14.1 million and $27.4 million, respectively,
while decreases in total interest expense of $21.6 million and $35.0 million,
respectively more than offset the decreases in total interest income. Net
interest rate spread for the three and six month periods ended June 30, 1999 was
3.07% and 2.99%, respectively as compared to 2.48% and 2.59% for the same
periods in the previous year. The improved net interest rate spreads for the
current year periods are the result of higher yields on our securities portfolio
and lower costs on total interest-bearing liabilities.
INTEREST INCOME
Total interest income for the three and six month periods ended June 30,
1999, was $145.5 million and $291.4 million, respectively compared to $159.6
million and $318.8 million. The decreases in total interest income for the
current year periods is primarily related to securities and interest-bearing
deposits that had a combined lower average balance of approximately $1.0 billion
when compared to the prior year. Total interest income from loans remained
relatively unchanged as lower rates were offset by a higher average balance for
the current year periods.
INTEREST EXPENSE
Total interest expense for the three and six month periods ended June 30,
1999, was $78.4 million and $160.7 million, respectively, compared to $100.0
million and $195.8 million. The total cost of funds for the three and six months
periods ended June 30, 1999 was 3.88% and 3.97% as compared to 4.52% and 4.51%,
respectively, for the same periods one year earlier. The decreases in total
interest expense for the current year three and six month periods as compared to
one year earlier, are the results of a lower volume of average interest-bearing
liabilities of $692.2 million and $524.9 million, respectively, as well as a
reduction in the total rate incurred on total interest-bearing liabilities.
Reduced interest expense on total borrowings for the current year periods as
compared to the previous year same periods was $11.4 million and $16.8 million.
The rates incurred on total borrowings for the 1999 three and six month periods
were 5.16% and 5.22%, respectively, as compared to 5.68% and 5.74 %,
respectively, for the previous year same periods. Interest rates incurred on
total deposits were 3.65% and 4.23% and 3.76% and 4.21% for the three and six
month periods ended in 1999 and 1998, respectively.
20
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and paid by Webster.
THREE MONTHS ENDED JUNE 30, 1999 1998
- --------------------------- ----- ------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ------- ------- -------- -------
ASSETS:
INTEREST-EARNING ASSETS:
Loans $ 5,220,629 $ 95,669 7.34 % $ 4,953,184 $ 95,035 7.66 %
Securities 3,159,790 49,844 6.31 4,160,018 64,593 6.21
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-EARNING ASSETS 8,380,419 145,513 6.95 9,113,202 159,628 7.00
------- -------
Noninterest-Earning Assets 544,095 496,665
-------- --------
TOTAL ASSETS $ 8,924,514 $ 9,609,867
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Deposits $ 5,643,329 46,906 3.65 % $ 5,789,534 57,018 3.93 %
Borrowings 2,448,044 31,519 5.16 2,994,007 42,959 5.68
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-BEARING LIABILITIES 8,091,373 78,425 3.88 8,783,541 99,977 4.52
------ --------- -------
Noninterest-Bearing Liabilities 104,071 99,057
-------- -------
TOTAL LIABILITIES 8,195,444 8,882,598
Capital Securities and Preferred Stock of
Subsidiary Corporation 199,577 199,577
SHAREHOLDERS' EQUITY 529,493 527,692
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,924,514 $ 9,609,867
========= =========
NET INTEREST INCOME $ 67,088 $ 59,651
====== =======
INTEREST RATE SPREAD 3.07 % 2.48 %
==== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.20 % 2.64 %
==== ====
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 1998
- ------------------------- ----- ------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ------- ------- -------- -------
ASSETS:
INTEREST-EARNING ASSETS:
Loans $ 5,139,085 $ 188,894 7.37 % $ 4,766,579 $ 192,893 8.09 %
Securities 3,241,505 102,528 6.33 4,220,979 125,934 5.97
--------- ------- ---- --------- ------- ----
TOTAL INTEREST-EARNING ASSETS 8,380,590 291,422 6.96 8,987,558 318,827 7.10
------- -------
Noninterest-Earning Assets 559,624 484,309
-------- --------
TOTAL ASSETS $ 8,940,214 $ 9,471,867
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Deposits $ 5,595,504 $ 95,486 3.76 % $ 5,796,915 113,693 4.21
Borrowings 2,521,825 65,261 5.22 2,845,271 82,086 5.74
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-BEARING LIABILITIES 8,117,329 160,747 3.97 8,642,186 195,779 4.51
------- -------
Noninterest-Bearing Liabilities 91,209 137,185
------- --------
TOTAL LIABILITIES 8,208,538 8,779,371
Capital Securities and Preferred Stock of
Subsidiary Corporation 199,577 174,992
SHAREHOLDERS' EQUITY 532,099 517,504
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,940,214 $ 9,471,867
========= =========
NET INTEREST INCOME $ 130,675 $ 123,048
======= =======
INTEREST RATE SPREAD 2.99 % 2.59 %
==== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.12 % 2.76 %
==== ====
21
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.1 million and $4.1 million,
respectively, for the three and six month periods ended June 30, 1999 compared
to $1.9 million and $3.8 million for the respective periods in 1998. At June 30,
1999 the allowance for loan losses totaled $61.4 million and represented 197.6%
of non-accrual loans compared to $57.1 million and 190.7% at June 30, 1998.
NONINTEREST INCOME
Total noninterest income for the three and six months ended June 30,
1999 totaled $20.2 million and $39.7 million, respectively, compared to $21.8
million and $37.1 million for the respective periods in 1998. When the three
month periods are compared, reduced income for the current period of $1.6
million is due to primarily from lower income from net gains on the sale of
loans and investments of $7.0 million that was partially offset by increased fee
and service charge income of $4.5 million and other income of $826,000. During
the second quarter of 1998, $350 million of securities, most of which were
mortgage securities with relatively narrow spreads to wholesale funding, were
sold and largely accounts for the higher net gains for the previous year period.
When the six month periods are compared, noninterest income for the current year
period was $2.5 million higher due to increased income from fees and service
charges of $7.9 million and other income of $2.5 million that more than offset
reduced net gains from loan and securities sales income.
NONINTEREST EXPENSES
Total noninterest expenses for the three and six month periods ended
June 30, 1999 totaled $50.0 million and $98.1 million, respectively, compared to
$62.8 million and $108.3 million, respectively, for the same periods in 1998.
Included in noninterest expenses for the prior year periods is $17.4 million of
acquisition related expenses. On an adjusted basis, operating expenses for the
current year three and six month periods increased $4.6 million and $7.2
million, respectively, as compared to the same periods in 1998. While virtually
all operating expenses increased for the current periods, salaries and benefits,
occupancy and intangible amortization were the most significant. The increases
in noninterest expenses for the current year periods is primarily due to
expenses resulting from the acquisitions of Maritime and Village in the second
quarter of 1999, Access National Mortgage, Inc. ("Access") in the first quarter
of 1999 and Eagle Financial Corp. ("Eagle"), and Damman Insurance Associates
("Damman") in the second quarter of 1998.
INCOME TAXES
Total income tax expense for the current three and six month periods was
$11.9 million and $23.2 million as compared to $7.3 million and $19.0 million
for the same periods in 1998. Tax expenses for the 1999 periods are higher than
the corresponding 1998 periods because of higher income before income taxes. The
effective tax rate is approximately 34% for the three and six month periods in
1999 as compared to 44% and 39% in the same periods a year ago. During the first
quarter of 1999, Webster formed a Connecticut Passive Investment Company. 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. The legislation was effective for tax years beginning on or
after January 1, 1999.
22
Webster Financial Corporation and Subsidiaries
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table details the estimated market value of Webster's
interest-sensitive assets and interest-sensitive liabilities at June 30, 1999 if
interest rates instantaneously increase or decrease 100 basis points.
Book Market Estimated Market Value Impact
Value Value -100 BP +100 BP
----- ----- ------- -------
Interest-sensitive assets
Trading $ 70,561 $ 70,561 $ 525 $ (1,165)
Non-trading 8,346,844 8,099,095 199,871 (247,505)
Interest-sensitive liabilities 8,395,892 8,213,315 (31,371) 207,037
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $217.2
million (See Note 2 to Consolidated Financial Statements) and nonaccrual loans
of $31.1 million (See "Asset Quality" within the MD&A). Values for mortgage
servicing rights have been included in the table above as changes in interest
rates affect the valuation of the servicing rights. Equity securities and
nonaccrual assets not included in the above table are, however, subject to
fluctuations in market value based on other risks.
Based on Webster's asset/liability mix at June 30, 1999, management's net
interest income sensitivity analysis of the effects of changing interest rates
estimates that an instantaneous 100 basis point increase in interest rates would
decrease net interest income over the next twelve months by about 4.7% and an
instantaneous 100 basis point decline in interest rates would increase net
interest income over the next twelve months by about 3.6%. The above estimated
market values are subject to factors that could cause actual results to differ
from such projections and estimates.
FORWARD LOOKING STATEMENTS
Statements in the sections captioned "Management's Discussion and
Analysis of Consolidated Financial Statements," "Quantitative and Qualitative
Disclosures about Market Risk" and "Year 2000 Readiness Disclosure Statement"
are forward-looking statements within the meaning of the Securities and Exchange
Act of 1934, as amended. Actual results could differ materially from those
management expectations, projections and estimates. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products, services and prices. Such developments could have an adverse impact on
Webster's financial position and results of operations.
23
Webster Financial Corporation and Subsidiaries
YEAR 2000 READINESS DISCLOSURE STATEMENT
- --------------------------------------------------------------------------------
The Corporation's overall Year 2000 project plan continues to meet regulatory
requirements and targeted objectives. The following discussion addresses the
status of the project as of June 30, 1999.
I. THE CORPORATION'S STATE OF READINESS
During the second quarter of 1999, the Corporation focused on completing
the validation of core functionality on mission critical applications. At June
30, 1999, validation of 100% of identified core functionality was completed. The
Corporation has not made any significant revisions to the Year 2000 project plan
as reported in the 1998 Annual Report and has met the June 30, 1999 target date
for completion of the validation and implementation phases for core business
systems.
II. THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES
At June 30, 1999, the Corporation's estimated total direct costs for Year
2000 remediation remains at approximately $1 million. Approximately $760,000 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 $145,000 and expenses related to consulting services
for Year 2000 management and systems testing that amounted to approximately
$613,000. During the next 6 months, the Corporation anticipates Year 2000
readiness direct expenses to total approximately $240,000.
III. THE RISKS OF THE CORPORATION'S YEAR 2000 ISSUES
During the second quarter of 1999, the Corporation continued to focus on
Contingency planning for potential business disruptions resulting from problems
encountered with internal operations and infrastructure or external connections.
The Corporation will continue to identify and revise potential scenarios during
1999 as needed.
IV. THE CORPORATION'S CONTINGENCY PLANS
At June 30, 1999, the Corporation has completed contingency plans for
identified core business functions. Contingency planning is scenario-driven and
focuses on risk assessment, alternate solutions for business resumption and
approaches to minimize the impact of each scenario. Testing and validation of
contingency plans is substantially complete. Contingency plans will continue to
be reviewed and refined during 1999 and as changes in the external environment
occur. During the mid-December 1999 through mid-January 2000 period, the
Corporation is taking an event management approach intended to ensure a state of
readiness. Event management plans will continue to be reviewed and refined
during 1999.
24
Webster Financial Corporation and Subsidiaries
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on April 22, 1999.
(b) Achille A. Apicella, George T. Carpenter, John J. Crawford and
C. Michael Jacobi were re-elected as directors at the annual
meeting. Continuing directors include: Richard H. Alden, Joel S.
Becker, O. Joseph Bizzozero, Jr., Harry P. DiAdamo, Jr., Robert
A. Finkenzeller, John F. McCarthy, James C. Smith and Sister
Marguerite Waite.
(c) The following matters were voted upon and approved by the
Registrant's shareholders at the 1999 annual meeting on April
22, 1999: (i) election of four directors to serve a three year
term (Proposal 1); and (ii) ratification of the appointment of
KPMG LLP as independent auditors of Webster for the year ending
December 31, 1999 (Proposal 2). As to Proposal 1, Achille A.
Apicella received 31,756,912 votes for election and 226,810
votes were withheld; George T. Carpenter received 31,746,197
votes for election and 237,525 votes were withheld; John J.
Crawford received 31,760,893 votes for election and 222,829
votes were withheld; and C. Michael Jacobi received 31,760,336
votes for election and 223,386 votes were withheld. There were
no abstentions or broker non-votes for any of the nominees. As
to Proposal 2, shareholders cast 31,718,313 votes for, 139,853
against, 125,556 abstentions, and 0 broker non-votes.
(d) Not Applicable.
Item 5. OTHER INFORMATION - None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3 Bylaws of Webster Financial Corporation, as amended.
27 Financial Data Tables.
(b) Reports on Form 8-K
Webster filed the following Current Reports on Form 8-K with the
Securities and Exchange Commission (the ("SEC") during the quarter
ended June 30, 1999:
25
Webster Financial Corporation and Subsidiaries
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Current Report on Form 8-K filed with the SEC on April 9, 1999 (date of report
April 6, 1999) (announcing regulatory approval of Webster's proposed acquisition
of Maritime Bank & Trust Company and the exchange ratio for the transaction).
Current Report on Form 8-K filed with the SEC on May 6, 1999 (date of report
April 21, 1999) (announcing the completion of Webster's acquisition of Maritime
Bank & Trust Company, regulatory and shareholder approval of Webster's proposed
acquisition of Village Bancorp, Inc. and the exchange ratio for the Village
transaction).
Current Report on Form 8-K filed with the SEC on July 13, 1999 (date of report
June 29, 1999) (regarding the announcement of Webster's proposed acquisition of
New England Community Bancorp, Inc.).
26
Webster Financial Corporation and Subsidiaries
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: August 13, 1999 By:
---------------------------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
27
Webster Financial Corporation and Subsidiaries
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EXHIBIT INDEX
Exhibit No. Description
------------ -----------
3 Bylaws of Webster Financial Corporation, as amended.
27 Financial Data Tables.
28