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 SEPTEMBER 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
- --------------------------------------------------------------------------------
(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) 578-2592
----------------------------------------------------
(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) 37,944,859 SHARES
- -------------------------------- --------------------------------------------
Class Issued and Outstanding at October 31, 1999
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
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INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION:
Consolidated Statements of Condition at September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 26
EXHIBIT INDEX 27
EXHIBITS 28
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------ ------
ASSETS:
Cash and due from depository institutions $ 170,200 $ 173,863
Interest-bearing deposits 785 3,560
Securities: (note 2)
Trading, at fair value 63,146 91,114
Available for sale, at fair value 2,529,198 2,969,822
Held to maturity, (fair value: $315,617 in 1999;
$404,365 in 1998) 327,523 401,154
Loans receivable:
Residential loans 3,788,183 3,749,152
Commercial real estate loans 498,897 416,203
Commercial and industrial loans 666,240 401,772
Home equity loans 456,371 439,369
Other consumer loans 41,343 42,122
Allowance for loan losses (62,785) (55,109)
--------- ---------
Loans receivable, net 5,388,249 4,993,509
Accrued interest receivable 60,002 55,012
Premises and equipment, net 88,567 79,324
Foreclosed properties, net 5,338 3,526
Intangible assets 135,126 78,380
Cash surrender value of life insurance 146,285 141,059
Prepaid expenses and other assets 82,633 43,594
--------- ---------
TOTAL ASSETS $ 8,997,052 $ 9,033,917
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Checking and NOW $ 1,082,449 $ 1,070,814
Savings and MMDAs 1,576,125 1,429,271
Certificates of deposit 2,905,436 3,151,188
--------- ---------
Total deposits 5,564,010 5,651,273
Federal Home Loan Bank advances 1,603,917 1,774,560
Securities sold under agreements to repurchase and other borrowings (note 6) 951,438 738,921
Advance payments by borrowers for taxes and insurance 20,066 32,293
Accrued expenses and other liabilities (note 8) 85,261 82,414
--------- ---------
TOTAL LIABILITIES 8,224,692 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 (note 14); Issued - 38,479,422 shares at
September 30, 1999 and
38,353,424 shares at December 31, 1998 385 384
Paid-in capital 252,897 249,819
Retained earnings 370,934 314,791
Less treasury stock at cost, 413,063 shares at September 30, 1999
and 1,026,770 shares at December 31, 1998 (11,487) (27,914)
Less Employee Stock Ownership Plan shares purchased with debt (1,128) (1,339)
Accumulated other comprehensive (loss) income (note 4) (38,818) 19,138
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 572,783 554,879
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,997,052 $ 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)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME:
Loans $ 99,666 $ 95,056 $ 288,560 $ 287,949
Securities and interest-bearing deposits 48,173 57,227 150,701 183,161
------- ------- -------- --------
Total interest income 147,839 152,283 439,261 471,110
------- ------- -------- --------
INTEREST EXPENSE:
Deposits 45,649 55,465 141,135 169,158
Borrowings 33,566 37,175 98,827 119,261
------- ------- -------- --------
Total interest expense 79,215 92,640 239,962 288,419
------- ------- -------- --------
NET INTEREST INCOME 68,624 59,643 199,299 182,691
Provision for loan losses 2,100 1,500 6,200 5,300
------- ------- -------- --------
Net interest income after provision for loan losses 66,524 58,143 193,099 177,391
------- ------- -------- --------
NONINTEREST INCOME:
Fees and service charges 17,432 12,039 44,375 31,104
Gain on sale of loans and loan servicing, net 353 235 1,792 2,800
Gain (loss) on sale of securities, net (939) 1,143 2,480 11,269
Other noninterest income 3,804 2,977 11,660 8,357
------- ------- -------- --------
Total noninterest income 20,650 16,394 60,307 53,530
------- ------- -------- --------
NONINTEREST EXPENSES:
Salaries and employee benefits 24,088 19,640 66,484 58,396
Occupancy expense of premises 4,288 4,251 13,059 12,018
Furniture and equipment expenses 5,070 4,352 14,551 12,990
Intangible amortization 3,840 2,512 9,450 7,174
Marketing expenses 2,134 1,837 6,484 5,866
Acquisition-related expenses -- -- -- 17,400
Capital securities expense (note 12) 3,661 3,692 10,984 11,046
Dividends on preferred stock of subsidiary corporation 1,038 1,037 3,113 3,113
Other operating expenses (note 5) 7,978 8,659 26,055 26,288
------- ------- -------- --------
Total noninterest expenses 52,097 45,980 150,180 154,291
------- ------- -------- --------
Income before income taxes 35,077 28,557 103,226 76,630
Income taxes (note 13) 10,924 8,474 34,095 27,426
------- ------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 24,153 $ 20,083 $ 69,131 $ 49,204
======= ======= ======= =======
Net income per common share: (note 3)
Basic $0.64 $0.53 $1.86 $1.30
Diluted $0.63 $0.52 $1.83 $1.27
Dividends declared per common share $0.12 $0.11 $0.35 $0.32
See accompanying notes to condensed consolidated financial statements.
4
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------ ------
OPERATING ACTIVITIES:
Net income $ 69,131 $ 49,204
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,200 5,300
Provision for foreclosed property losses 100 285
Provision for depreciation on premises and equipment 9,391 9,334
Amortization of securities and loan premiums, net 4,293 5,946
Amortization of hedging costs, net 3,516 3,485
Amortization of intangibles, net 9,450 7,174
Amortization of mortgage servicing rights 1,200 1,388
Gains on sale of foreclosed properties, net (545) (678)
Gains on sale of loans and securities, net (4,975) (15,343)
Losses on trading securities, net 704 1,274
Decrease in trading securities 27,290 10,803
Loans originated for sale (168,287) (67,448)
Sale of loans, originated for sale 166,127 67,150
Other loan sales -- 46,400
Increase in interest receivable (2,985) (2,960)
Increase (decrease) in accrued expenses and other liabilities, net 14,396 (50,694)
Increase in cash surrender value of life insurance (5,668) (3,396)
(Decrease) increase in interest payable (10,870) 3,263
Decrease (increase) in prepaid expenses and other assets, net 2,081 (753)
Pooling adjustments, net -- 7,860
-------- -------
Net cash provided by operating activities 120,549 77,594
-------- -------
INVESTING ACTIVITIES:
Purchases of securities, available for sale (712,521) (1,892,632)
Purchases of securities, held to maturity (1,283) (151,988)
Maturities of securities 301,589 117,683
Proceeds from sale of securities, available for sale 306,455 1,142,403
Proceeds from sale of securities, held to maturity 15,458 --
Principal collected on securities 562,664 842,653
Life insurance purchases, net -- (122,700)
Net decrease in interest-bearing deposits 4,139 65,941
Loans purchased -- (66,173)
Net (increase) decrease in loans (194,049) 65,934
Proceeds from sale of foreclosed properties 5,509 10,937
Purchases of premises and equipment, net (11,117) (16,246)
Cash received through purchase acquisitions, net of cash paid 16,706 1,688
-------- -------
Net cash provided (used) by investing activities 293,550 (2,500)
-------- -------
FINANCING ACTIVITIES:
Net decrease in deposits (370,545) (114,573)
Repayment of FHLB advances (2,493,996) (3,568,579)
Proceeds from FHLB advances 2,323,354 3,616,970
Repayment of other borrowings (28,674,697) (11,079,560)
Proceeds from other borrowings 28,882,456 11,094,745
Net decrease in advance payments for taxes and insurance (12,227) (19,111)
Cash dividends to common and preferred shareholders (12,979) (14,358)
Common stock repurchased (66,711) (22,583)
Exercise of stock options 7,583 8,428
---------- --------
Net cash used by financing activities (417,762) (98,621)
---------- --------
Decrease in cash and cash equivalents (3,663) (23,527)
Cash and cash equivalents at beginning of period 173,863 151,322
-------- --------
Cash and cash equivalents at end of period $ 170,200 $ 127,795
======== ========
See accompanying notes to condensed consolidated financial statements.
5
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------ --------
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 22,069 $ 30,447
Interest paid $249,606 $284,266
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to foreclosed properties $ 7,454 $ 12,750
ASSETS ACQUIRED AND LIABILITIES ASSUMED IN PURCHASE BUSINESS COMBINATIONS WERE
AS FOLLOWS:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 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 9,646
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 nine month periods
ended September 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"), the parent company of Nowlending.com, an internet residential
mortgage lender. On April 21, 1999, Webster acquired Maritime Bank & Trust
Company ("Maritime") and on May 19, 1999, acquired Village Bancorp, Inc.
("Village"). These transactions were all accounted for as purchases, and
therefore, results are reported only for the periods subsequent to the
acquisition dates.
These financial statements should be read in conjunction with the
consolidated 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):
September 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 $ 63,146(a) $ -- $ -- $ 63,146 $ 91,114(a) $ -- $ -- $ 91,114
-------- ------ -------- ---------- ---------- ------ ------- ---------
AVAILABLE FOR SALE PORTFOLIO:
U.S. treasury notes 22,086 10 (129) 21,967 13,514 123 -- 13,637
U.S. government agency 13,951 29 (156) 13,824 16,501 278 -- 16,779
Municipal bonds and notes 14,689 -- (682) 14,007 14,688 516 -- 15,204
Corporate bonds and notes 73,828 2 (7,434) 66,396 81,452 454 (2,148) 79,758
Equity securities 190,988 9,391 (7,650) 192,729 211,871 7,241 (4,664) 214,448
Mortgage-backed securities 2,265,581 7,031 (61,449) 2,211,163 2,582,759 39,937 (5,248) 2,617,448
Purchased interest-rate contracts 12,470 -- (3,358) 9,112 15,985 -- (3,437) 12,548
--------- ------ -------- --------- --------- ------ -------- ---------
2,593,593 16,463 (80,858) 2,529,198 2,936,770 48,549 (15,497) 2,969,822
--------- ------ -------- --------- --------- ------ -------- ---------
HELD TO MATURITY PORTFOLIO:
U.S. treasury notes 10,403 -- (63) 10,340 2,455 12 -- 2,467
U.S. government agency 2,533 1 (4) 2,530 6,000 15 -- 6,015
Municipal bonds and notes 22,907 2 (518) 22,391 12,500 347 -- 12,847
Corporate bonds and notes 135,485 12 (9,829) 125,668 151,536 2,626 (1,171) 152,991
Mortgage-backed securities 156,195 833 (2,340) 154,688 228,663 2,426 (1,044) 230,045
--------- ------ -------- --------- --------- ------ -------- ---------
327,523 848 (12,754) 315,617 401,154 5,426 (2,215) 404,365
--------- ------ -------- --------- --------- ------ -------- ---------
Total $ 2,984,262 $ 17,311 $ (93,612) $ 2,907,961 $ 3,429,038 $ 53,975 $ (17,712) $ 3,465,301
========= ====== ======== ========= =========== ====== ======== =========
(a) Stated at fair value.
During the second quarter of 1999, Webster acquired Maritime and Village.
At the date of acquisition, Maritime 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 nine month
periods ended September 30, 1999 was 37,950,170 and 37,124,146, respectively,
and for the three and nine month periods ending September 30, 1998 was
38,011,104 and 37,952,903, respectively. The weighted-average number of shares
used in the computation of diluted earnings per common share for the three and
nine month periods ended September 30, 1999 was 38,509,362 and
8
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
37,719,340, respectively, and for the three and nine month periods ended
September 30, 1998 was 38,663,761 and 38,650,302, 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 nine
month periods ended September 30, 1999 and 1998 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 24,153 $ 20,083 $ 69,131 $49,204
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) expense of $(8,720) and $(37,978) for
the three and nine months ended September 30, 1999, respectively,
and $10,511 and $14,106 for the three
and nine months ended September 30, 1998, respectively) (12,797) 14,515 (55,738) 19,480
Less reclassification adjustment for gains included in net
income (net of income tax expense of $15 and $1,093 for the three
and nine months ended September 30, 1999, respectively, and $959
and $5,007 for the three and nine months ended
September 30, 1998, respectively) 34 1,324 2,218 6,914
--- ------ ------ ------
Other comprehensive (loss) income (12,831) 13,191 (57,956) 12,566
------- ------ ------- ------
Comprehensive income $ 11,322 $ 33,274 $ 11,175 $61,770
========= ====== ====== ======
NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Gain on sale of foreclosed property, net $ (226) $ (271) $ (545) $ (678)
Provision for losses on foreclosed property 25 40 100 285
Rental income (17) (40) (52) (105)
Foreclosed property expenses 196 279 485 1,065
---- ---- ---- ------
Foreclosed property expenses and provisions, net $ (22) $ 8 $ (12) $ 567
======== ======== ======== =========
9
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
----------------------------------------------
At September 30, 1999, securities sold under agreements to repurchase
including short-term dollar roll transactions totaled $673.4 million. Securities
sold under agreements to repurchase and dollar roll balances averaged
approximately $765.1 million during the quarter and the maximum amount
outstanding at month-end during the quarter was $814.2 million. Securities
underlying these transactions are either U.S. Government or Federal Agency
securities. These securities are either delivered to counterparties directly or
held by Webster's safekeeping agents on behalf of customers. Information
concerning these transactions is summarized below for September 30, 1999:
(Dollars in thousands)
WEIGHTED WEIGHTED BOOK VALUE MARKET VALUE
BALANCE AT AVERAGE AVERAGE OF OF
9/30/99 INTEREST RATE MATURITY DATE COLLATERAL COLLATERAL
------- ------------- ------------- ---------- ----------
$673,394 5.15% less than 2 months $695,527 $685,742
NOTE 7 - SHAREHOLDERS' EQUITY
--------------------
For the three month period ended September 30, 1999, total equity increased
$7.3 million. The net increase was primarily due to $24.2 million of net income
that was partially offset by $4.6 million of dividend payments to common
shareholders, $1.3 million of repurchases of Webster common stock and a $12.8
million increase in unrealized losses related to the available for sale
securities portfolio. For the nine month period ended September 30, 1999, total
equity increased $17.9 million. The net increase was primarily due to $69.1
million of net income, $76.6 million related to acquisitions completed during
the period, and $8.3 million related to option exercises that was partially
offset by $13.0 of dividend payments to common shareholders, $66.7 million of
Webster common stock repurchases and $58.0 million of other comprehensive loss
due to a reduction of unrealized gains, net of tax, related to the available for
sale securities portfolio.
During the 1999 third quarter period, 51,400 common shares of Webster stock
were repurchased at an average price of $24.94 and for the 1999 nine month
period, approximately 2.3 million common shares were repurchased at an average
price of $28.95. Common shares totaling approximately 2.4 million and 469,000
were reissued from treasury during the nine month period for the acquisitions of
Maritime and Village and for stock option exercises, respectively.
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.
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, respectively, Webster recorded approximately
$47.2 million of acquisition-related charges. Additionally, Webster recorded an
increase of $11.4 million to the provision for loan losses related to the
acquisitions of Eagle, MidConn, 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.
10
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
Data processing contract termination (537) -- --
Branch closure costs and building costs (88) (202) (296)
Acquisition-related and miscellaneous expenses -- -- (221)
--- --- ------
Balance of acquisition-related accrued liabilities
at September 30, 1999 $ 3,175 $ 1,398 $ 883
===== ===== ===
The remaining total accrued liability of $5.5 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 now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 and upon adoption. 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, subject to adjustment. Webster expects to account for
the transaction as a pooling of interests and record after-tax acquisition
related charges of approximately $9.3 million. As of September 30, 1999, the
NECB acquisition is pending regulatory and shareholder approval. The transaction
is currently expected to close in the fourth quarter of 1999 as shareholder
approval has been received.
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
NOTE 11 - BUSINESS SEGMENTS (CONTINUED)
-----------------------------
Operating income and total assets by business segment are as follows:
Three Months Ended September 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 42,698 $ 8,021 $ 17,370 $ 535 $ -- $ 68,624
Provision for loan losses 270 876 954 -- -- 2,100
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 42,428 7,145 16,416 535 -- 66,524
Noninterest income 12,568 675 2,645 1,802 2,960 20,650
Noninterest expense 35,145 3,621 3,649 1,452 3,531 47,398
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 19,851 4,199 15,412 885 (571) 39,776
Income taxes 6,183 1,307 4,800 275 (178) 12,387
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) after taxes $ 13,668 $ 2,892 $ 10,612 $ 610 $ (393) $ 27,389
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $903,856 $956,395 $3,452,640 $3,661,386 $22,775 $8,997,052
Three Months Ended September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 34,727 $ 6,429 $ 16,503 $ 1,984 $ -- $ 59,643
Provision for loan losses 270 284 946 -- -- 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 34,457 6,145 15,557 1,984 -- 58,143
Noninterest income 8,326 426 2,222 2,926 2,494 16,394
Noninterest expense 28,784 2,971 5,219 1,461 2,816 41,251
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 13,999 3,600 12,560 3,449 (322) 33,286
Income taxes 4,154 1,068 3,728 1,023 (96) 9,877
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) after taxes $ 9,845 $ 2,532 $ 8,832 $ 2,426 $ (226) $ 23,409
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $752,026 $570,653 $3,436,700 $4,380,476 $23,831 $9,163,686
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $121,658 $ 22,758 $ 55,006 $ (123) $ -- $ 199,299
Provision for loan losses 720 2,624 2,856 -- -- 6,200
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 120,938 20,134 52,150 (123) -- 193,099
Noninterest income 31,703 1,609 8,286 9,851 8,858 60,307
Noninterest expense 102,872 10,909 7,082 5,298 9,922 136,083
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 49,769 10,834 53,354 4,430 (1,064) 117,323
Income taxes 16,439 3,579 17,623 1,462 (351) 38,752
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) after taxes $ 33,330 $ 7,255 $ 35,731 $ 2,968 $ (713) $ 78,571
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $903,856 $956,395 $3,452,640 $3,661,386 $22,775 $8,997,052
Nine Months Ended September 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BUSINESS MORTGAGE TOTAL
(IN THOUSANDS) BANKING BANKING LENDING TREASURY OTHER SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 94,274 $ 17,218 $ 70,769 $ 430 $ -- $ 182,691
Provision for loan losses 828 868 3,604 -- -- 5,300
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 93,446 16,350 67,165 430 -- 177,391
Noninterest income 23,532 968 5,909 18,205 4,916 53,530
Noninterest expense 80,907 8,555 23,937 4,343 4,990 122,732
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 36,071 8,763 49,137 14,292 (74) 108,189
Income taxes 12,910 3,137 17,585 5,115 (26) 38,721
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) after taxes $ 23,161 $ 5,626 $ 31,552 $ 9,177 $ (48) $ 69,468
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets at period end $752,026 $570,653 $3,436,700 $4,380,476 $23,831 $9,163,686
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
13
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 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 (net of taxes), that total for the three
and nine month periods ended September 30, 1999, $(3.2) million and $(9.4)
million, respectively, and for the same respective periods in 1998, $(3.3)
million and $(20.3) million, respectively, that do not directly relate to
segments. The major categories not included in the segments for the three and
nine month periods ended September 30, 1999, were (on a before tax basis) $3.7
million of capital securities expense, $1.0 million of dividend expense on
preferred stock for the three month period and $11.0 million of capital
securities expense and $3.1 million of dividend expense on preferred stock for
the nine month period. For the three and nine month periods ended September 30,
1998, the major categories not included in the segments were (on a before tax
basis) $3.7 million of capital securities expense, $1.0 million of dividend
expense on preferred stock for the three month period and $11.0 million of
capital securities expense, $3.1 million of dividend expense on preferred stock
and $17.4 million of acquisition-related expense for the nine month period.
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 $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. Expense on the securities for the three and nine month periods ended
September 30, 1999, was $3.7 million and $11.0 million, respectively. Expense
for the same periods in 1998, was $3.7 million and $11.0 million, respectively.
14
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES
------------
Total income tax expense for the current three and nine month periods was
$10.9 million and $34.1 million as compared to $8.5 million and $27.4 million
for the same periods in 1998. Tax expense for the 1999 periods is higher than
the corresponding 1998 periods primarily due to a higher level of income before
taxes. Webster recorded a reduction in income tax expense of $1.0 million and
$2.5 million for the 1999 and 1998 quarters, respectively, related to net tax
benefits received through prior acquisitions. 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 PICs 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 is effective for
tax years beginning on or after January 1, 1999.
NOTE 14 - SUBSEQUENT EVENTS
-----------------
On November 9, 1999, the shareholders of Webster Financial Corporation held
a special meeting and approved the following:
1. The agreement and plan of merger, dated as of June 29, 1999, between
Webster Financial Corporation and New England Community Bancorp, Inc.,
("NECB"), the merger of NECB into Webster and the other
transactions contemplated by the merger agreement, as described in
the attached joint proxy statement/prospectus;
2. An amendment to Webster's certificate of incorporation to increase
the number of authorized shares of Webster's common stock from
50,000,000 to 200,000,000.
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 $9.0 billion at September 30, 1999, decreasing $36.9
million from December 31, 1998. The reduction is primarily due to a decrease of
$542.2 million in investment securities, that was partially offset by increases
in gross loans of $402.4 million, intangible assets of $56.7 million and other
assets of $39.0 million. The total increase to intangible assets was primarily
the result of core deposit intangible and goodwill amounts recorded during the
second quarter connected to the acquisitions of Maritime and Village banks. The
net increase in gross loans is primarily related to commercial and industrial
loans and commercial real estate loans that increased approximately $264.0
million and $83.0 million, respectively, for the current period. The net
increase in total commercial loans for the current period is primarily related
to commercial loans received through the acquisitions of Maritime and Village
that totaled approximately $98.7 million and a net increase to syndicated loans
of $148 million. The increase in other assets is primarily the result of the
change in the deferred tax portion of unrealized gains and losses on the
available for sale securities portfolio. Interest-bearing liabilities decreased
$45.4 million for the current nine month period, the result of total deposits
decreasing $87.3 million and total borrowings increasing $41.9 million. Total
equity had a net increase of $17.9 million for the current period. The net
increase in equity was primarily due to $69.1 million of net income, $76.6
million related to the issuance of common stock from treasury for acquisitions
completed during the period, and $8.3 million related to option exercises, that
was partially offset by $13.0 of dividend payments to common shareholders, $66.7
million of Webster common stock repurchases and $58.0 million of other
comprehensive loss due to a decline in the market value of the available for
sale securities portfolio.
At September 30, 1999, the Bank had Tier 1 leveraged, Tier 1 risk-based,
and total risk-based capital ratios of 6.43%, 11.17% and 12.38%, respectively.
The Bank met the regulatory capital requirements to be categorized as a "well
capitalized" institution at September 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 September 30, 1999, residential and consumer loans
comprised approximately 79% 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
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of September 30, 1999 and
December 31, 1998 follows (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Residential mortgage loans $ 3,788,183 $ 3,749,152
Commercial real estate loans 498,897 416,203
Commercial loans 666,240 401,772
Home equity loans 456,371 439,369
Consumer loans 41,343 42,122
------- -------
Total loans 5,451,034 5,048,618
Allowance for loan losses (62,785) (55,109)
-------- --------
Loans receivable, net $ 5,388,249 $ 4,993,509
========= =========
Included above at September 30, 1999 and December 31, 1998 were loans held
for sale of $15.5 million and $1.7 million, respectively.
The following table details the nonaccrual assets at September 30, 1999 and
December 31, 1998 (in thousands):
September 30, 1999 December 31, 1998
------------------ -----------------
Loans Accounted for on a Nonaccrual Basis:
Residential $ 11,308 $ 9,040
Commercial 19,606 14,703
Consumer 1,359 1,636
------ ------
Total nonaccrual loans 32,273 25,379
Foreclosed Properties:
Residential and consumer 2,959 1,153
Commercial 2,379 2,373
------ ------
Total nonaccrual assets $ 37,611 $ 28,905
======= ======
The net increase in commercial non accrual loans for the current period is
primarily due to loans that have been received through prior acquisitions.
At September 30, 1999, Webster's allowance for losses on loans of $62.8
million represented 194.5% of nonaccrual loans and its total allowances for
losses on nonaccrual assets of $63.0 million amounted to 166.5% of nonaccrual
assets. A detail of the changes in the allowances for losses on loans and
foreclosed property for the nine months ended September 30, 1999 follows (in
thousands):
Allowances For Losses On
------------------------
Foreclosed Total
Loans Properties Allowances for Losses
----- ---------- ---------------------
Balance at December 31, 1998 $ 55,109 $ 207 $ 55,316
Provisions for losses 6,200 100 6,300
Losses charged to allowances (3,429) (64) (3,493)
Recoveries credited to allowances 1,258 19 1,277
Allowances received through acquisitions 3,647 -- 3,647
------ -------- ------
Balance at September 30, 1999 $ 62,785 $ 262 $ 63,047
======== ======== =========
17
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO 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 utilizes 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.
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.
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 September 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
18
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
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 loan commitments outstanding of $104.0 million, other
non-mortgage loan commitments of $49.9 million, unused home equity credit lines
of $337.4 million and commercial lines and letters of credit of $462.5 million
at September 30, 1999.
19
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Comparison of the three and nine month periods ended September 30, 1999 and 1998
GENERAL
- -------
Net income for the three month period ended September 30, 1999, was $24.2
million or $.63 per diluted share compared to $20.1 million or $.52 per diluted
share for the previous year respective period. Net income for the nine month
period ended September 30, 1999, was $69.1 million or $1.83 per diluted share
compared to $49.2 million or $1.27 per diluted share for the previous year
respective period. When 1998 net income is adjusted for $13.2 million of
acquisition expenses (net of taxes), net income for the nine month period is
$62.4 million or $1.61 per diluted share. In general, higher net income for the
current year three and nine month periods, was primarily the result of higher
net interest income and fees and service charges income partially offset by
increased operating expenses.
NET INTEREST INCOME
- -------------------
Net interest income for the three and nine month periods ended September
30, 1999, amounted to $68.6 million and $199.3 million, respectively, compared
to $59.6 million and $182.7 million for the respective periods in 1998. Total
interest income for the current year three and nine month periods compared to
the same periods in 1998 decreased $4.4 million and $31.8 million, respectively,
while decreases in total interest expense of $13.4 million and $48.5 million,
respectively, more than offset the decreases in total interest income. Net
interest rate spread for the three and nine month periods ended September 30,
1999, was 3.10% and 3.02%, respectively as compared to 2.61% and 2.59% for the
same periods in the previous year. The improved net interest-rate spreads for
the current year periods are primarily the result of lower costs on deposits and
borrowings.
INTEREST INCOME
- ---------------
Total interest income for the three and nine month periods ended September
30, 1999, was $147.8 million and $439.3 million, respectively compared to $152.3
million and $471.1 million for the respective 1998 periods. The decreases in
total interest income for the current year periods are primarily related to
lower earned average rates on loans that more than offset the positive effect of
increased loan average balances for the current year period. Additionally, lower
average balances for securities in the current periods as compared to the
respective 1998 periods were also a contributing factor to lower interest income
for the current year period.
INTEREST EXPENSE
- ----------------
Total interest expense for the three and nine month periods ended September
30, 1999, was $79.2 million and $240.0 million, respectively, compared to $92.6
million and $288.4 million for the respective periods in 1998. The total cost of
funds for the three and nine month periods ended September 30, 1999, was 3.89%
and 3.95% as compared to 4.43% and 4.48%, respectively, for the same periods one
year earlier. The decreases in total interest expense for the current year three
and nine month periods as compared to one year earlier, are the results of a
lower volume of average interest-bearing liabilities of $155.0 million and
$400.2 million, respectively, as well as a reduction in the rates incurred on
both deposit and borrowing liabilities. Reduced interest expense on total
borrowings for the current year periods as compared to the previous year
respective periods was $3.6 million and $20.4 million. The rates incurred on
total borrowings for the current year three and nine month periods were 5.31%
and 5.25%, respectively, as compared to 5.77% and 5.80%, respectively, for the
respective previous year periods. Interest rates incurred on total deposits were
3.23% and 3.37% for the current three and nine month periods, respectively, and
3.87% and 3.90% for the respective 1998 periods. The decreases in total deposit
interest expense for the current year periods is primarily due to certificates
of deposit interest rates that on average decreased approximately 60 basis
points during the current year periods.
20
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO 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 SEPTEMBER 30, 1999 1998
- -------------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ------- ------- -------- -------
Assets:
INTEREST-EARNING ASSETS:
Loans $ 5,379,609 $ 99,666 7.39 % $ 4,982,028 $ 95,056 7.60 %
Securities 3,067,914 48,173 6.28 3,651,738 57,227 6.27
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-EARNING ASSETS 8,447,523 147,839 6.99 8,633,766 152,283 7.04
------- -------
Noninterest-earning assets 517,026 483,426
-------- --------
TOTAL ASSETS $ 8,964,549 $ 9,117,192
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Deposits $ 5,611,368 45,649 3.23 % $ 5,719,662 55,465 3.87 %
Borrowings 2,508,812 33,566 5.31 2,555,550 37,175 5.70
--------- ------ ---- --------- ------- ----
TOTAL INTEREST-BEARING LIABILITIES 8,120,180 79,215 3.89 8,275,212 92,640 4.43
------ -------
Noninterest-bearing liabilities 130,298 95,042
-------- -------
TOTAL LIABILITIES 8,250,478 8,370,254
Capital securities and preferred stock of
subsidiary corporation 150,000 199,577
SHAREHOLDERS' EQUITY 564,071 547,361
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,964,549 $ 9,117,192
========= =========
NET INTEREST INCOME $ 68,624 $ 59,643
====== =======
INTEREST RATE SPREAD 3.10 % 2.61 %
===== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.25 % 2.79 %
==== ====
- ------------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
- ------------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(Dollars in thousands) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
------- -------- ------- ------- -------- -------
Assets:
INTEREST-EARNING ASSETS:
Loans $ 5,220,141 $ 288,560 7.38 % $ 4,843,275 $ 287,949 7.92 %
Securities 3,183,005 150,701 6.31 4,031,668 183,161 6.06
--------- ------- ---- --------- ------- ----
TOTAL INTEREST-EARNING ASSETS 8,403,146 439,261 6.97 8,874,943 471,110 7.07
------- -------
Noninterest-earning assets 545,269 477,399
-------- --------
TOTAL ASSETS $ 8,948,415 $ 9,352,342
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Deposits $ 5,600,849 141,135 3.37 % $ 5,770,880 169,158 3.90 %
Borrowings 2,517,440 98,827 5.25 2,747,636 119,261 5.73
--------- ------ ---- --------- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 8,118,289 239,962 3.95 8,518,516 288,419 4.48
------- -------
Noninterest-bearing liabilities 133,200 122,983
-------- --------
TOTAL LIABILITIES 8,251,489 8,641,499
Capital securities and preferred stock of
subsidiary corporation 150,000 183,277
Shareholders' equity 546,926 527,566
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,948,415 $ 9,352,342
========= =========
NET INTEREST INCOME $ 199,299 $ 182,691
======= =======
INTEREST RATE SPREAD 3.02 % 2.59 %
==== ====
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.16 % 2.76 %
==== ====
21
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses was $2.1 million and $6.2 million,
respectively, for the three and nine month periods ended September 30, 1999,
compared to $1.5 million and $5.3 million for the respective periods in 1998. At
September 30, 1999, the allowance for loan losses totaled $62.8 million and
represented 194.5% of non-accrual loans compared to $57.0 million and 192.7% at
September 30, 1998.
NONINTEREST INCOME
- ------------------
Total noninterest income for the three and nine months ended September 30,
1999, totaled $20.7 million and $60.3 million, respectively, compared to $16.4
million and $53.5 million for the respective periods in 1998. When the three and
nine month periods are compared, increased income for the current periods of
$4.3 million and $6.8 million is due primarily to increased income from fees and
service charges, and to a lesser extent, higher noninterest other income.
Virtually all categories of fees and service charge income increased for the
current periods with the most significant increases related to deposit-based
fees, residential mortgage servicing and other fees and insurance fees and
commissions. The net loss of $939,000 for the current quarter period on
securities is primarily due to trading account market-to-market adjustments that
totaled $988,000. During the second quarter period of 1998, the Bank realized a
net gain of approximately $7.0 million that was primarily related to the sale of
$350.0 million of securities, most of which were mortgage securities with
relatively narrow spreads to wholesale funding.
NONINTEREST EXPENSES
- --------------------
Total noninterest expenses for the three and nine month periods ended
September 30, 1999, totaled $52.1 million and $150.2 million, respectively,
compared to $46.0 million and $154.3 million, respectively, for the same periods
in 1998. Included in noninterest expenses for the prior year nine month period
is $17.4 million of acquisition related expenses. Excluding acquisition related
expenses, operating expenses for the current year three and nine month periods
increased $6.1 million and $13.3 million, respectively, as compared to the same
periods in 1998. While virtually all operating expenses increased for the
current periods, salaries and benefits, and intangible amortization were the
most significant. The increases in noninterest expenses for the current year
periods are primarily due to additional operating expenses resulting from the
acquisitions of Maritime and Village during the second quarter of 1999, Access
National Mortgage, Inc. ("Access") in the first quarter of 1999 and Damman
Insurance Associates ("Damman") in the second quarter of 1998.
INCOME TAXES
- ------------
Total income tax expense for the current three and nine month periods was
$10.9 million and $34.1 million as compared to $8.5 million and $27.4 million
for the same periods in 1998. Tax expense for the 1999 periods is higher than
the corresponding 1998 periods primarily due to a higher level of income before
taxes. Webster recorded a reduction in income tax expense of $1.0 million and
$2.5 million for the 1999 and 1998 quarters, respectively, related to net tax
benefits received through prior acquisitions. 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 PICs 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 is 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 September 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 $ 63,146 $ 63,146 $ 313 $ (796)
Non-trading 8,222,512 8,074,281 187,568 (218,298)
Interest-sensitive liabilities 8,319,416 8,136,670 (128,670) 120,086
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $192.7
million (see note 2 to Consolidated Financial Statements) and nonaccrual loans
of $32.3 million (see "Asset Quality" within the MD&A). Values for mortgage
servicing rights have been included in the table above as changes in interest
rates affect the valuation of the servicing rights. Equity securities and
nonaccrual assets not included in the above table are, however, subject to
fluctuations in market value based on other risks.
Based on Webster's asset/liability mix at September 30, 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 3.5% and
an instantaneous 100 basis point decline in interest rates would increase net
interest income over the next twelve months by about 3.1%. 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 September 30, 1999.
I. THE CORPORATION'S STATE OF READINESS
------------------------------------
During the third quarter of 1999, the Corporation focused on validating
applications identified as less critical for core business functionality. The
Corporation has not made any significant revisions to the Year 2000 project plan
as reported in the 1998 Annual Report and has met previously reported target
dates for completion of the validation and implementation phases for core
business systems.
II. THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES
-------------------------------------------------------
At September 30, 1999, the Corporation's estimated total direct costs for
Year 2000 remediation are approximately $1.1 million. Estimation of direct costs
increased by approximately $100,000 from the previously reported estimates.
Approximately $860,000 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 $685,000. During the next six 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 third 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 September 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 was completed as of September 30, 1999. 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.
24
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable.
Item 5. OTHER INFORMATION - Not Applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Tables.
(b) Reports on Form 8-K
Webster filed the following Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") during the quarter
ended September 30, 1999:
Current Report on Form 8-K filed with the SEC on July 13, 1999
(date of report June 29, 1999) (announcing Webster's proposed
acquisition of New England Community Bancorp, Inc.)
25
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
Registrant
Date: November 12, 1999 By: /s/ John V. Brennan
----------------- ----------------------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
26
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Tables.
27