UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ending March 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to __________________ Commission File Number: 0-15213 -------- WEBSTER FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1187536 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Webster Plaza, Waterbury, Connecticut 06720 - --------------------------------------- ---------- (Address of principal executive offices) (ZipCode) (203) 753-2921 --------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding for the issuer's classes of common stock, as of the latest practicable date. Common Stock (par value $ .01) 11,981,452 Shares ------------------------------ ---------------------------------------- (Class) Issued and Outstanding at May 8, 1997
Webster Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- INDEX Page No. -------- PART I - FINANCIAL INFORMATION Consolidated Statements of Condition at March 31, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Consolidated Financial Statements 10 PART II - OTHER INFORMATION 16 SIGNATURES 17 2
Webster Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CONDITION (Dollars in Thousands, Except Share Data) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, ASSETS 1997 1996 ----------- ----------- <S> <C> <C> Cash and Due from Depository Institutions $ 90,578 $ 100,113 Interest-bearing Deposits 23,702 27 Securities: (Note 2) Trading at Fair Value 62,440 59,331 Available for Sale, at Fair Value 1,243,123 810,989 Held to Maturity, (Market Value: $463,855 in 1997; $500,458 in 1996) 472,465 506,159 Loans Receivable, Net 3,431,896 3,384,465 Segregated Assets, Net 69,889 75,670 Accrued Interest Receivable 30,942 31,400 Premises and Equipment, Net 56,108 56,575 Foreclosed Properties, Net 13,519 12,991 Core Deposit Intangible 44,971 46,442 Prepaid Expenses and Other Assets 43,986 42,116 ----------- ----------- Total Assets $ 5,583,619 $ 5,126,278 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 4,054,179 $ 4,099,501 Federal Home Loan Bank Advances 660,945 510,130 Other Borrowings 420,136 144,627 Advance Payments by Borrowers for Taxes and Insurance 11,953 28,447 Accrued Expenses and Other Liabilities 52,869 51,480 ----------- ----------- Total Liabilities 5,200,082 4,834,185 ----------- ----------- Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust (Note 9) 100,000 -- ----------- ----------- SHAREHOLDERS' EQUITY Cumulative Convertible Preferred Stock, Series B, No shares issued and outstanding at March 31, 1997 and 98,084 shares issued and outstanding at December 31, 1996 -- 1 Common Stock, $.01 par value: Authorized - 30,000,000 shares; Issued - 12,003,116 shares at March 31, 1997 and 12,142,555 shares at December 31, 1995 120 120 Paid-in Capital 153,541 171,766 Retained Earnings 133,270 139,936 Less Treasury Stock at cost, 49,609 shares at March 31, 1997 and 575,274 shares at December 31, 1996 (1,710) (18,801) Less Employee Stock Ownership Plan Shares Purchased with Debt (1,971) (2,574) Unrealized Gains on Securities, Net 287 1,645 ----------- ----------- Total Shareholders' Equity 283,537 292,093 ----------- ----------- Total Liabilities and Shareholders' Equity $ 5,583,619 $ 5,126,278 =========== =========== </TABLE> 3
Webster Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except Share Data) - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1997 1996 -------- -------- INTEREST INCOME: Loans and Segregated Assets $ 67,338 $ 62,608 Securities and Interest-bearing Deposits 24,688 21,571 -------- -------- Total Interest Income 92,026 84,179 -------- -------- INTEREST EXPENSE: Interest on Deposits 39,315 39,480 Interest on Borrowings 11,340 9,822 -------- -------- Total Interest Expense 50,655 49,302 -------- -------- Net Interest Income 41,371 34,877 Provision for Loan Losses (Note 6) 7,025 1,650 -------- -------- Net Interest Income After Provision for Loan Losses 34,346 33,227 -------- -------- NONINTEREST INCOME: Fees and Service Charges 5,603 3,987 Gain on Sale of Loans and Loan Servicing, Net 139 115 Gain on Sale of Securities, Net 398 582 Other Noninterest Income 1,165 1,050 -------- -------- Total Noninterest Income 7,305 5,734 -------- -------- NONINTEREST EXPENSES: Salaries and Employee Benefits 14,596 13,380 Occupancy Expense of Premises 2,949 2,698 Furniture and Equipment Expenses 2,701 1,905 Federal Deposit Insurance Premiums 247 526 Foreclosed Property Expenses and Provisions, Net (Note 4) 437 1,393 Marketing Expenses 1,494 1,422 Core Deposit Intangible Amortization 1,471 913 Non-recurring Expenses (Note 6) 19,858 500 Capital Securities Expense 1,648 -- Other Operating Expenses 5,458 3,942 -------- -------- Total Noninterest Expenses 50,859 26,679 -------- -------- Income (Loss) Before Income Taxes (9,208) 12,282 Income Tax (Benefit) Expense (4,250) 4,594 -------- -------- NET INCOME (LOSS) (4,958) 7,688 Preferred Stock Dividends -- 324 -------- -------- Net Income (Loss) Available to Common Shareholders ($ 4,958) $ 7,364 ======== ======== Net Income (Loss) Per Common Share: Primary ($ 0.41) $ 0.62 Fully Diluted ($ 0.41) $ 0.60 Dividends Declared Per Common Share $ 0.18 $ 0.16 4
Webster Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1997 1996 ------ ----- OPERATING ACTIVITIES: <S> <C> <C> Net Income (Loss) $ (4,958) $ 7,688 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Provision for Loan Losses 7,025 1,650 Provision for Foreclosed Property Losses 63 650 Provision for Depreciation and Amortization 2,171 1,501 Amortization of Securities Premiums, Net (118) 695 Amortization of Hedging Costs, Net 652 101 Amortization and Write-down of Core Deposit Intangible 1,471 913 Amortization of Mortgage Servicing Rights 97 191 Gains on Sale of Foreclosed Properties, Net (151) (348) Loans and Securities Gains, Net (340) (224) Gains on Trading Securities, Net (197) (473) (Increase) Decrease in Trading Securities (5,579) 1,022 Loans Originated for Sale (10,514) (16,758) Sale of Loans, Originated for Sale 10,508 11,990 Decrease in Interest Receivable 458 119 Increase (Decrease) in Interest Payable 938 (878) Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 3,118 (15,273) Decrease in Prepaid Expenses and Other Assets, Net 1,316 1,958 ----------- ----------- Net Cash Provided (Used) by Operating Activ ties 5,960 (5,476) ----------- ----------- INVESTING ACTIVITIES: Purchases of Securities, Available for Sale (503,762) (13,714) Purchases of Securities, Held to Maturity (5,949) (44,362) Maturities of Securities 15,002 28,781 Proceeds from Sale of Securities, Available for Sale 28,469 114,016 Net (Increase) Decrease in Interest-bearing Deposits (23,675) 13,001 Purchase of Loans (65,000) (37,382) Net Decrease in Loans 8,651 12,703 Proceeds from Sale of Foreclosed Properties 1,598 3,786 Net Decrease in Segregated Assets 5,781 5,872 Principal Collected on Mortgage-backed Securities 65,126 48,308 Purchases of Premises and Equipment, Net (1,704) (3,921) Net Cash and Cash Equivalents Received from Bank Acquisition -- 113,551 ----------- ----------- Net Cash (Used) Provided by Investing Activities (475,463) 240,639 ----------- ----------- FINANCING ACTIVITIES: Net Decrease in Deposits (45,322) (10,588) Repayment of FHLB Advances (997,182) (416,413) Proceeds from FHLB Advances 1,147,997 291,749 Repayment of Other Borrowings (710,057) (189,317) Proceeds from Other Borrowings 986,334 156,080 Net Decrease in Advance Payments for Taxes and Insurance (16,494) (8,318) Net Proceeds from Issuance of Capital Securities 97,700 -- Cash Dividends to Common and Preferred Shareholders (1,708) (1,784) Common Stock Repurchased (1,660) -- Exercise of Stock Options 360 497 ----------- ----------- Net Cash Provided (Used) by Financing Activities 459,968 (178,094) ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents (9,535) 57,069 Cash and Cash Equivalents at Beginning of Period 100,113 62,653 ----------- ----------- Cash and Cash Equivalents at End of Period $ 90,578 $ 119,722 =========== =========== SUPPLEMENTAL DISCLOSURES: Income Taxes Paid 1,535 1,681 Interest Paid 42,220 49,591 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer of Loans to Foreclosed Properties 8,159 6,040 </TABLE> 5
Webster Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION ----------------------------------------------------- The accompanying consolidated financial statements include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All adjustments were of a normal recurring nature. The results of operations for the three month period ended March 31, 1997 are not necessarily indicative of the results which may be expected for the year as a whole. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Webster Financial Corporation 1996 Annual Report to shareholders. The consolidated financial statements include the accounts of Webster Financial Corporation ("Webster") and its wholly owned subsidiary, Webster Bank (the "Bank"). On January 31, 1997, Webster acquired DS Bancor, Inc. ("DS Bancor") through a merger transaction. The transaction was accounted for as a pooling of interests; accordingly, the financial statements as of and for the periods prior to the DS Bancor transaction have been restated to reflect the combination. 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 recorded as adjustments to shareholders' equity on a tax effected basis. Securities classified as Trading Securities are carried at fair value with unrealized gains and losses included in earnings. Gains and losses on the sales of securities are recorded using the specific identification method. A summary of securities are as follows (Dollars in Thousands): <TABLE> <CAPTION> March 31, 1997 December 31, 1996 --------------------------- --------------------- Book Estimated Book Estimated Value Fair Value Value Fair Value TRADING SECURITIES: Mortgage-Backed Securities: <S> <C> <C> <C> <C> GNMA $35,205 $35,205 $31,537 $31,537 FHLMC 27,235 27,235 27,794 27,794 -------- --------- --------- -------- 62,440 62,440 59,331 59,331 -------- --------- --------- -------- </TABLE> 6
Webster Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2 - SECURITIES (continued) <TABLE> <CAPTION> March 31, 1997 December 31, 1996 ---------------------------- ------------------------------ Book Estimated Book Estimated Value Fair Value Value Fair Value -------- ------------ ------- ------------ <S> <C> <C> <C> <C> AVAILABLE FOR SALE PORTFOLIO: U.S. Treasury Notes: Matures over 1 within 5 years 2,507 2,522 2,508 2,544 U.S. Government Agency: Matures over 1 within 5 years 12,923 13,008 12,883 12,974 Matures over 5 within 10 years -- -- 9,700 9,638 Matures over 10 years 5,700 5,511 -- -- Corporate Bonds and Notes: Matures within 1 year -- -- 2,000 1,999 Matures over 1 within 5 years 170 172 -- -- Matures over 5 within 10 years 2,492 2,490 2,659 2,655 Mutual Funds* 12,257 12,257 7,216 7,236 Equity Securities: Stock in Federal Home Loan Bank of Boston 41,499 41,499 39,832 39,832 Other Equity Securities 55,014 60,591 32,486 36,644 Mortgage Backed Securities: FNMA 259,621 255,229 142,497 141,944 FHLMC 71,509 71,614 17,214 17,425 GNMA 518,576 518,801 236,393 239,142 Collateralized Mortgage Obligations 241,992 240,398 296,180 294,920 Unamortized Hedge Instruments 17,484 19,031 5,460 4,036 Unrealized Securities Gains, Net 1,379 -- 3,961 -- ------------ ------------- ----------- --------- 1,243,123 1,243,123 810,989 810,989 ------------ ------------- ----------- ---------- HELD TO MATURITY PORTFOLIO: U.S. Treasury Notes: Matures within 1 year 699 700 944 956 U.S. Government Agency: Matures within 1 year 5,225 5,201 6,867 6,867 Matures over 1 within 5 years 23,041 23,454 28,089 28,712 Matures over 5 within 10 years 499 479 499 487 Corporate Bonds and Notes: Matures within 1 year 700 700 301 302 Matures over 1 within 5 years 777 769 1,176 1,173 Matures over 10 years 100 99 100 100 Money Market Preferred Stock 7,500 7,500 8,000 8,000 Mortgage Backed Securities: FHLMC 28,065 28,204 84,862 84,069 FNMA 80,069 79,145 28,859 29,086 GNMA 1,259 1,295 1,309 1,369 Collateralized Mortgage Obligations 324,531 316,309 345,153 339,337 ------------- ------------ ------------ ---------- 472,465 463,855 506,159 500,458 ------------- ----------- ----------- ---------- Total $1,778,028 $1,769,418 $1,376,479 $1,370,778 ============= ============ ============ ========== </TABLE> * Mutual Funds consist primarily of funds invested in money market and short duration instruments. 7
Webster Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3 - NET INCOME PER SHARE -------------------- Primary net income per share is calculated by dividing net income less preferred stock dividends by the weighted-average number of shares of common stock and common stock equivalents outstanding, when dilutive. The common stock equivalents consist of common stock options and warrants. Fully diluted net income per share is calculated by dividing adjusted net income by the weighted-average fully diluted common shares, including the effect of common stock equivalents and the hypothetical conversion into common stock of the Series B 7 1/2% Cumulative Convertible Preferred Stock. The weighted-average number of shares used in the computation of primary net income per share for the three months ended March 31, 1997 was 12,114,585 and for the three months ended March 31, 1996 was 11,842,415. The weighted-average number of shares used in the computation of fully diluted earnings per share for the three months ended March 31, 1997 was 12,183,746 and for the three months ended March 31, 1996 was 12,871,539. NOTE 4 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET ------------------------------------------------- Foreclosed property expenses and provisions, net are summarized as follows (in thousands): Three Months Ended March 31, 1997 1996 Gain on Sale of Foreclosed Property, Net $ (151) $ (348) Provision for Losses on Foreclosed Property 63 650 Rental Income (27) (119) Foreclosed Property Expenses 552 1,210 ------- ------- Foreclosed Property Expenses and Provisions, Net $ 437 $ 1,393 ======= ======= NOTE 5 - REVERSE REPURCHASE AGREEMENTS At March 31, 1997, Webster had short term borrowings through reverse repurchase agreements outstanding. Information concerning borrowings under reverse repurchase agreements is summarized below (dollars in thousands): <TABLE> <CAPTION> BALANCE AT WEIGHTED MATURITY BOOK VALUE MARKET VALUE MARCH 31, 1997 TERM AVERAGE RATE DATE OF COLLATERAL OF COLLATERAL - ------------------- -------------- ------------ ------------------ --------------- ---------------- <S> <C> <C> <C> <C> <C> $230,790 1 to 3 months 5.41% Less than 3 months $237,366 $238,697 </TABLE> The securities underlying the reverse repurchase agreements are all U.S. Agency collateral and have been delivered to the broker-dealers who arrange the transactions. Webster uses reverse repurchase agreements when the cost of such borrowings is less than other funding sources. The average balance and the maximum amount of outstanding reverse repurchase agreements at any month-end during the 1997 first quarter was $165.3 million and $245.8 million, respectively. The total balance for reverse repurchase agreements outstanding at March 31, 1996 was $93.5 million. 8
Webster Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6 - DS BANCOR ACQUISITION --------------------- In connection with the acquisition of DS Bancor, Inc., which was completed on January 31, 1997, Webster recorded approximately $19.9 million in merger-related charges and a $5.6 million addition to the provision for loan losses to conform to Webster's credit policies. The following table presents a summary of the merger-related accrued liability (in thousands): Balance of DS Bancor merger-related accrual at December 31, 1996 $ 0 Additions 19,900 Compensation (severance and related costs) (6,500) Data Processing Contract Termination (1,100) Write down of fixed assets (600) Transaction costs (including investment bankers, attorneys and accountants) (1,700) Merger related and miscellaneous expenses (2,500) -------- Balance of DS Bancor merger-related accrual at March 31, 1997 $ 7,500 ======== The remaining liability of $7.5 million represents, for the most part, an accrual for data processing contract termination and the estimated loss on sale of excess fixed assets due to consolidation of overlapping branch locations. NOTE 7 - ACCOUNTING STANDARDS -------------------- In September 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which was amended by SFAS No. 127 in December 1996 to defer the effective date of certain provisions of SFAS No. 125 for one year. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control of the underlying assets or liabilities transferred. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. It is expected that the provisions of this statement will not have a material impact on the financial results of the corporation. On January 1, 1997, Webster adopted SFAS No. 125, except as amended by SFAS No.127, with no material impact on its financial results. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This statement simplifies the standards for computing and presenting earnings per share previously found in APB Opinion No. 15 and makes them comparable to international standards. It replaces the presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. It is expected that the implementation of this statement will not have a material impact on the financial results of Webster. This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. NOTE 8 - CONVERSION OF CONVERTIBLE PREFERRED STOCK ------------------------------------------ During the month of January 1997, preferred stockholders converted the remaining 98,084 shares of convertible preferred shares into 563,002 shares of common stock. NOTE 9 - CAPITAL-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST. ----------------------------------------------------------------------- On January 30, 1997, Webster completed the sale of $100 million of Webster Capital Trust I Capital Securities. Webster Capital Trust I is a business trust formed for the purpose of issuing capital securities and investing the proceeds in junior subordinated debentures, due 2027, issued by Webster. The primary assets of the Trust are the junior subordinated debentures. Interest payments on the debenutures are tax deductible by Webster. The securities have an annual interest rate of 9.36%, payable semiannually, beginning July 29, 1997. Webster will use the capital for general corporate purposes. 9
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- GENERAL Webster Financial Corporation ("Webster" ), through its subsidiary, Webster Bank, (the "Bank") delivers financial services to individuals, families and businesses located throughout Connecticut. Webster Bank emphasizes three business lines - consumer, business and mortgage banking, each supported by centralized administration and operations. The Corporation has grown significantly in recent years, primarily through a series of acquisitions which have expanded and strengthened its franchise. Webster currently serves customers from 78 full service banking offices located in Hartford, New Haven, Fairfield, Litchfield, and Middlesex counties in Connecticut. CHANGES IN FINANCIAL CONDITION - ------------------------------ Total assets were $5.6 billion at March 31, 1997, an increase of $457.3 million from $5.1 billion at December 31, 1996. The increase in total assets is due primarily to the purchase of securities and an increase in net loans of $401.5 million and $47.4 million, respectively. The increases were funded, in part, by the capital received in January 1997 discussed below. Net Segregated Assets decreased to $69.9 million at March 31, 1997 from $75.7 million at December 31, 1996 due primarily to principal repayments of $5.7 million and net chargeoffs of $99,000. Total net foreclosed properties were $13.5 million at March 31, 1997 compared to $13.0 million at December 31, 1996. The net increase in foreclosed properties of $500,000 for the current quarter was primarily attributable to additions of $4.4 million, that were offset by sales of $1.5 million and valuation write downs of $2.4 million. Total liabilities were $5.2 billion at March 31, 1997, an increase of $365.9 million from $4.8 billion at December 31, 1996. The increase in total liabilities is due primarily to a net increase in borrowings of $426.3 million that was partially offset by a decrease of $45.3 million in deposits. On January 30, 1997, Webster completed the sale of $100 million of Webster Capital Trust I Capital Securities. Webster Capital Trust I is a business trust formed for the purpose of issuing capital securities and investing the proceeds in subordinated debentures, due 2027, issued by Webster. Interest payments on the debentures are tax deductible by Webster. The securities have an annual interest rate of 9.36%, payable semiannually, beginning July 29, 1997. Webster will use the net proceeds for general corporate purposes. Shareholders' equity was $283.5 million at March 31, 1997 and $292.1 at December 31, 1996. At March 31, 1997, the Bank had Tier 1 leveraged, Tier 1 risk-based, and total risk-based capital ratios of 6.09%, 12.23% and 13.49% , respectively. The Bank met the regulatory capital requirements to be categorized as a "well capitalized" institution at March 31, 1997. ASSET QUALITY - ------------- Webster devotes significant attention to maintaining high asset quality through conservative underwriting standards, active servicing of loans, aggressively managing nonperforming assets and maintaining adequate reserve coverage on nonaccrual assets. At March 31, 1997, residential and consumer loans comprised approximately 87% of the loan portfolio. All fixed income securities must have an investment rating in the top two rating categories by a major rating service at time of purchase. Unless otherwise noted, the information set forth concerning loans, nonaccrual loans, foreclosed properties and allowances for loan losses excludes Segregated Assets which are discussed separately. 10
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- A breakdown of loans receivable, net by type as of March 31, 1997 and December 31, 1996 follows (in thousands): March 31, 1997 December 31, 1996 --------------- ----------------- Residential Mortgage Loans $2,640,860 $2,574,304 Commercial Real Estate Loans 266,072 267,265 Commercial Loans 180,715 194,220 Consumer Loans (Including Home Equity) 392,502 390,284 ---------- ---------- Total Loans 3,480,149 3,426,073 Allowance for Loan Losses (48,253) (41,608) ----------- ---------- Loans Receivable, Net $3,431,896 $3,384,465 =========== ========== Included above at March 31, 1997 and December 31, 1996 were loans held for sale of $3.8 million and $3.9 million, respectively. Loans held for sale at March 31, 1997 and December 31, 1996 represented one-to-four family residential mortgage loans. The following table details the nonaccrual assets at March 31, 1997 and December 31, 1996 (in thousands): March 31, 1997 December 31, 1996 --------------- ----------------- Loans Accounted For on a Nonaccrual Basis: Residential Real Estate $23,901 $24,067 Commercial 11,965 12,874 Consumer 2,867 3,116 -------- --------- Total Nonaccrual Loans 38,733 40,057 Foreclosed Properties: Residential and Consumer 5,772 5,082 Commercial 7,747 7,909 --------- ---------- Total Nonaccrual Assets $52,252 $53,048 ========= ========== The net decrease in nonaccrual assets of $796,000 at March 31, 1997 as compared to the December 31, 1996 balance is due primarily to payoffs, foreclosed property sales and charge-offs. At March 31, 1997, Webster's allowance for losses on loans of $48.3 million represented 124.6% of nonaccrual loans and its total allowances for losses on nonaccrual assets of $48.8 million amounted to 92.4% of nonaccrual assets. A detail of the changes in the allowances for losses on loans and foreclosed property for the three months ended March 31, 1997 follows (in thousands): <TABLE> <CAPTION> Allowances For Losses On ------------------------------------ Impaired Foreclosed Total Loans Loans Properties Allowance for Losses ----- ----- ---------- -------------------- <S> <C> <C> <C> <C> Balance at December 31, 1996 $39,152 $ 2,456 $ 740 $42,348 Provisions for Losses 1,375 - 27 1,402 Provision for DS Bancor Loan Losses 5,650 - - 5,650 Allocation to General Allowance 1,600 (1,600) - - Losses Charged to Allowances (2,715) - (283) (2,998) Recoveries Credited to Allowances 2,335 - 76 2,411 -------- --------- ---------- -------- Balance at March 31, 1997 $ 47,397 $ 856 $ 560 $ 48,813 ======== ========= ========= ======== </TABLE> 11
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Segregated Assets, Net Segregated Assets, Net at March 31, 1997 included the following assets purchased from the FDIC in the First Constitution Acquisition which are subject to a loss-sharing arrangement with the FDIC (in thousands): <TABLE> <CAPTION> March 31, 1997 December 31, 1996 ---------------- ------------------ <S> <C> <C> Commercial Real Estate Loans $ 53,394 $ 58,745 Commercial Loans 6,449 6,606 Multi-Family Real Estate Loans 12,502 12,772 Foreclosed Properties 398 406 ----------- --------- 72,743 78,529 Allowance for Segregated Assets Losses (2,854) (2,859) ---------- ---------- Segregated Assets, Net $ 69,889 $ 75,670 ========== ======== </TABLE> Under the Purchase and Assumption Agreement with the FDIC relating to the First Constitution Acquisition, during the first five years after October 2, 1992 (the "Acquisition Date"), the FDIC is required to reimburse Webster quarterly for 80% of all net charge-offs (i.e., the excess of charge-offs over recoveries) and certain permitted expenses related to the Segregated Assets acquired by Webster. During the sixth and seventh years after the Acquisition Date, Webster is required to pay quarterly to the FDIC an amount equal to 80% of the recoveries during such years on Segregated Assets which were previously charged off after deducting certain permitted expenses related to those assets. Webster is entitled to retain 20% of such recoveries during the sixth and seventh years following the Acquisition Date and 100% thereafter. Upon termination of the seven-year period after the Acquisition Date, if the sum of net charge-offs on Segregated Assets for the first five years after the Acquisition Date plus permitted expenses during the entire seven-year period, less any recoveries during the sixth and seventh year on Segregated Assets charged off during the first five years, exceeds $49.2 million, the FDIC is required to pay Webster an additional 15% of any such excess over $49.2 million at the end of the seventh year. At March 31, 1997, cumulative net charge-offs aggregated $54.1 million. The reduction of $5.8 million for gross Segregated Assets for the current quarter is the result of approximately $340,000 in gross charge-offs and $5.7 million in payments received. In the 1997 first quarter, Webster received reimbursements for net charge-offs and eligible expenses on Segregated Assets aggregating $926,000. A reimbursement request totaling $89,000 has been submitted to the FDIC for the first quarter 1997 period. A detail of changes in the allowance for Segregated Assets losses follows (in thousands): Balance at December 31, 1996 $ 2,859 Charge-offs (17) Recoveries 12 ------- Balance at March 31, 1997 $ 2,854 ======= 12
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table details nonaccrual Segregated Assets at March 31, 1997 and December 31, 1996 (in thousands): <TABLE> <CAPTION> March 31, 1997 December 31, 1996 ---------------- ------------------ Segregated Assets Accounted For on a Nonaccrual Basis: <S> <C> <C> Commercial Real Estate Loans $ 3,725 $ 3,337 Commercial Loans 192 192 Multi-Family Real Estate Loans 723 495 -------- ------ Total Nonaccrual Loans 4,640 4,024 Foreclosed Properties: Commercial Real Estate 269 269 Multi-Family Real Estate 129 138 -------- ------- Total Nonaccrual Segregated Assets $ 5,038 $ 4,431 ======== ======= </TABLE> 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. To this end, Webster's strategies for managing interest-rate risk are responsive to changes in the interest-rate environment and to market demands for particular types of deposit and loan products. Management measures interest-rate risk using simulation, price elasticity and GAP analyses. Based on Webster's asset/liability mix at March 31, 1997, management's simulation analysis of the effects of changing interest rates estimates that an instantaneous +/- 100 basis point change in interest rates would change net interest income by less than 2%. Estimates regarding the impact of changes in interest rates are based on a number of assumptions, and therefore, Webster can provide no assurance as to the actual impact of such changes. Management believes that its interest-rate risk position represents a reasonable amount of interest-rate risk at March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Under regulations of the Office of Thrift Supervision, Webster Bank is required to maintain assets which are readily marketable in an amount equal to 5% or more of its net withdrawable deposits plus short-term borrowings. At March 31, 1997, Webster Bank had a liquidity ratio of 5.9% and was in compliance with the applicable regulations. Webster Bank had mortgage commitments outstanding of $70.2 million, non-mortgage commitments of $26.4 million, unused home equity credit lines of $255.2 million, available credit card lines of $60.2 million and commercial lines and letters of credit of $95.7 million. 13
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1996 GENERAL - ------- Net income for the current three month period ended March 31, 1997, excluding non-recurring items, was $10.0 million, or $.82 per fully diluted share, an increase of $2.0 million, as compared to $8.0 million or $.62 per fully diluted share for the same period in 1996. Including the non-recurring after tax charges of $15.0 million related to Webster's acquisition of DS Bancor, Inc., Webster reported a net loss of $5.0 million or $0.41 per fully diluted share for the 1997 first quarter. Results for the first quarter of 1996 included $290,000 of after tax non-recurring conversion costs related to the 20 branches acquired from Shawmut Bank Connecticut National Association (the "Shawmut Transaction"). The results of operations for the 1996 first quarter period included 44 days of income and expense related to the Shawmut Transaction, consummated on February 16, 1996. NET INTEREST INCOME ------------------- Net interest income for the three month period ended March 31, 1997 amounted to $41.4 million, an increase of $6.5 million or 19% as compared to $34.9 million for the same period in 1996. The increase is primarily attributable to an increased volume of average interest-earning assets and interest-bearing liabilities and a decrease in the cost of interest-bearing liabilities. The net interest rate spread for the three months ended March 31, 1997 was 3.20% as compared to 2.96% for the same period in 1996. Interest Income for the three months ended March 31, 1997 amounted to $92.0 million as compared to $84.2 million for the same period in 1996. The increase is due primarily to a higher volume of average interest-earning assets, offset by a decrease in the yield on loans. The yield on loans for the current three month period was 7.72% as compared to 7.86% for the same period a year earlier. Interest Expense for the three months ended March 31, 1997 amounted to $50.7 million compared to $49.3 million for the same period in 1996. This increase is due primarily to a higher amount of average interest-bearing liabilities offset by a decrease in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities decreased to 4.16% for the three months ended March 31, 1997 compared to 4.50% for the same period in 1996. Interest expense on borrowings for the three months ended March 31, 1997 amounted to $11.3 million as compared to $9.8 million for the same period in 1996. The increase in interest expense on borrowings is primarily attributed to a higher volume of borrowings offset by a lower cost of funds. PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses amounted to $7.0 million for the three month period ended March 31, 1997 as compared to $1.7 million for the same period in 1996. Included in the provision for the current quarter was a $5.6 million provision related to loans acquired in the DS Bancor Acquisition. At March 31, 1997, the allowance for loan losses was $48.3 million and represented 124.6% of nonaccrual loans, compared to $53.0 million and 102.6% a year earlier. 14
Webster Financial Corporation and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NONINTEREST INCOME - ------------------ Noninterest income increased to $7.3 million for the three month period ended March 31, 1997 from $5.7 million in the same period in 1996. The increase was due primarily to a $1.6 million increase in fees and service charges, offset by a $160,000 decrease in net gains from loan and securities sales. There were $537,000 of net gains on sales of loans and securities for the three months ended March 31, 1997 as compared to $697,000 of net gains for the same period in 1996. NONINTEREST EXPENSES - -------------------- Noninterest expenses for the three months ended March 31, 1997 amounted to $50.9 million as compared to $26.7 million for the same period in 1996. The increase in noninterest expenses for the current quarter is due primarily to $19.9 million in non-recurring expenses related to the acquisition of DS Bancor, Inc., completed on January 31, 1997. Additionally, increases in salaries and employee benefits, furniture and equipment, core deposit intangible amortization, Capital Securities expenses and other operating expenses were offset by decreases in foreclosed property expenses and FDIC premiums. INCOME TAXES - ------------ Webster recorded an income tax benefit for the three months ended March 31, 1997 of $4.3 million compared to income tax expense of $4.6 million for the comparable 1996 quarter. The income tax benefit was due to the net loss recorded by Webster as a result of the $25.4 million of non-recurring expenses related to the DS Bancor, Inc. Acquisition. 15
Webster Financial Corporation and Subsidiaries - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS - Not Applicable Item 2. CHANGES IN SECURITIES - Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Registrant had a special meeting of shareholders on January 30, 1997. The Registrant's annual meeting of shareholders was held on April 17, 1997. (b) Not Applicable (c) Not Applicable (d) Not Applicable Item 5. OTHER INFORMATION On April 4, 1997, Webster announced that it had signed a definitive merger agreement by which Webster will acquire People's Savings Financial Corp., a $482 million savings bank headquartered in New Britain, CT., on a stock for stock basis valued at $34 per share in a tax free exchange. The acquisition is expected to close in the third quarter of 1997 and be accounted for as a pooling of interests. On May 6, 1997, Webster announced that it had entered into an Agreement and Plan of Merger by which Webster will acquire Sachem Trust National Association ("Sachem Trust"), a trust company headquartered in Guilford, CT with $300 million in trust assets, in a tax free stock-for-stock exchange. Under the terms of the Agreement, Sachem Trust shareholders will receive 0.493 shares of Webster common stock for each share of Sachem Trust common stock. Webster will issue up to 85,333 shares of Webster common stock in exchange for all 173,000 outstanding shares of Sachem Trust. Ten percent of the consideration will be held in escrow pending certain conditions and may be used by Webster to fund certain expenses detailed in the merger agreement. Sachem Trust is the largest independent trust company in Connecticut and operates trust offices in Guilford, Westport and Greenwich. The acquisition is expected to close in the third quarter of 1997 and be accounted for as a purchase. Webster plans to Repurchase shares of Webster common stock up to the total number of shares issued to Sachem Trust shareholders. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. 3. Bylaws of Registrant, as amended Exhibit No. 27. Financial Data Table (b) Reports on Form 8-K Form 8K filed January 2 , 1997 (announcing the approval from the OTS to acquire DS Bancor, Inc.) Form 8K filed February 14, 1997 (announcing the completion of the acquisition of DS Bancor, Inc.) Form 8K filed February 21 , 1997 (announcing the date for the Registrant's annual meeting of shareholders) 16
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: May 15, 1997 By: /s/ John V. Brennan ---------------------- -------------------- John V. Brennan Executive Vice President Chief Financial Officer and Treasurer Date: May 15, 1997 By: /s/ Peter J. Swiatek ---------------------- --------------------- Peter J. Swiatek Controller 17