<PAGE>
As filed with the Securities and Exchange Commission on July 28, 1995
Registration No. 33-_____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Webster Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware 6712 06-1187536
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
------------------------
First Federal Plaza
Waterbury, Connecticut 06720
(203) 753-2921
(Address, including zip code, and telephone
number, including area code, of Registrant's principal
executive offices)
------------------------
John V. Brennan
Executive Vice President
Webster Financial Corporation
First Federal Plaza
Waterbury, Connecticut 06702
(203) 753-2921
(Name, address including zip code, and telephone number,
including area code, of Registrant's agent for service)
------------------------
Copy to:
Charles E. Allen, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
Calculation of Registration Fee
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered offering price per aggregate offering registration fee
registered unit price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par 1,337,618 $23.24* $31,086,242.32* $10,719.40*
value $.01 per share
- ------------------------------------------------------------------------------------------------------------------
<FN>
* Estimated pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities
Act of 1933 based upon the average of the high and low price for shares of
common stock of Shelton Bancorp, Inc. as reported on the Nasdaq National
Market on July 26, 1995 and the exchange ratio prescribed by the Agreement
and Plan of Merger.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
WEBSTER FINANCIAL CORPORATION
Cross Reference Sheet
Pursuant to Item 501 of Regulation S-K, the following table sets forth
the location in the Proxy Statement/Prospectus of the information required by
Part I of Form S-4.
<TABLE>
<CAPTION>
Items of Form S-4 Location in Prospectus
----------------- ----------------------
A. INFORMATION ABOUT THE TRANSACTION
<S> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus........................... Facing Page; Cross Reference Sheet; and Front
Cover Page of Joint Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Available Information; Incorporation of Certain
Documents by Reference; and Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............................ Summary; Certain Considerations; and Market
Prices and Dividends
4. Terms of the Transaction................................... Summary; The Merger
5. Pro Forma Financial Information............................ Pro Forma Combined Financial Statements
6. Material Contracts With the Company Being
Acquired................................................. Not applicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................................... Not applicable
8. Interests of Named Experts and Counsel..................... Not applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Not applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants................ Summary; Certain Considerations; Incorporation
of Certain Documents by Reference; and
Description of Capital Stock and Comparison of
Shareholder Rights
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
11. Incorporation of Certain Information by
Reference................................................ Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants.............................................. Not applicable
13. Incorporation of Certain Information by
Reference................................................ Not applicable
14. Information with Respect to Registrants Other
Than S-3 or S-2 Registrants.............................. Not applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies.................. Not applicable
16. Information with Respect to S-2 or S-3
Companies................................................ Summary; The Merger; Shelton Bancorp, Inc.;
Market Prices and Dividends; Appendix B and
Appendix C
17. Information with Respect to Companies Other
Than S-3 or S-2 Companies................................ Not applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited....................... Summary; Shelton Meeting; Webster Meeting; The
Merger; Shelton Stock Ownership by Certain
Persons; Description of Capital Stock and
Comparison of Shareholder Rights
19. Information if Proxies, Consents or
Authorizations are Not to be Solicited or
in an Exchange Offer..................................... Not applicable
</TABLE>
ii
<PAGE>
Webster Financial
Corporation
August __, 1995
To the Shareholders of
Webster Financial Corporation:
You are cordially invited to attend a special meeting of shareholders
(the "Webster Meeting") of Webster Financial Corporation ("Webster") to be held
on September ___, 1995 at 4:00 p.m. at the Elton Ballroom, 30 West Main Street,
Waterbury, Connecticut.
As described in the enclosed Joint Proxy Statement/Prospectus, at the
Special Meeting, you will be asked to approve the proposed issuance of up to
1,337,618 shares of common stock of Webster ("Webster Stock") to shareholders of
Shelton Bancorp, Inc. ("Shelton") in connection with the acquisition of Shelton
by Webster. In the acquisition, Shelton shareholders will receive .92 of a share
of Webster Stock for each share of Shelton common stock. The presence, in person
or by proxy, of at least a majority of the Webster Stock entitled to vote at the
Webster Meeting, and the affirmative vote of the holders of a majority of the
votes cast, is necessary to approve the issuance of these shares of Webster
Stock.
Your Board of Directors has unanimously approved the issuance of the
shares of Webster Stock and recommends that you vote "FOR" approval of the
issuance of these shares.
You are urged to read the accompanying Joint Proxy
Statement/Prospectus, which provides you with a description of the terms of the
acquisition. It is very important that your shares be represented at the Webster
Meeting. Whether or not you plan to attend the Webster Meeting, you are
requested to complete, date and sign the proxy card and return it as soon as
possible in the enclosed postage paid envelope.
Sincerely,
JAMES C. SMITH
Chairman and Chief Executive Officer
First Federal Plaza Waterbury, Connecticut 06702
<PAGE>
WEBSTER FINANCIAL CORPORATION
First Federal Plaza
Waterbury, Connecticut 06702
-------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
SEPTEMBER __, 1995
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Webster Meeting") of Webster Financial Corporation ("Webster") will be held on
September __, 1995 at 4:00 p.m. at the Elton Ballroom, 30 West Main Street,
Waterbury, Connecticut for the following purposes:
1. To authorize the issuance of up to 1,337,618 shares of
common stock of Webster ("Webster Stock") to shareholders of Shelton
Bancorp, Inc. ("Shelton") in connection with the acquisition of Shelton
by Webster pursuant to an agreement and plan of merger, dated June 20,
1995, as amended, among Webster, Webster Acquisition Corp. and Shelton
(the "Merger Agreement"). As more fully described in the Joint Proxy
Statement/Prospectus, the Merger Agreement provides for Webster to
issue .92 of a share of Webster Stock for each outstanding share of
Shelton common stock in the acquisition; and
2. To transact such other business as may properly come before
the Webster Meeting, or any adjournments thereof.
The Board of Directors has fixed the close of business on August __,
1995 as the record date for the determination of shareholders of Webster
entitled to notice of and to vote at the Webster Meeting. Only holders of
Webster Stock of record at the close of business on that date will be entitled
to notice of and to vote at the Webster Meeting or any adjournments thereof.
By Order of the Board of Directors
JAMES C. SMITH
Chairman and Chief Executive Officer
Waterbury, Connecticut
August __, 1995
WE URGE YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND
RETURN IT AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR
NOT YOU PLAN TO ATTEND THE WEBSTER MEETING IN PERSON. YOUR PROXY MAY BE REVOKED
IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT
ANY TIME BEFORE IT IS VOTED AT THE WEBSTER MEETING.
<PAGE>
SHELTON BANCORP, INC.
375 Bridgeport Avenue
Shelton, Connecticut 06484
August __, 1995
To the Shareholders of
Shelton Bancorp, Inc.:
You are cordially invited to attend a special meeting of shareholders
(the "Shelton Meeting") of Shelton Bancorp, Inc. ("Shelton") to be held on
September ___, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee Terrace,
Ansonia, Connecticut.
As described in the enclosed Joint Proxy Statement/Prospectus, at the
Shelton Meeting, you will be asked to approve an agreement and plan of merger,
dated June 20, 1995, as amended (the "Merger Agreement"), pursuant to which
Shelton and Shelton Savings Bank would be acquired by Webster Financial
Corporation ("Webster"). The Merger Agreement provides for the acquisition to
occur by merging a wholly-owned subsidiary of Webster formed for such purpose
into Shelton (the "Merger"). As part of the Merger, each outstanding share of
Shelton common stock ("Shelton Stock") will be converted into .92 of a share of
Webster common stock ("Webster Stock") in a tax free exchange, plus cash to be
paid in lieu of fractional shares.
Your Board of Directors has determined that the Merger is in the best
interests of Shelton and its shareholders and has unanimously approved the
Merger Agreement. The Board unanimously recommends that you vote "FOR" approval
of the Merger Agreement.
Consummation of the Merger is subject to certain conditions, including
approval of the Merger Agreement by at least two-thirds of the outstanding
shares of Shelton Stock entitled to be voted at the Shelton Meeting and to the
receipt of certain regulatory approvals. The Merger Agreement is also subject to
the approval by the Webster shareholders of the issuance of the shares of
Webster Stock in the Merger.
Alex. Brown & Sons Incorporated, Shelton's financial advisor in
connection with the Merger, has delivered its written opinion to Shelton's Board
of Directors that, as of the date of the Merger Agreement, the consideration to
be received by the shareholders of Shelton in the Merger was fair to such
holders from a financial point of view. The written opinion of Alex. Brown &
Sons Incorporated is reproduced in full as Appendix A to the accompanying Joint
Proxy Statement/Prospectus.
You are urged to read the Joint Proxy Statement/Prospectus, which
provides you with a description of the terms of the Merger. It is very important
that your shares be represented at the Shelton Meeting. Whether or not you plan
to attend the Shelton Meeting, you are requested to complete, date and sign the
proxy card and return it as soon as possible in the enclosed postage paid
envelope. Failure to return a properly executed proxy card or to vote at the
Shelton Meeting will have the same effect as a vote against the Merger
Agreement.
Sincerely,
KENNETH E. SCHAIBLE
President and Treasurer
<PAGE>
SHELTON BANCORP, INC.
375 Bridgeport Avenue
Shelton, Connecticut 06484
-------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
SEPTEMBER __, 1995
-------------------
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Shelton Meeting") of Shelton Bancorp, Inc. ("Shelton") will be held on
September __, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee Terrace,
Ansonia, Connecticut for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
an agreement and plan of merger, dated June 20, 1995, as amended, among
Webster Financial Corporation ("Webster"), Webster Acquisition Corp.
and Shelton (the "Merger Agreement"). As more fully described in the
Joint Proxy Statement/Prospectus, the Merger Agreement provides for
Shelton and Shelton Savings Bank to be acquired by Webster through a
merger of a wholly-owned subsidiary of Webster formed for such purpose
into Shelton (the "Merger"). As part of the Merger, each outstanding
share of Shelton common stock ("Shelton Stock") will be converted into
.92 of a share of Webster common stock in a tax free exchange, plus
cash to be paid in lieu of fractional shares; and
2. To transact such other business as may properly come before
the Shelton Meeting, or any adjournments thereof, including, without
limitation, a motion to adjourn the Shelton Meeting to another time
and/or place for the purpose of soliciting additional proxies in order
to approve the Merger Agreement or otherwise.
The Board of Directors of Shelton has fixed the close of business on
August __, 1995 as the record date for the determination of shareholders
entitled to notice of and to vote at the Shelton Meeting. Only holders of
Shelton Stock of record at the close of business on that date will be entitled
to notice of and to vote at the Shelton Meeting or any adjournments thereof.
By Order of the Board of Directors
KENNETH E. SCHAIBLE
President and Treasurer
Shelton, Connecticut
August __, 1995
WE URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SHELTON MEETING IN PERSON. YOUR PROXY MAY BE REVOKED
IN THE MANNER DESCRIBED IN THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AT
ANY TIME BEFORE IT IS VOTED AT THE SHELTON MEETING.
<PAGE>
SHELTON BANCORP, INC. WEBSTER FINANCIAL CORPORATION
375 Bridgeport Avenue First Federal Plaza
Shelton, Connecticut 06484 Waterbury, Connecticut 06702
JOINT PROXY STATEMENT
----------------------
WEBSTER FINANCIAL CORPORATION
PROSPECTUS
1,337,618 Shares of Common Stock
----------------------
This Joint Proxy Statement/Prospectus is being furnished to
shareholders of Shelton Bancorp, Inc. ("Shelton") and to shareholders of Webster
Financial Corporation ("Webster"). This Joint Proxy Statement/Prospectus relates
to the special meeting of shareholders of Shelton (the "Shelton Meeting") to be
held on September ___, 1995 at 10:00 a.m. at Rapp's Paradise Inn, 557 Wakelee
Terrace, Ansonia, Connecticut, and to the special meeting of shareholders of
Webster (the "Webster Meeting") to be held on September __, 1995 at 4:00 p.m. at
the Elton Ballroom, 30 West Main Street, Waterbury, Connecticut (collectively,
the "Shareholders Meetings"), and to any adjournments of the Shareholders
Meetings. This Joint Proxy Statement/Prospectus is first being mailed to
shareholders of Shelton and to shareholders of Webster on or around August ___,
1995.
At the Shelton Meeting, the principal item of business will be to
consider and vote upon an agreement and plan of merger, dated June 20, 1995, as
amended, among Webster, Webster Acquisition Corp. ("Merger Sub"), and Shelton
(the "Merger Agreement"). The Merger Agreement provides for Shelton to be
acquired by Webster through a merger of Merger Sub, a wholly-owned subsidiary of
Webster formed for such purpose, into Shelton (the "Merger"). As part of the
Merger, each outstanding share of Shelton common stock, par value $1.00 per
share ("Shelton Stock"), will be converted into .92 of a share of Webster common
stock, par value $.01 per share ("Webster Stock") (the "Exchange Ratio"), plus
cash in lieu of fractional shares. Based on the last reported sales price per
share of Webster Stock on August __, 1995 of $___ and the Exchange Ratio, the
calculated value of each share of Shelton Stock to be exchanged in the Merger is
$_____. No assurance can be given as to the market price of Webster Stock at or
after consummation of the Merger. Because the market price of Webster Stock is
subject to fluctuation, the value of the shares of Webster Stock that holders of
Shelton Stock will receive in the Merger may materially increase or decrease
prior to or after consummation of the Merger. See "MARKET PRICES AND DIVIDENDS."
In connection with the Merger Agreement, Shelton has granted Webster an
irrevocable option (the "Option") to purchase up to 267,324 shares of newly
issued Shelton Stock at a purchase price of $17.00 per share upon the occurrence
of certain events. For a more detailed description of the Merger and the Option,
see "THE MERGER." The Merger is subject to various conditions, including
approvals of applicable federal and Connecticut regulatory authorities. This
Joint Proxy Statement/Prospectus also constitutes a prospectus of Webster with
respect to up to 1,337,618 shares of Webster Stock to be issued to Shelton
shareholders as part of the Merger.
At the Webster Meeting, the principal item of business will be to
authorize the issuance of up to 1,337,618 shares of Webster Stock to Shelton
shareholders as part the Merger.
1
<PAGE>
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), ANY STATE SECURITIES COMMISSION,
THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), OR THE CONNECTICUT COMMISSIONER OF BANKING (THE
"CONNECTICUT COMMISSIONER"), NOR HAS THE SEC, ANY STATE SECURITIES COMMISSION,
THE OTS, THE FDIC, OR THE CONNECTICUT COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF WEBSTER STOCK OFFERED HEREBY ARE
NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED BY THE FDIC, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY.
The information set forth in this Joint Proxy Statement/Prospectus
concerning Shelton has been furnished by Shelton. The information concerning
Webster and Merger Sub has been furnished by Webster. The description of the
Merger Agreement and other documents in this Joint Proxy Statement/Prospectus is
qualified by reference to the text of those documents, copies of which will be
provided without charge upon written or oral request addressed to Lee A. Gagnon,
Executive Vice President, Chief Operating Officer and Secretary of Webster
Financial Corporation, First Federal Plaza, Waterbury, Connecticut 06702,
telephone (203) 753-2921.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, OR
INCORPORATED BY REFERENCE HEREIN, IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY SHELTON OR WEBSTER OR THE OFFERING OF WEBSTER STOCK MADE HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY SHELTON OR WEBSTER. THIS JOINT PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY WEBSTER STOCK OFFERED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR
FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN
OFFER, OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE WEBSTER STOCK
OFFERED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF SHELTON OR WEBSTER OR THE INFORMATION HEREIN OR THE DOCUMENTS OR
REPORTS INCORPORATED BY REFERENCE SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
----------------------
The date of this Joint Proxy Statement/Prospectus is August __, 1995.
2
<PAGE>
TABLE OF CONTENTS
Page
Available Information....................... 4
Incorporation of Certain Documents
by Reference........................... 4
Summary .................................. 6
The Parties............................ 6
The Merger............................. 7
Comparison of Shareholder Rights....... 10
Market Prices of Common Stock.......... 11
Comparative Per Share Data............. 11
Summary Financial and Other
Data............................... 13
Certain Considerations...................... 19
Issuance of Webster Stock.............. 19
Legislative and General Regulatory
Developments....................... 19
Sources of Funds for Dividends;
Stock Repurchases.................. 20
Effect of Interest Rate Fluctuations... 20
Shelton Meeting............................. 21
Matters to be Considered at the
Shelton Meeting.................... 21
Record Date and Voting ................ 21
Vote Required; Revocability of
Proxies............................ 22
Solicitation of Proxies................ 22
Webster Meeting............................. 22
Matters to be Considered at the
Webster Meeting.................... 22
Record Date and Voting................. 23
Vote Required; Revocability of
Proxies................................ 24
Solicitation of Proxies................ 24
The Merger.................................. 24
The Parties............................ 24
Background of the Merger............... 25
Recommendations of Shelton
Board of Directors................. 26
Purpose and Effects of the Merger...... 27
Structure.............................. 27
Exchange Ratio......................... 28
Regulatory Approvals................... 29
Conditions to the Merger............... 30
Conduct of Business Pending
the Merger............................. 31
Third Party Proposals.................. 31
Expenses; Breakup Fee.................. 31
Opinion of Financial Advisor........... 32
Certain Provisions of the Merger
Agreement.............................. 35
Termination and Amendment of
the Merger Agreement................... 35
Certain Federal Income Tax
Consequences........................... 36
Accounting Treatment................... 36
Resales of Webster Stock Received in
the Merger............................. 36
No Appraisal Rights.................... 37
Interests of Certain Persons in
the Merger............................. 37
Option Agreement....................... 39
Pro Forma Combined Financial
Statements......................... 41
Shelton Bancorp, Inc........................ 48
General................................ 48
Competition............................ 48
Regulation............................. 48
Economic Conditions and
Governmental Policy................ 49
Taxation............................... 49
Market Prices and Dividends................. 50
Shelton Stock Ownership by
Certain Persons........................ 52
Description of Capital Stock and
Comparison of Shareholder Rights....... 52
Webster Stock.......................... 52
Series B Stock......................... 53
Senior Notes........................... 54
Certificate of Incorporation and Bylaw
Provisions............................. 55
Applicable Law......................... 57
Legal Matters............................... 58
Experts ................................... 58
Appendix A -- Opinion of Alex. Brown
& Sons, Incorporated................... A-1
Appendix B -- Shelton Consolidated
Financial Statements - June 30
Year End............................... B-1
Appendix C -- Shelton Consolidated
Financial Statements - March 31
Unaudited.............................. C-1
3
<PAGE>
AVAILABLE INFORMATION
Shelton and Webster are both subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder, and in accordance therewith file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, such reports, proxy statements and other information filed
by Shelton and Webster may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices located at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite
1300, Seven World Trade Center, New York, New York 10048.
Webster has filed with the SEC a Registration Statement on Form S-4
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the Webster Stock to be issued to the
shareholders of Shelton in connection with the Merger. As permitted by the rules
and regulations of the SEC, this Joint Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement. Such
additional information may be obtained from the SEC's principal office in
Washington, D.C. as set forth above. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated by reference herein as to
the contents of any contract or other document are not necessarily complete and,
in each instance where such contract or document is filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Shelton with the SEC (File No.
0-17495) under the Exchange Act are hereby incorporated in this Joint Proxy
Statement/Prospectus by reference: (i) Shelton's Annual Report on Form 10-K for
the year ended June 30, 1994; (ii) Shelton's Quarterly Reports on Form 10-Q for
the quarters ended September 30, 1994, December 31, 1994 and March 31, 1995; and
(iii) Shelton's Current Report on Form 8-K dated June 20, 1995.
The following documents filed by Webster with the SEC (File No.
0-15213) under the Exchange Act are hereby incorporated in this Joint Proxy
Statement/Prospectus by reference: (i) Webster's Annual Report on Form 10-K for
the year ended December 31, 1994; (ii) Webster's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995; and (iii) Webster's Current Reports on
Form 8-K dated March 1, 1995 and June 20, 1995 and on Form 8-K/A dated July 27,
1995.
All documents filed by Shelton or Webster pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Joint
Proxy Statement/Prospectus and prior to the Merger shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus. In lieu of
incorporating by reference the description of the capital stock of Webster which
is contained in a registration statement filed under the Exchange Act, such
description is included in this Joint Proxy Statement/Prospectus. See
"DESCRIPTION OF WEBSTER CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS."
4
<PAGE>
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement/Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this Joint
Proxy Statement/Prospectus. Webster will provide without charge to each person
to whom a copy of this Joint Proxy Statement/Prospectus is delivered, upon
written or oral request of such person, a copy of any or all of the documents
incorporated herein by reference and not delivered herewith (other than exhibits
to such documents which are not specifically incorporated by reference into the
text of such documents).
This Joint Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. These documents
are available upon request directed to: Lee A. Gagnon, Executive Vice President,
Chief Operating Officer and Secretary, Webster Financial Corporation, First
Federal Plaza, Waterbury, Connecticut 06702; telephone (203) 753-2921. In order
to ensure timely delivery of the documents, any request should be made at least
five business days prior to the Special Meetings.
5
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Joint Proxy Statement/Prospectus. This summary is not intended
to be a complete description and is qualified in its entirety by reference to
the more detailed information contained in this Joint Proxy Statement/Prospectus
herein. Shareholders of Shelton and of Webster are urged before voting to give
careful consideration to all of the information contained in this Joint Proxy
Statement/Prospectus.
THE MERGER AGREEMENT TO BE CONSIDERED AT THE SHELTON MEETING INVOLVES A
MATTER OF GREAT IMPORTANCE TO SHELTON'S SHAREHOLDERS. IF THE MERGER AGREEMENT IS
APPROVED AND THE MERGER CONSUMMATED, EACH SHARE OF SHELTON STOCK WILL BE
CONVERTED INTO .92 OF A SHARE OF WEBSTER STOCK, PLUS CASH IN LIEU OF FRACTIONAL
SHARES, AND EACH SHELTON SHAREHOLDER'S SEPARATE EQUITY INTEREST IN SHELTON WILL
CEASE.
THE ISSUANCE OF UP TO 1,337,618 SHARES OF WEBSTER STOCK TO THE SHELTON
SHAREHOLDERS AS PART OF THE MERGER IS ALSO A MATTER OF GREAT IMPORTANCE TO
WEBSTER'S SHAREHOLDERS.
The Parties
Webster. Webster, a Delaware corporation, is the holding company of
First Federal Bank, a federal savings bank headquartered in Waterbury,
Connecticut ("First Federal"), and Bristol Savings Bank, a state chartered
savings bank headquartered in Bristol, Connecticut ("Bristol"). Deposits at
First Federal and Bristol are insured by the FDIC. Through First Federal and
Bristol, Webster is engaged primarily in the business of attracting deposits
from the general public and investing those funds in mortgage loans for the
purchase, construction and refinancing of one-to-four family homes. Webster also
provides commercial banking services to businesses in its primary market areas.
Webster currently serves customers from 39 banking offices located in New Haven,
Fairfield, Litchfield and Hartford Counties in Connecticut.
Prior to consummation of the Merger involving Shelton, Webster intends
to (i) convert Bristol into a federal savings bank under the name "Webster Bank"
and (ii) then merge First Federal into Webster Bank (the "Webster Bank Merger").
Webster Bank will be a federal savings bank, headquartered in Waterbury, with
its deposits insured by the Bank Insurance Fund ("BIF") of the FDIC. Before
giving effect to the Merger involving Shelton, 49% of the deposits at Webster
Bank will be assessed at BIF premium rates and 51% assessed at premium rates
applicable to the Savings Association Insurance Fund ("SAIF") of the FDIC.
At March 31, 1995, Webster had consolidated total assets of $2.8
billion, total deposits of $2.2 billion, and shareholders' equity of $143.4
million, or 5.15% of total assets. The Webster Stock is quoted on the Nasdaq
National Market under the symbol "WBST". The address of Webster's principal
executive offices is First Federal Plaza, Waterbury, CT 06702.
Webster, as a holding company, is regulated primarily by the OTS at the
federal level and by the Connecticut Commissioner. First Federal, as a federal
savings bank, is regulated primarily by the OTS and as to certain matters also
by the FDIC. Bristol, as a state-chartered savings bank, is regulated by the
Connecticut Commissioner and by the FDIC. Webster Bank, as a federal savings
bank, will be regulated primarily by the OTS and as to certain matters also by
the FDIC. See "THE MERGER -- The Parties" and "-- Structure."
Merger Sub. Merger Sub, a Delaware corporation, is a wholly-owned
subsidiary of Webster formed to facilitate the Merger. The separate corporate
existence of Merger Sub will terminate upon its merger into Shelton. See "THE
MERGER -- The Parties."
6
<PAGE>
Shelton. Shelton, a Delaware corporation, is the holding company of
Shelton Savings Bank ("Shelton Bank"), a state-chartered savings bank
headquartered in Shelton, Connecticut. Deposits at Shelton Bank are insured by
the BIF of the FDIC. Through Shelton Bank, Shelton is engaged primarily in the
business of attracting deposits from the general public and investing those
funds primarily in residential mortgage loans. Shelton Bank also makes
commercial mortgage and consumer loans. Shelton Bank has six banking offices
located in Ansonia, Bethany, Oxford and Shelton. Its general market area is
eastern Fairfield County and southwestern New Haven County. Shelton Bank
provides a wide range of retail deposit and credit services, with special
emphasis on residential real estate lending. Through its Trust Department,
Shelton Bank also provides investment advisory and management services to retail
and corporate customers.
At March 31, 1995, Shelton had consolidated total assets of $295.0
million, total deposits of $270.1 million and shareholders' equity of $19.5
million, or 6.6% of total assets. The address of Shelton's principal executive
office is 375 Bridgeport Avenue, Shelton, Connecticut 06484 and its telephone
number is (203) 944-2200.
Shelton, as a holding company, is regulated primarily by the OTS at the
federal level and by the Connecticut Commissioner. Shelton Bank, as a
state-chartered savings bank, is regulated by the Connecticut Commissioner and
by the FDIC. See "THE MERGER -- The Parties."
The Merger
General. The Merger Agreement provides for the acquisition of Shelton
by Webster through the merger of Shelton into Webster's subsidiary, Merger Sub,
with Shelton being the surviving corporation (the "Merger"). Immediately after
the Merger, Shelton will merge into Webster, with Webster being the surviving
holding company (the "Holding Company Merger"). Immediately after the Holding
Company Merger, Webster will cause Shelton Bank to be merged into Webster Bank,
as the surviving federal savings bank (the "Surviving Bank") (the "Shelton Bank
Merger"). The Surviving Bank will be headquartered in Waterbury, Connecticut,
and will be a FDIC/BIF insured federally chartered savings bank, with
approximately 63% of its deposit premiums assessed at BIF rates and
approximately 37% assessed at SAIF rates. See "THE MERGER -- Structure."
Upon consummation of the Merger, each outstanding share of Shelton
Stock, except for shares held, directly or indirectly, by Shelton or Webster
(other than shares held in a fiduciary capacity ("Trust Account Shares") or in
respect of a debt previously contracted ("DPC Shares")), will be converted into
.92 of a share of Webster Stock, plus cash to be paid in lieu of fractional
shares. The Merger will not change the outstanding Webster Stock held by the
Webster shareholders.
Exchange Ratio. The Merger Agreement provides that upon consummation of
the Merger, each of the 1,343,341 outstanding shares of Shelton Stock, except
for shares held, directly or indirectly, by Shelton or Webster (other than Trust
Account Shares or DPC Shares), will be automatically converted into .92 share of
Webster Stock, plus cash to be paid in lieu of fractional shares (the "Exchange
Ratio"). This would involve the issuance of up to 1,235,874 shares of Webster
Stock to the Shelton shareholders. The Exchange Ratio is not subject to market
price adjustment. On August ___, 1995, the closing sale price of the Webster
Stock on the Nasdaq National Market was $___ per share. See "THE MERGER --
Exchange Ratio."
Shelton Stock Options. Under the Merger Agreement, shares of Shelton
Stock issued prior to consummation of the Merger upon exercise of the 110,591
outstanding options held by directors, officers and other employees of Shelton
will also be converted into Webster Stock at the Exchange Ratio, which would
involve the issuance of up to 101,744 additional shares of Webster Stock as part
of the Merger. Any of these options that are not exercised prior to the
consummation of the Merger will remain outstanding, but automatically become
options to purchase Webster Stock, with the exercise price and number of shares
covered by each option to be adjusted to reflect the Exchange Ratio. The
duration and other terms of these options will otherwise remain the same, except
that the options held by non-employee directors of Shelton will be modified to
permit their exercise until three months after termination of service as
advisory directors of the Surviving Bank rather than expiring three months after
the Merger when their service as directors of Shelton and Shelton Bank will
cease. Options held by officers and other employees of Shelton and Shelton Bank
whose employment does not continue with the Surviving Bank will terminate three
months after such employment ceases. See "THE MERGER -- Interests of Certain
Persons in the Merger."
7
<PAGE>
Shelton Meeting. The Shelton Meeting will be held on September ___,
1995 at 10:00 a.m. at the Rapp's Paradise Inn, 557 Wakelee Terrace, Ansonia,
Connecticut, at which time the holders of record of the Shelton Stock at the
close of business on August __, 1995 (the "Shelton Record Date") will be asked
to consider and vote upon a proposal to approve and adopt the Merger Agreement.
The affirmative vote of the holders of two-thirds of the outstanding shares of
Shelton Stock entitled to vote at the Shelton Meeting is required to approve and
adopt the Merger Agreement.
All nine directors and executive officers of Shelton, who beneficially
own an aggregate of 202,311 shares of Shelton Stock (excluding stock options),
or 16% of the outstanding Shelton Stock, as of the Shelton Record Date, have
entered into a stockholder agreement, dated June 20, 1995 (the "Stockholder
Agreement"), with Webster pursuant to which they have each agreed, among other
things, to vote their shares of Shelton Stock in favor of the approval and
adoption of the Merger Agreement and against any third party Merger proposal. No
consideration was paid to any of the directors or executive officers of Shelton
for entering into the Stockholder Agreement. Webster required that the
Stockholder Agreement with the directors and executive officers of Shelton be
executed as a condition to Webster entering into the Merger Agreement. See
"SHELTON MEETING."
The Board of Directors of Shelton believes that the terms of the Merger
Agreement are fair to, and in the best interests of, Shelton and its
shareholders. The Board of Directors of Shelton unanimously approved the Merger
Agreement and recommends that holders of Shelton Stock vote FOR approval and
adoption of the Merger Agreement. For a discussion of the factors considered by
the Board of Directors in reaching its decision, see "THE MERGER -- Background
of the Merger" and "-- Recommendations of the Shelton Board of Directors and
Reasons for the Merger."
Webster Meeting. The Webster Meeting will be held on September __, 1995
at 4:00 p.m. at the Elton Ballroom, 30 West Main Street, Waterbury, Connecticut,
at which time the holders of record of the Webster Stock at the close of
business on August __, 1995 (the "Webster Record Date") will be asked to
consider and vote upon the issuance of up to 1,337,618 shares of Webster Stock
to the Shelton shareholders as part of the Merger. The Merger is conditioned on
the approval by the Webster shareholders of the issuance of these shares of
Webster Stock to the Shelton shareholders as part of the Merger, which approval
requires an affirmative vote of a majority of the votes cast by the Webster
shareholders entitled to vote at the Webster Meeting, and that a majority of the
outstanding Webster Stock be represented in person or by proxy thereat. The
Board of Directors of Webster unanimously recommends that its shareholders vote
FOR approval of the issuance of these shares to the Shelton shareholders as part
of the Merger.
Fairness Opinion. On June 20, 1995, Alex. Brown & Sons Incorporated
("Alex. Brown") has delivered its written opinion to the Board of Directors of
Shelton to the effect that, as of such date, the terms of the Merger Agreement,
including the Exchange Ratio, are fair, from a financial point of view, to
Shelton and its shareholders. The receipt of this opinion was a condition to
Shelton's obligations under the Merger Agreement. The opinion of Alex. Brown
describes the matters considered and the scope of the review undertaken in
rendering such opinion. Alex. Brown's opinion and presentation to the Shelton
Board, together with a review by the Shelton Board of the assumptions used by
Alex. Brown, were among the factors considered by the Shelton Board in reaching
its determination to approve the Merger. See "THE MERGER -- Opinion of Financial
Advisor." A copy of Alex. Brown's opinion letter dated June 20, 1995 is attached
as Appendix A to this Joint Proxy Statement/Prospectus and should be read by
Shelton shareholders in its entirety.
8
<PAGE>
Webster consulted with its outside financial advisor, Merrill Lynch &
Co., as to certain issues concerning the Merger. However, Webster did not engage
any financial advisor to render a fairness opinion with respect to the terms of
the Merger. The Board of Directors of Webster relied primarily upon the
financial analysis, experience and recommendations of Webster's senior executive
officers in considering the Merger.
Regulatory Approvals. In order for the Merger to be consummated, the
approvals of the Connecticut Commissioner and the OTS must be obtained.
Applications are pending to obtain such approvals. See "THE MERGER -- Regulatory
Approvals."
Accounting Treatment. The Merger is intended to qualify as a "pooling
of interests" for accounting and financial reporting purposes. Consummation of
the Merger is conditioned upon the Merger so qualifying. See "THE MERGER --
Accounting Treatment."
Federal Income Tax Consequences. The Merger is intended to constitute a
tax-free exchange for federal income tax purposes as to the Webster Stock issued
to the Shelton shareholders. See "THE MERGER -- Certain Federal Income Tax
Consequences."
Lack of Appraisal Rights. Under Delaware law, holders of the Shelton
Stock will not be entitled to any dissenters' appraisal rights with respect to
the Merger. Delaware law exempts the Merger from dissenters' appraisal rights
since the Webster Stock is traded on the Nasdaq National Market. There are also
no dissenters' appraisal rights to the holders of Webster Stock. See "THE MERGER
- -- No Appraisal Rights."
Effective Time. The Merger will become effective on the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with applicable law or on such later date as the Certificate may
specify (the "Effective Time"). The Certificate will be filed (i) on the fifth
day after the last required regulatory approval is received and all applicable
waiting periods are expired, (ii) if elected by Webster, the last business day
of the month in which the date set forth in (i) above occurs, or (iii) such
other time as the parties may agree.
Termination. The Merger Agreement may be terminated at any time prior
to the Effective Time by the mutual consent of Shelton and Webster and by either
of them individually under certain specified circumstances, including if the
Merger is not consummated by March 31, 1996. See "THE MERGER -- Termination and
Amendment of Merger Agreement."
Exchange of Shelton Stock Certificates. Upon the Effective Time, each
holder of a certificate representing Shelton Stock issued and outstanding
immediately prior to the Merger will, upon the surrender thereof (duly endorsed,
if required) to Webster's transfer agent, Chemical Bank (the "Exchange Agent"),
be entitled to receive a certificate representing the number of whole shares of
Webster Stock into which such Shelton Stock will have been automatically
converted as part of the Merger. The Exchange Agent will mail a letter of
transmittal with instructions to all holders of record of Shelton Stock as of
the Effective Time for use in surrendering their certificates for Shelton Stock
in exchange for new certificates representing Webster Stock. Certificates should
not be surrendered by Shelton shareholders until the letter of transmittal and
instructions are received. See "THE MERGER -- Exchange Ratio."
Option Agreement. In consideration of Webster's entering into the
Merger Agreement (without other consideration or monetary payment), Webster and
Shelton entered into an option agreement, dated June 20, 1995 (the "Option
Agreement"), immediately after their execution of the Merger Agreement. The
Option Agreement may have the effect of discouraging the making of alternative
acquisition-related proposals, even if such proposal is for a higher price per
share for Shelton Stock than the price per share represented by the Exchange
Ratio, and increasing the likelihood that the Merger will be consummated in
accordance with the terms of the Merger Agreement.
9
<PAGE>
If the Option becomes exercisable, Webster may purchase at a price of
$17.00 per share up to 267,324 shares of newly issued Shelton Stock, which is
equal to 19.9% of the currently outstanding Shelton Stock. The Option would
become exercisable primarily upon the occurrence of certain events that create
the potential for a third party to acquire Shelton. To the knowledge of Shelton,
no event that would permit exercise of the Option has occurred as of the date
hereof. If the Option becomes exercisable, Webster or any permitted transferee
of Webster may, under certain circumstances, require Shelton to repurchase for a
formula price the Option (in lieu of its exercise) or any shares of Shelton
Stock purchased upon exercise of the Option. See "THE MERGER -- Option
Agreement."
Arrangements with Shelton Directors and Executive Officers. The Merger
Agreement provides for one Shelton director (jointly selected by the Boards of
Directors of Webster and Shelton) to be elected as a director of the Surviving
Bank upon the consummation of the Merger, with such director to serve until the
Surviving Bank's 1999 annual meeting. All directors of Shelton will be invited
to serve on an advisory board to the Surviving Bank for a period of 40 months
from the consummation of the Merger, with compensation for such service of $650
as a monthly retainer and $600 per monthly advisory board meeting attended. Such
compensation will not be paid to the advisory director also serving as a
director of the Surviving Bank, or to an advisory director also serving as an
officer or consultant to the Surviving Bank or to J. Allen Kosowsky. See "THE
MERGER -- Interests of Certain Persons in the Merger."
Severance payments will be made upon the consummation of the Merger to
Kenneth E. Schaible of $450,978, to William C. Nimons of $336,176, and to Ralph
J. Rodriguez of $209,953 pursuant to their existing employment agreements, as
modified and limited by the Merger Agreement. These payments are based on three
times their respective average annual compensation that was paid by Shelton and
includible in their gross income for federal tax purposes for the calendar years
1990 through 1994, reduced by $1.00. Messrs. Schaible, Nimons and Rodriguez have
agreed to have their severance payments limited by Section 280G of the Internal
Revenue Code (the "Code"), whereas their existing employment agreements were not
so limited and would have resulted in their receiving larger severance benefits
than the severance payment amounts shown above. Upon consummation of the Merger,
the Surviving Bank has agreed to enter into an employment and consulting
agreement with Mr. Schaible, providing for his employment for a six month period
as a senior vice president to assist in the transition at a salary of $10,000
per month and for his service as a part-time consultant for three years
thereafter, with annual consulting fees at the rate of $50,000, $40,000 and
$30,000, respectively, for the first, second and third years. Upon such
consummation, the Surviving Bank also has agreed to enter into consulting
agreements with Messrs. Nimons and Rodriguez for an eighth-month period on a
part-time basis to assist in the transition, with fees at $7,500 per month to
Mr. Nimons and $5,000 per month to Mr. Rodriguez. See "THE MERGER -- Interests
of Certain Persons in the Merger."
Comparison of Shareholder Rights
If the Merger is consummated, the holders of Shelton Stock will become
holders of Webster Stock. There are certain differences between the rights of
Webster shareholders and Shelton shareholders. See "DESCRIPTION OF CAPITAL STOCK
AND COMPARISON OF SHAREHOLDER RIGHTS" for a summary of the differences between
the rights of holders of Shelton Stock and Webster Stock.
10
<PAGE>
Market Prices of Common Stock
Both Webster Stock and Shelton Stock are traded on the Nasdaq National
Market. The symbol for Webster Stock is "WBST." The symbol for Shelton Stock is
"SSBC."
The following table sets forth per share closing prices of the Webster
Stock and the Shelton Stock on the Nasdaq National Market as of the dates
specified and the pro forma equivalent market value of the Webster Stock to be
issued for the Shelton Stock in the Merger. See "MARKET PRICES AND DIVIDENDS."
<TABLE>
<CAPTION>
Shelton Stock
Pro Forma
Last Reported Sale Price Equivalent Market
Date Webster Stock Shelton Stock Value (a)
<S> <C> <C> <C>
December 31, 1992....................... $17.25 $11.43 $15.87
December 31, 1993....................... 22.875 15.50 21.05
December 30, 1994....................... 18.50 15.25 17.02
March 31, 1995.......................... 21.625 15.00 19.90
June 20, 1995 (b)....................... 24.125 17.50 22.20
August ___, 1995........................
________________________
<FN>
(a) Calculated by multiplying the respective closing prices of the Webster Stock
by the .92 Exchange Ratio.
(b) Last trading date prior to announcement of the execution of the Merger Agreement.
</TABLE>
Shareholders are advised to obtain current market quotations for
Webster Stock. It is expected that the market price of Webster Stock will
fluctuate between the date of this Joint Proxy Statement/Prospectus and the date
on which the Merger is consummated. Because the number of shares of Webster
Stock to be received by Shelton shareholders in the Merger is fixed, the value
of the shares of Webster Stock that the holders of Shelton Stock will receive in
the Merger may increase or decrease prior to or after consummation of the
Merger.
Comparative Per Share Data
Following are certain comparative historical per share data of Webster
and of Shelton, pro forma combined per share data of Webster and Shelton, and
equivalent pro forma per share data of Shelton. All historical and pro forma
data exclude Bristol prior to its acquisition by Webster on March 3, 1994 in a
transaction accounted for as a purchase. The financial data is based on, and
should be read in conjunction with, the historical consolidated financial
statements and the notes thereto of Webster and of Shelton and the pro forma
combined financial statements and the notes thereto appearing or incorporated by
reference elsewhere in this Joint Proxy Statement/Prospectus. All per share data
of Webster, Shelton and pro forma are presented on a fully diluted basis and
have been adjusted retroactively to give effect to stock dividends. Since
Webster's fiscal year ends December 31 and Shelton's fiscal year ends June 30,
the results for each of Shelton's fiscal years have been restated for comparison
purposes on a calendar year basis to correspond to Webster's fiscal year. The
pro forma data is not necessarily indicative of results which will be obtained
on a combined basis. The pro forma data has not been adjusted to reflect any of
the improvements in operating efficiencies that Webster anticipates may occur in
the future due to the Merger.
11
<PAGE>
<TABLE>
<CAPTION>
At or for the
Three Months Ended
March 31, At or for the Year Ended December 31,
-------------------- ------------------------------------------
1995 1994 1993 1992
<S> <C> <C> <C> <C>
Net Income per fully diluted Common Share:
Webster -- historical $ .71 $ 2.60 $ 2.18(a) $ 1.07
Shelton -- historical .43 1.61 1.32(a) 1.29
Pro Forma Combined (b) .67 2.44 2.04 1.16
Shelton Equivalent Pro Forma (c) .62 2.24 1.88 1.07
Cash Dividends per Common Stock:
Webster -- historical .16 .52 .50 .48
Shelton -- historical .16 .55 .45 .42
Pro Forma Combined (b) .16 .45 .46 .45
Shelton Equivalent Pro Forma (c) .15 .41 .42 .41
Book Value per Common Share:
Webster -- historical 22.99 22.02 21.69 18.47
Shelton -- historical 14.63 14.39 13.50 12.49
Pro Forma Combined (b) 21.09 20.59 19.90 21.29
Shelton Equivalent Pro Forma (c) 19.40 18.94 18.30 19.59
<FN>
- ----------------------
(a) Before cumulative effect of change in method of accounting for income taxes
adopted by Webster in January 1993 and by Shelton in July 1993 in
accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 109 ("FASB 109"), which resulted in an increase of
$.79 per share in Webster's net income for 1993 and an increase of $.21 per
share in Shelton's net income for 1993.
(b) Pro forma combined net income amounts shown above reflect the proposed
acquisition of Shelton on a pooling of interests basis for each period
shown as if the Merger had occurred at the beginning of such period.
(c) Shelton equivalent pro forma per share amounts are calculated by
multiplying the pro forma combined amounts by the .92 Exchange Ratio.
</TABLE>
12
<PAGE>
Summary Financial and Other Data
The following tables present summary historical financial and other
data for Webster and Shelton as of the dates and for the periods indicated. This
summary data is based upon, and should be read in conjunction with, the
historical and pro forma consolidated financial statements and notes thereto of
Webster and Shelton and notes thereto appearing or incorporated by reference
elsewhere herein. As to historical information, see "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "SHELTON BANCORP, INC." appearing elsewhere herein
and "SHELTON CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30 YEAR END" and "SHELTON
CONSOLIDATED FINANCIAL STATEMENTS MARCH 31 UNAUDITED" in Appendix B and Appendix
C, respectively, attached hereto. For pro forma information, see "-- Comparative
Per Share Data" above and "PRO FORMA COMBINED FINANCIAL STATEMENTS" appearing
elsewhere herein. The pro forma amounts are not necessarily indicative of
results which will be obtained on a combined basis. All adjustments necessary
for a fair presentation of financial position and results of operations of
interim periods have been included.
Selected Consolidated Financial Data - Webster
<TABLE>
<CAPTION>
Financial Condition
and Other Data - Webster
(Dollars in Thousands) At December 31,
At March 31, --------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets .......................... $ 2,786,088 $ 2,761,464 $ 2,220,020 $ 2,114,757 $ 941,332 $ 758,063
Loans receivable, net ................. 1,642,197 1,656,022 1,283,509 1,348,572 556,865 536,849
Mortgage-backed securities ............ 687,616 617,031 505,657 346,719 222,034 112,581
Securities ............................ 145,321 129,111 107,359 32,559 43,953 39,426
Segregated Assets, net ................ 130,919 137,096 176,998 223,907 -- --
Core deposit intangible ............... 5,275 5,457 11,829 15,463 1,402 --
Deposits .............................. 2,171,305 2,163,467 1,724,061 1,761,381 778,323 582,964
FHL Bank advances and other
borrowings ......................... 425,130 410,675 308,952 190,664 68,072 88,591
Shareholders' equity .................. 143,392 137,941 108,873 113,444(a) 68,412 67,372
Number of full service offices ........ 39 39 33 33 17 12
</TABLE>
<TABLE>
<CAPTION>
Operating Data - Webster At or for the Three Months
(Dollars in Thousands) Ended March 31, At or for the Year Ended December 31,
--------------- -------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $ 46,185 $ 37,048 $ 173,250 $ 137,807 $ 92,402 $ 72,927 $ 71,484
Interest expense................. 26,345 18,769 89,513 71,992 50,700 48,123 50,528
------ ------ ------ ------ ------ ------ ------
Net interest income.............. 19,840 18,279 83,737 65,815 41,702 24,804 20,956
Provision for loan losses........ 280 900 2,900 4,447 4,336 3,665 10,189
Noninterest income............... 4,398 3,090 12,367 8,774 6,238 4,179 3,400
Noninterest expenses:
Core deposit intangible writedown -- -- 5,000 -- -- -- --
OREO expenses and provisions, net 1,322 1,069 6,852 4,556 5,661 4,777 386
Other noninterest expenses.... 15,812 13,214 61,210 43,889 27,710 16,329 14,756
------ ------ ------ ------ ------ ------ ------
Total noninterest expenses.. 17,134 14,283 73,062 48,445 33,371 21,106 15,142
------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes 6,824 6,186 20,142 21,697 10,233 4,212 (975)
Income taxes..................... 2,160 2,376 3,657 9,160 5,446 1,867 1,646
----- ----- ----- ----- ----- ----- -----
Net income (loss) before cumula-
tive change (b)............... 4,664 3,810 16,485 12,537 4,787 2,345 (2,621)
Cumulative change (b)............ -- -- -- 4,300 -- -- --
--- --- --- ----- --- --- ---
Net income (loss)................ 4,664 3,810 16,485 16,837 4,787 2,345 (2,621)
Preferred stock dividends........ 324 469 1,716 2,653 581 -- --
--- --- ----- ----- --- --- ----
Net income (loss) available to
common stockholders.......... $ 4,340 $ 3,341 $ 14,769 $ 14,184 $ 4,206 $ 2,345 $ (2,621)
===== ===== ====== ====== ===== ===== =======
Loan originations during period.. $ 69,032 $ 192,001 $ 678,624 $ 319,646 $ 207,055 $ 89,529 $ 88,040
Net increase (decrease) in deposits 7,838 491,908 439,406 (37,320) 983,058 95,359 42,043
Loans serviced for others........ 872,411 709,628 864,649 268,637 308,200 152,400 169,200
Mortgage loan servicing asset.... 4,011 3,715 4,180 992 1,305 20 --
</TABLE>
See footnotes on the following page
13
<PAGE>
Significant Statistical Data - Webster
<TABLE>
<CAPTION>
At or for the Three Months
Ended March 31, At or for the Year Ended December 31,
--------------- -------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
For The Period:
Interest rate spread .................... 3.06% 3.15% 3.30% 3.10% 3.26% 2.71% 2.20%
Net yield on average earning assets ..... 3.11% 3.22% 3.37% 3.22% 3.49% 3.13% 2.89%
Return on average assets before
cumulative change (b) ................. 0.69% 0.63% 0.61% 0.59% 0.39% 0.28% (0.35)%
Return on average shareholders' equity
before cumulative change (b) .......... 13.16% 12.98% 12.62% 11.18% 6.13% 3.44% (3.62)%
Return on average shareholders' equity
after cumulative change (b) ........... 13.16% 12.98% 12.62% 15.02% 6.13% 3.44% (3.62)%
Average shareholders' equity to average
assets ................................ 5.21% 4.86% 4.85% 5.27% 6.32% 8.22% 9.66%
Net income (loss) per common share
before cumulative change (b) (c):
Primary .............................. $ 0.78 $ 0.77 $ 2.95 $ 2.50 $ 1.09 $ 0.62 $ (0.64)
Fully Diluted ........................ $ 0.71 $ 0.66 $ 2.60 $ 2.18 $ 1.07 $ 0.62 $ (0.64)
Net income (loss) per common share
after cumulative change (b) (c):
Primary .............................. $ 0.78 $ 0.77 $ 2.95 $ 3.59 $ 1.09 $ 0.62 $ (0.64)
Fully Diluted ........................ $ 0.71 $ 0.66 $ 2.60 $ 2.97 $ 1.07 $ 0.62 $ (0.64)
Cash dividends paid per common
share (c) ............................. $ 0.16 $ 0.13 $ 0.52 $ 0.50 $ 0.48 $ 0.48 --
Dividend payout ratio on common
shares before cumulative change (b) ... 22.54% 19.70% 20.00% 16.84% 44.86% 77.42% --
Noninterest expenses to average assets .. 2.52% 2.36% 2.72% 2.28% 2.70% 2.55% 2.02%
Noninterest expenses (excluding OREO
expenses and provisions) to average
assets ................................ 2.33% 2.19% 2.46% 2.06% 2.24% 1.97% 1.97%
Net interest income to noninterest
expenses .............................. 1.16x 1.28x 1.15x 1.36x 1.25x 1.18x 1.38x
Ratio of earnings to fixed charges ...... 1.93x 2.31x 1.80x 2.31x 2.48x 1.69x .89x
At End of Period:
Book value per common share (c) ......... $ 22.99 $ 21.10 $ 22.02 $ 21.69 $ 18.47 $ 18.19 $ 17.93
Tangible book value per common share .... $ 22.03 $ 18.84 $ 21.03 $ 18.63 $ 14.40 $ 17.82 $ 17.93
Common shares outstanding
(000's) (c) ........................... 5,487 5,022 5,482 3,866 3,801 3,760 3,758
Shareholders' equity to total assets .... 5.15% 4.75% 5.00% 4.90% 5.36% 7.26% 8.89%
Nonaccrual loans and OREO to total
assets ................................ 1.99% 3.21% 2.14% 2.54% 2.96% 2.87% 2.84%
Allowance for loan losses to nonaccrual
loans ................................. 127.40% 120.11% 135.39% 137.39% 106.73% 94.53% 102.02%
Allowance for loan and OREO losses
to nonaccrual loans and OREO .......... 77.86% 61.97% 77.69% 79.14% 79.67% 40.86% 36.56%
<FN>
___________________
(a) Includes $18.25 million of Cumulative Perpetual Preferred Stock, Series
A (the "Series A Stock") of Webster outstanding at December 31, 1992, which
was redeemed on June 29, 1993 with a portion of the net proceeds from an
offering of its Senior Notes (as defined). Webster redeemed $11.75 million
of Series A Stock on December 30, 1992 with a portion of the net proceeds
from the sale of its Cumulative Convertible Preferred Stock, Series B (the
"Series B Stock"). The Series A Stock was issued by Webster in its assisted
acquisition of certain assets and liabilities of First Constitution Bank
(the "First Constitution Merger") from the FDIC.
(b) Refers to a cumulative change in the method of accounting for income taxes
adopted by Webster in January 1993 in accordance with FASB 109.
(c) All per share data of Webster and the number of its outstanding common
shares have been adjusted retroactively to give effect to a 10% stock
dividend in June 1993.
</TABLE>
14
<PAGE>
Selected Consolidated Financial Data - Shelton
<TABLE>
<CAPTION>
Financial Condition
and Other Data - Shelton
(Dollars in Thousands) At March 31, At June 30,
1995 1994 1993 1992 1991 1990
------------ ------- ------ -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Total assets.......................... $ 294,998 $ 276,003 $ 259,868 $ 248,611 $ 186,933 $ 170,955
Loans Receivable, Net................. 220,378 189,228 171,892 167,687 146,594 142,891
Mortgage-backed Securities............ 14,356 15,991 10,177 7,916 581 656
Securities............................ 41,636 50,608 57,727 52,900 24,358 14,745
Deposits.............................. 270,141 252,046 239,504 227,665 166,731 138,615
FHL Bank advances and other
borrowings......................... 3,700 5,200 3,200 4,700 5,700 17,223
Shareholders' equity.................. 19,534 18,262 16,425 14,970 14,052 14,020
Number of full service offices........ 6 6 6 6 5 5
</TABLE>
<TABLE>
<CAPTION>
Operating Data - Shelton At or for the Nine Months
(Dollars in Thousands) Ended March 31, At or for the Year Ended June 30,
--------------- ---------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $ 13,926 $ 12,467 $ 16,739 $ 17,616 $ 19,032 $ 16,999 $ 16,373
Interest expense................. 7,304 6,318 8,476 9,519 11,807 11,514 11,673
----- ----- ----- ----- ------ ------ ------
Net interest income.............. 6,622 6,149 8,263 8,097 7,225 5,485 4,700
Provision for loan losses........ 270 95 150 793 875 380 140
Noninterest income............... 1,096 1,254 1,633 2,467 1,437 389 866
Noninterest expenses:
OREO expenses and provisions, net 52 240 257 579 413 472 27
Other noninterest expenses.... 4,629 4,666 6,214 5,681 4,866 3,698 3,536
----- ----- ----- ----- ----- ----- -----
Total noninterest expenses.. 4,681 4,906 6,471 6,260 5,279 4,170 3,563
----- ----- ----- ----- ----- ----- -----
Income before income taxes
and cumulative change (a)..... 2,767 2,402 3,275 3,511 2,508 1,324 1,863
Income taxes..................... 1,077 1,014 1,300 1,591 1,297 554 797
----- ----- ----- ----- ----- --- ---
Net income before
cumulative change (a)......... 1,690 1,388 1,975 1,920 1,211 770 1,066
Cumulative change (a)............ -- 275 275 -- -- -- --
--- --- --- --- --- --- ---
Net income (loss)................ $ 1,690 $ 1,663 $ 2,250 $ 1,920 $ 1,211 $ 770 $ 1,066
===== = ===== = ===== = ===== = ===== = === = =====
Loan originations during period.. $ 49,647 $ 52,820 $ 74,529 $ 53,900 $ 73,674 $ 33,452 $ 32,759
Net increase (decrease) in deposits 19,374 11,047 12,542 11,839 60,934 28,116 19,132
Loans serviced for others........ 78,478 84,285 83,538 100,846 32,591 21,451 18,842
Mortgage loan servicing asset.... 228 314 287 453 800 -- --
</TABLE>
See footnotes on the following page
15
<PAGE>
Significant Statistical Data - Shelton
<TABLE>
<CAPTION>
At or for the Nine Months
Ended March 31, At or for the Year Ended June 30,
--------------- ---------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
For The Period:
Interest rate spread............. 2.98% 3.18% 3.15% 3.31% 3.19% 3.09% 2.56%
Net yield on average earning assets 3.25% 3.36% 3.33% 3.46% 3.36% 3.34% 3.01%
Return on average assets before
cumulative change (a).......... 0.78% 0.84% 0.74% 0.76% 0.52% 0.44% 0.65%
Return on average shareholders' equity
before cumulative change (a)... 11.98% 10.77% 11.36% 12.14% 8.29% 5.63% 7.57%
Return on average shareholders' equity
after cumulative change (a).... 11.98% 12.89% 12.94% 12.14% 8.29% 5.63% 7.57%
Average shareholders' equity to average
assets......................... 6.52% 6.54% 6.55% 6.26% 6.29% 7.76% 8.56%
Net income per common share
before cumulative change (a) (b):
Primary....................... $1.25 $1.04 $1.53 $1.52 $0.96 $0.60 $0.77
Fully Diluted................. $1.25 $1.04 $1.50 $1.52 $0.96 $0.60 $0.77
Net income per common share after
cumulative change (a) (b):
Primary....................... $1.25 $1.25 $1.74 $1.52 $0.96 $0.60 $0.77
Fully Diluted................. $1.25 $1.24 $1.71 $1.52 $0.96 $0.60 $0.77
Cash dividends paid per common
share (b)...................... $0.46 $0.37 $0.49 $0.43 $0.40 $0.37 $0.33
Dividend payout ratio on common
shares before cumulative change (a) 35.56% 33.29% 31.95% 28.13% 41.54% 60.39% 40.99%
Noninterest expenses to average assets 2.16% 2.49% 2.44% 2.48% 2.27% 2.37% 2.16%
Noninterest expenses (excluding OREO
expenses and provisions) to average
assets......................... 2.14% 2.37% 2.34% 2.25% 2.10% 2.10% 2.15%
Net interest income to noninterest
expenses....................... 1.41x 1.25x 1.28x 1.29x 1.37x 1.32x 1.32x
Ratio of earnings to fixed charges 12.07x 12.44x 11.43x 11.39x 5.65x 2.19x 1.95x
At End of Period:
Book value per common share (b).. $14.63 $13.71 $14.00 $12.89 $11.87 $11.14 $10.45
Common shares outstanding
(000's) (b).................... 1,335 1,301 1,304 1,274 1,261 1,261 1,341
Shareholders' equity to total assets 6.62% 6.56% 6.62% 6.32% 6.02% 7.52% 8.20%
Nonaccrual loans and OREO to total
assets......................... 0.87% 0.91% 0.77% 1.31% 1.99% 2.55% 2.66%
Allowance for loan losses to nonaccrual
loans.......................... 78.74% 117.27% 116.36% 147.53% 37.98% 16.64% 29.96%
Allowance for loan and OREO losses
to nonaccrual loans and OREO... 55.66% 59.35% 60.93% 44.00% 24.42% 10.87% 8.28%
<FN>
- ------------------
(a) Refers to a cumulative change in the method of accounting for income taxes
adopted by Shelton in July 1993 in accordance with FASB 109.
(b) All per share data of Shelton and the number of its outstanding common
shares have been adjusted retroactively to give effect to stock dividends.
</TABLE>
16
<PAGE>
Pro Forma Combined Financial Data
<TABLE>
<CAPTION>
Financial Condition
and Other Data - Pro Forma
(Dollars in Thousands) At March 31, At December 31,
1995 1994 1993 1992 1991 1990
------------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total assets.......................... $3,081,086 $3,053,851 $2,483,403 $2,367,722 $1,173,489 $ 934,823
Loans receivable, net................. 1,862,575 1,869,216 1,467,935 1,522,168 701,478 682,417
Mortgage-backed securities............ 701,972 631,718 518,435 346,719 235,114 113,204
Securities............................ 186,957 174,130 151,329 91,604 97,326 55,551
Segregated Assets, net................ 130,919 137,096 176,998 223,907 -- --
Core deposit intangible............... 5,275 5,457 11,829 15,463 1,402 --
Deposits.............................. 2,441,446 2,432,984 1,966,574 1,995,079 990,054 732,511
FHL Bank advances and other
borrowings......................... 428,830 414,375 312,152 193,864 73,772 101,791
Shareholders' equity.................. 160,866 156,807 126,273 129,195 83,067 81,021
Number of full service offices........ 45 45 39 39 22 17
</TABLE>
<TABLE>
<CAPTION>
Operating Data - Pro Forma At or for the Three Months
(Dollars in Thousands) Ended March 31, At or for the Year Ended December 31,
--------------- -------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.................. $ 50,954 $ 41,189 $ 190,820 $ 154,589 $ 111,021 $ 90,901 $ 88,319
Interest expense................. 28,907 20,820 98,464 80,803 61,205 60,015 62,264
------ ------ ------ ------ ------ ------ ------
Net interest income.............. 22,047 20,369 92,356 73,786 49,816 30,886 26,055
Provision for loan losses........ 385 935 3,155 4,597 5,574 4,285 10,379
Noninterest income............... 4,790 3,269 13,629 10,703 8,407 5,150 4,027
Noninterest expenses:
Core deposit intangible writedown -- -- 5,000 -- -- -- --
OREO expenses and provisions, net 1,335 1,110 6,949 5,085 6,135 5,089 734
Other noninterest expenses...... 17,388 14,749 67,346 49,912 33,018 20,550 18,340
------ ------ ------ ------ ------ ------ ------
Total noninterest expenses.. 18,723 15,859 79,295 54,997 39,153 25,639 19,074
------ ------ ------ ------ ------ ------ ------
Income before income taxes....... 7,729 6,844 23,535 24,895 13,496 6,112 629
Income taxes..................... 2,495 2,541 4,850 10,595 7,083 2,774 2,341
----- ----- ----- ------ ----- ----- -----
Net income (loss) before cumulative
change........................ 5,234 4,303 18,685 14,300 6,413 3,338 (1,712)
Cumulative change ............... -- -- -- 4,575 -- -- --
-- -- -- ----- -- -- --
Net income (loss)................ 5,234 4,303 18,685 18,875 6,413 3,338 (1,712)
Preferred stock dividends........ 324 469 1,716 2,653 581 -- --
--- --- ----- ----- --- -- --
Net income (loss) available to
common stockholders.......... $ 4,910 $ 3,834 $ 16,969 $ 16,222 $ 5,832 $ 3,338 $ (1,712)
===== ===== ====== ====== ===== ===== =======
Loan originations during period.. $ 81,707 $ 204,193 $ 745,618 $ 390,337 $ 283,926 $ 133,418 $ 118,301
Net increase (decrease) in
deposits...................... 9,741 499,946 466,410 (28,505) 1,005,025 157,543 59,485
Loans serviced for others........ 950,873 793,787 949,337 357,699 409,190 183,273 188,565
Mortgage loan servicing asset.... 4,239 4,029 4,427 1,337 2,008 20 --
</TABLE>
17
<PAGE>
Significant Statistical Data - Pro Forma
<TABLE>
<CAPTION>
At or for the Three Months
Ended March 31, At or for the Year Ended December 31,
--------------- -------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
For The Period:
Interest rate spread ..................... 3.02% 3.17% 3.29% 3.13% 3.32% 2.81% 2.35%
Net yield on average earning assets ...... 3.08% 3.25% 3.34% 3.23% 3.50% 3.14% 2.94%
Return on average assets before
cumulative change... .................. 0.70% 0.64% 0.67% 0.60% 0.43% 0.32% (0.19%)
Return on average shareholders' equity
before cumulative change................ 13.00% 12.74% 12.55% 11.11% 6.87% 4.06% (1.98%)
Return on average shareholders' equity
after cumulative change................. 13.00% 12.74% 12.55% 14.66% 6.87% 4.06% (1.98%)
Average shareholders' equity to average
assets ................................. 5.35% 5.00% 5.37% 5.39% 6.29% 7.94% 9.38%
Net income (loss) per common share
before cumulative change:
Primary ............................... $ 0.71 $ 0.69 $ 2.69 $ 2.25 $ 1.18 $ 0.68 ($ 0.33)
Fully Diluted ......................... $ 0.67 $ 0.61 $ 2.44 $ 2.04 $ 1.16 $ 0.68 ($ 0.33)
Net income (loss) per common share
after cumulative change:
Primary ............................... $ 0.71 $ 0.69 $ 2.69 $ 3.13 $ 1.18 $ 0.68 ($ 0.33)
Fully Diluted ......................... $ 0.67 $ 0.61 $ 2.44 $ 2.73 $ 1.16 $ 0.68 ($ 0.33)
Cash dividends paid per common
share................................... $ 0.16 $ 0.13 $ 0.45 $ 0.46 $ 0.43 $ 0.43 $ 0.46
Dividend payout ratio on common
shares before cumulative change.... .... 23.88% 21.31% 18.44% 16.85% 37.07% 63.24% --
Noninterest expenses to average assets ... 2.49% 2.35% 2.86% 2.30% 2.64% 2.45% 2.03%
Noninterest expenses (excluding OREO
expenses and provisions) to average
assets ................................. 2.31% 2.18% 2.61% 2.09% 2.23% 1.95% 1.95%
Net interest income to noninterest
expenses ............................... 1.18x 1.28x 1.16x 1.34x 1.27x 1.22x 1.39x
Ratio of earnings to fixed charges ....... 2.05x 2.44x 1.93x 2.50x 2.85x 1.90x 1.06x
At End of Period:
Book value per common share.... .......... $ 21.09 $ 19.82 $ 20.59 $ 19.90 $ 21.29 $ 16.88 $ 16.47
Tangible book value per common share ..... $ 20.32 $ 17.99 $ 19.78 $ 17.58 $ 18.13 $ 16.60 $ 16.47
Common shares outstanding
(000's)................................. 6,811 6,324 6,780 5,088 4,895 3,760 3,758
Shareholders' equity to total assets ..... 5.22% 4.91% 5.13% 5.08% 5.46% 7.08% 8.67%
Nonaccrual loans and OREO to total
assets ................................. 1.94% 3.00% 2.10% 2.41% 2.83% 2.83% 2.75%
Allowance for loan losses to nonaccrual
loans .................................. 124.93% 120.04% 134.04% 135.79% 108.71% 77.15% 79.20%
Allowance for loan and OREO losses
to nonaccrual loans and OREO ........... 76.90% 61.90% 77.01% 77.32% 76.95% 36.07% 32.18%
</TABLE>
18
<PAGE>
CERTAIN CONSIDERATIONS
Shelton shareholders should consider, among other matters, the
following factors in voting upon the Merger Agreement, consummation of which
will result in holders of Shelton Stock receiving shares of Webster Stock. These
factors should also be considered by Webster shareholders in voting on the
proposal to approve the issuance of Webster Stock to the Shelton shareholders as
part of the Merger.
Issuance of Webster Stock
Under the Merger Agreement, the consideration payable to the holders of
Shelton Stock consists of .92 of a share of Webster Stock for each outstanding
share of Shelton Stock, plus cash in lieu of a fractional share. See "THE MERGER
- -- Exchange Ratio" and "DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF
SHAREHOLDER RIGHTS." As of the Webster Record Date, there were 5,498,142
outstanding shares of Webster Stock held by 2,119 holders of record and 171,869
outstanding shares of Series B Stock of Webster, convertible into 986,062 shares
of Webster Stock, held by three holders of record. Based on the Exchange Ratio,
an aggregate of 1,235,874 additional shares of Webster Stock would be issued to
the Shelton shareholders as part of the Merger for the 1,343,341 shares of
Shelton Stock outstanding as of the Shelton Record Date. As of the Webster
Record Date, such additional shares of Webster Stock to be issued in the Merger
would constitute 18.4% of the shares of Webster Stock to be outstanding
following consummation of the Merger or 16.0% if the Series B Stock of Webster
is converted into Webster Stock.
Legislative and General Regulatory Developments
General. Webster and Shelton are both subject to various regulatory
restrictions as savings and loan holding companies, primarily by the OTS and the
Connecticut Commissioner. First Federal is, and the Surviving Bank will be,
subject to extensive regulation by the OTS as their primary federal regulator
and to regulation as to certain matters by the FDIC. Shelton and Bristol, as
state-chartered savings banks, are subject to extensive regulation by the
Connecticut Commissioner and the FDIC. The OTS and FDIC have adopted numerous
regulations and undertaken other regulatory initiatives, and further regulations
and initiatives may occur. Future legislation or regulatory developments could
have an adverse effect on Webster or Shelton or the Surviving Bank.
Regulatory Capital. Regulatory capital requirements have increased
significantly in recent years and additional proposed increases are now pending.
Further increases are possible in future periods. Current regulatory capital
requirements for FDIC insured savings institutions include a Tier 1 leverage or
core capital to adjusted total assets ratio and a risk-based capital ratio in
which assets are weighted based upon their inherent risk. As of March 31, 1995,
First Federal, Bristol and Shelton Bank exceeded all currently applicable
regulatory capital requirements.
The OTS issued new regulations, effective September 1994, which added
an interest-rate risk component to the risk-based capital requirement. Under the
new OTS regulation, an institution is considered to have excess interest-rate
risk if, based upon a 200 basis point change in market interest rates, the
market value of an institution's capital changes by more than 2%. This new
requirement is not expected to have a material effect on the Surviving Bank's
ability to meet the risk-based capital requirement. The FDIC is also expected to
issue similar regulations.
At March 31, 1995, First Federal had a total risk-based capital ratio
of 13.43%, a Tier 1 risk-based capital ratio of 12.20% and a Tier 1 leverage
capital ratio of 5.59%, thereby meeting the applicable regulatory capital ratios
required for classification as a well-capitalized bank for federal deposit
insurance assessment rate purposes. At March 31, 1995, Bristol had a total
risk-based capital ratio of 15.19%, a Tier 1 risk-based ratio of 13.91% and a
Tier 1 leverage capital ratio of 8.70%, which ratios met the applicable
regulatory capital ratios required for classification as a well capitalized bank
for such rate purposes. At March 31, 1995, Shelton had a total risk-based
capital ratio of 12.34%, a Tier 1 risk-based capital ratio of 11.44% and a Tier
1 leveraged capital ratio of 6.09%, which ratios met the applicable regulatory
capital ratios required for classification as a well capitalized bank for such
rate purposes. On a combined basis, the Surviving Bank at March 31, 1995, would
have had a total risk-based capital ratio of 13.65%, a Tier 1 risk-based capital
ratio of 12.44% and a Tier 1 leveraged capital ratio of 6.10%, which ratios
would have met the applicable regulatory capital ratios required for
classification as a well capitalized bank for such rate purposes. There can be
no assurance that applicable regulatory capital requirements will be met in the
future.
19
<PAGE>
Sources of Funds for Cash Dividends; Stock Repurchases
The principal sources of funds for Webster's payments of cash dividends
on the Webster Stock and its Series B Stock, as well as for the payment of
principal and interest on its $40 million principal amount of 8 3/4% Senior
Notes due 2000 (the "Senior Notes"), are dividends from First Federal and
Bristol. The principal source of funds for Shelton's payment of cash dividends
on the Shelton Stock are dividends from Shelton Bank. In addition, at March 31,
1995 at the holding company level, Webster had liquid investments of $16.2
million and Shelton had cash on hand of $1.3 million. The Surviving Bank will be
subject to certain regulatory requirements that affect its ability to pay cash
dividends to Webster. The Series B Stock ranks prior to the Webster Stock as to
payment of cash dividends. In addition, the Senior Notes contain certain
covenants that affect Webster's ability to pay cash dividends on the Webster
Stock. See "DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS."
See "MARKET PRICES AND DIVIDENDS."
On July 24, 1995, Webster announced a stock repurchase program for up
to 10% of its currently outstanding shares of Webster Stock, which program will
reduce Webster's liquid investments. Such program is being suspended during the
solicitation of proxies for the Shareholders Meetings.
Effect of Interest Rate Fluctuations
Both Webster's and Shelton's consolidated results of operations depend
to a large extent on the level of their net interest income, which is the
difference between interest income from interest-earning assets (such as loans
and investments) and interest expense on interest-bearing liabilities (such as
deposits and borrowings). If interest-rate fluctuations cause their cost of
funds to increase faster than the yield of their interest-bearing assets, net
interest income will be reduced. Managements of both Webster and Shelton
respectively believe that their interest-rate risk position at March 31, 1995
represented a reasonable amount of interest-rate risk. While Webster and Shelton
use various monitors of interest rate risk, they are unable to predict future
fluctuations in interest rates or the specific impact thereof. The market values
of most of their financial assets are sensitive to fluctuations in market
interest rates. Fixed-rate investments, mortgage-backed securities and mortgage
loans decline in value as interest rates rise. Although Webster's investment and
mortgage-backed securities portfolios have grown in recent quarters, most of the
growth has been in adjustable-rate securities or short-term securities with
maturities of less than two years. Changes in interest rates also can affect the
amount of loans originated by Webster and Shelton, as well as the value of their
loans and other interest-earning assets and their ability to realize gains on
the sale of such assets and liabilities. The extent to which borrowers prepay
loans also is affected by prevailing interest rates. When interest rates
increase, borrowers are less likely to prepay their loans; whereas, when
interest rates decrease, borrowers are more likely to prepay loans. Funds
generated by prepayments may be invested at a lower rate. Prepayments may
adversely affect the value of mortgage loans, the levels of such assets that are
retained in their portfolio, net interest income and loan servicing income.
Similarly, prepayments on mortgage-backed securities also may affect adversely
the value of these securities and interest income.
20
<PAGE>
SHELTON MEETING
Matters to be Considered at the Shelton Meeting
This Joint Proxy Statement/Prospectus is first being mailed to the
holders of Shelton Stock on or about August __, 1995 and is accompanied by a
proxy card furnished in connection with the solicitation of proxies by the
Shelton Board of Directors for use at the Shelton Meeting. The Shelton Meeting
is scheduled to be held on September __, 1995 at 10:00 a.m., at Rapp's Paradise
Inn, 557 Wakelee Terrace, Ansonia, Connecticut. At the Shelton Meeting, the
holders of Shelton Stock will consider and vote upon approval of the Merger
Agreement.
Record Date and Voting
The Board of Directors of Shelton has fixed the close of business on
August __, 1995 as the Shelton Record Date for the determination of the holders
of Shelton Stock entitled to receive notice of and to vote at the Shelton
Meeting. Only holders of record of Shelton Stock at the close of business on
that date will be entitled to vote at the Shelton Meeting or at any adjournment
thereof. At the close of business on the Shelton Record Date, there were
1,343,341 shares of Shelton Stock outstanding and entitled to vote at the
Shelton Meeting, held by ___ shareholders of record.
Each holder of Shelton Stock on the Shelton Record Date will be
entitled to one vote for each share held of record upon each matter properly
submitted at the Shelton Meeting or at any adjournment thereof. The presence, in
person or by proxy, of at least one-third of the outstanding shares of Shelton
Stock entitled to be voted at the Shelton Meeting is necessary to constitute a
quorum. Abstentions will be included in the calculation of the number of votes
represented at the Shelton Meeting for purposes of determining whether a quorum
has been achieved. Broker non-votes will not be counted for purposes of
determining whether a quorum is present. Since approval of the Merger Agreement
requires the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Shelton Stock entitled to be voted at the Special Meeting,
abstentions and broker non-votes will have the same effect as a vote against the
Merger Agreement.
If a quorum is not obtained, or if fewer shares of Shelton Stock are
voted in favor of approval of the Merger Agreement than the number required for
approval, it is expected that the Shelton Meeting will be adjourned for the
purpose of allowing additional time for obtaining additional proxies. In such
event, proxies will be voted to approve an adjournment, except for proxies as to
which instructions have been given to vote against the Merger Agreement. The
holders of a majority of the shares represented in person or by proxy at the
Shelton Meeting would be required to approve any adjournment of the Shelton
Meeting.
If the enclosed proxy card is properly executed and received by Shelton
in time to be voted at the Shelton Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval of the
Merger Agreement.
The Board of Directors of Shelton is not aware of any matters other
than the proposal to approve the Merger Agreement (or a proposal to adjourn the
Shelton Meeting) that may be properly brought before the Shelton Meeting. If any
other matters properly come before the Shelton Meeting, the persons named in the
accompanying proxy will vote the shares represented by all properly executed
proxies on such matters in such manner as shall be determined by the proxies
therefor.
SHELTON SHAREHOLDERS SHOULD NOT FORWARD ANY COMMON STOCK CERTIFICATES
WITH THEIR PROXY CARDS. IF THE MERGER IS CONSUMMATED, STOCK CERTIFICATES SHOULD
BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A LETTER OF
TRANSMITTAL WHICH WOULD BE SENT TO SHELTON SHAREHOLDERS BY THE EXCHANGE AGENT
PROMPTLY AFTER THE EFFECTIVE TIME.
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Vote Required; Revocability of Proxies
The affirmative vote of at least two-thirds of the outstanding shares
of Shelton Stock entitled to be voted at the Shelton Meeting is required in
order to approve and adopt the Merger Agreement.
THE REQUIRED VOTE OF THE SHELTON SHAREHOLDERS ON THE MERGER AGREEMENT
IS BASED UPON THE TOTAL NUMBER OF OUTSTANDING SHARES OF SHELTON STOCK AND NOT
UPON THE NUMBER OF SHARES WHICH ARE ACTUALLY VOTED. ACCORDINGLY, THE FAILURE TO
SUBMIT A PROXY CARD OR TO VOTE IN PERSON AT THE SHELTON MEETING OR THE
ABSTENTION FROM VOTING BY A SHAREHOLDER WILL HAVE THE SAME EFFECT AS A "NO" VOTE
WITH RESPECT TO THE MERGER AGREEMENT.
All nine directors and executive officers of Shelton who beneficially
owned an aggregate of 202,311 shares of Shelton Stock, or 16% of the outstanding
shares of Shelton Stock, as of the Shelton Record Date, have entered into an
agreement with Webster pursuant to which they have each agreed, among other
things, to vote their shares of Shelton Stock in favor of the approval and
adoption of the Merger Agreement. No consideration was paid to any of the
directors for entering into the Stockholder Agreement. Webster required that the
Stockholder Agreement with the directors and executive officers of Shelton be
executed as a condition to Webster entering into the Merger Agreement.
The presence of a shareholder at the Shelton Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder may revoke
a proxy at any time prior to its exercise by (i) delivering to William C.
Nimons, Executive Vice President and Secretary, Shelton Bancorp, Inc., 375
Bridgeport Avenue, Shelton, CT 06484, a written notice of revocation prior to
the Shelton Meeting, (ii) delivering to Shelton prior to the Shelton Meeting a
duly executed proxy bearing a later date, or (iii) attending the Shelton Meeting
and voting in person.
The obligations of Shelton and Webster to consummate the Merger
Agreement are subject, among other things, to the condition that the
shareholders of Shelton approve and adopt the Merger Agreement. Approval of
Webster's shareholders for the issuance of the Webster Stock as part of the
Merger is also required. See "THE MERGER -- Conditions to the Merger."
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of Shelton may solicit proxies for the Shelton Meeting from shareholders
personally or by telephone or telegram without additional remuneration therefor.
In addition, Shelton has retained _________________, a proxy soliciting firm, to
assist in such solicitation. The fee to be paid to such firm is not expected to
exceed $_______ plus reasonable out-of-pocket expenses. Shelton will also make
arrangements with brokerage firms and other custodians, nominees and fiduciaries
to send proxy materials to their principals and will reimburse such parties for
their expenses in doing so. The cost of soliciting proxies will be paid by
Shelton.
WEBSTER MEETING
Matters to be Considered at the Webster Meeting
This Joint Proxy Statement/Prospectus is first being mailed to the
holders of Webster Stock on or about August __, 1995 and is accompanied by a
proxy card furnished in connection with the solicitation of proxies by the
Webster Board of Directors for use at the Webster Meeting. The Webster Meeting
is scheduled to be held on September __, 1995 at 4:00 p.m., at the Elton
Ballroom, 30 West Main Street, Waterbury, Connecticut. At the Webster Meeting,
the holders of Webster Stock will consider and vote upon a proposal to approve
the issuance of up to 1,337,618 shares of Webster Stock to the Shelton
shareholders as part of the Merger.
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Record Date and Voting
The Board of Directors of Webster has fixed the close of business on
August __, 1995 as the Webster Record Date for the determination of the holders
of Webster Stock entitled to receive notice of and to vote at the Webster
Meeting. Only holders of record of Webster Stock at the close of business on
that date will be entitled to vote at the Webster Meeting or at any adjournment
thereof. At the close of business on the Webster Record Date, there were
5,498,142 shares of Webster Stock outstanding and entitled to vote at the
Webster Meeting, held by ___ shareholders of record.
Each holder of Webster Stock on the Webster Record Date will be
entitled to one vote for each share held of record upon each matter properly
submitted at the Webster Meeting or at any adjournment thereof. The presence, in
person or by proxy, of at least one-third of the outstanding shares of Webster
Stock entitled to be voted at the Webster Meeting is necessary to constitute a
quorum. Abstentions will be included in the calculation of the number of votes
represented at the Webster Meeting for purposes of determining whether a quorum
has been achieved. Broker non-votes will not be counted for purposes of
determining whether a quorum is present.
The Merger is conditioned on the approval by the Webster shareholders
of the issuance of up to 1,337,618 shares of Webster Stock to the Shelton
shareholders as part of the Merger, which approval requires an affirmative vote
of a majority of the votes cast by the Webster shareholders entitled to vote at
the Webster Meeting, and that a majority of the outstanding Webster Stock be
represented in person or by proxy thereat. Approval by the Webster shareholders
for the issuance of the additional shares is necessary under the rules of the
Nasdaq National Market. Of the 1,337,618 shares of Webster Stock proposed to be
issued as part of the Merger, 1,235,874 shares of Webster Stock would be issued
to the holders of the 1,343,341 currently outstanding shares of Shelton Stock
and 101,744 shares of Webster Stock with respect to the exercise of the 110,591
currently outstanding options to purchase Shelton Stock held by directors,
officers and employees of Shelton.
If a quorum is not obtained, or if fewer shares of Webster Stock are
voted in favor of approval of the proposal authorizing the issuance of the
additional Webster Stock to the Shelton shareholders as part of the Merger than
the number required for approval, it is expected that the Webster Meeting will
be adjourned for the purpose of allowing additional time for obtaining
additional proxies. In such event, proxies will be voted to approve an
adjournment, except for proxies as to which instructions have been given to vote
against the proposal authorizing the issuance of the additional Webster Stock as
part of the Merger. The holders of a majority of the shares represented in
person or by proxy at the Webster Meeting would be required to approve any
adjournment of the Webster Meeting.
If the enclosed proxy card is properly executed and received by Webster
in time to be voted at the Webster Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed proxies
with no instructions indicated thereon will be voted "FOR" approval of the
proposal authorizing the issuance of the additional Webster Stock to the Shelton
shareholders as part of the Merger.
The Board of Directors of Webster is not aware of any matters other
than the proposal to approve the issuance of the additional shares of Webster
Stock to the Shelton shareholders as part of the Merger (or a proposal to
adjourn the Webster Meeting) that may be properly brought before the Webster
Meeting. If any other matters properly come before the Webster Meeting, the
persons named in the accompanying proxy will vote the shares represented by all
properly executed proxies on such matters in such manner as shall be determined
by a majority of the Board of Directors of Webster.
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Vote Required; Revocability of Proxies
The affirmative vote of a majority of the votes cast by the Webster
shareholders at the Webster Meeting is required to approve the issuance of the
additional shares of Webster Stock to the Shelton shareholders as part of the
Merger, provided that a majority of the outstanding Webster Stock is represented
in person or by proxy at the Webster Meeting.
The presence of a shareholder at the Webster Meeting will not
automatically revoke such shareholder's proxy. However, a shareholder may revoke
a proxy at any time prior to its exercise by (i) delivering to Lee A. Gagnon,
Executive Vice President and Secretary, Webster Financial Corporation, First
Federal Plaza, Waterbury, Connecticut 06702, a written notice of revocation
prior to the Webster Meeting, (ii) delivering to Webster prior to the Webster
Meeting a duly executed proxy bearing a later date, or (iii) attending the
Webster Meeting and voting in person.
The obligations of Webster and Shelton to consummate the Merger are
subject, among other things, to the condition that the shareholders of Webster
approve the issuance of additional shares of Webster Stock to the Shelton
shareholders as part of the Merger Agreement. Approval by Shelton's shareholders
of the Merger Agreement by at least two-thirds of the outstanding Shelton Stock
entitled to vote at the Shelton Meeting is also required. See "THE MERGER --
Conditions to the Merger."
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees
of Webster may solicit proxies for the Webster Meeting from shareholders
personally or by telephone or telegram without additional remuneration therefor.
In addition, Webster has retained D.F. King & Co., Inc., a proxy soliciting
firm, to assist in such solicitation. The fee to be paid to such firm is not
expected to exceed $_______ plus reasonable out-of-pocket expenses. Webster will
also make arrangements with brokerage firms and other custodians, nominees and
fiduciaries to send proxy materials to their principals and will reimburse such
parties for their expenses in doing so. The cost of soliciting proxies will be
paid by Webster.
THE MERGER
The information under this Section is qualified in its entirety by
reference to the full text of the Merger Agreement, including each of the
exhibits thereto, the material features of which are described in this Joint
Proxy Statement/Prospectus, and copies of which will be provided promptly
without charge upon written or oral request addressed to Lee A. Gagnon,
Executive Vice President, Chief Operating Officer and Secretary, Webster
Financial Corporation, First Federal Plaza, Waterbury, CT 06702, telephone (203)
753-2921.
The Parties
The Merger Agreement was entered into among Webster, Merger Sub and
Shelton. The Merger Agreement provides for a merger of Merger Sub, a
wholly-owned subsidiary of Webster, into Shelton (the "Merger").
Webster. Webster is a Delaware corporation and the holding company of
First Federal and Bristol, which are Webster's wholly-owned savings bank
subsidiaries and are respectively headquartered in Waterbury and Bristol,
Connecticut. Prior to the Merger with Shelton, Webster will cause (i) Bristol to
be converted from a state to a federal charter under the name "Webster Bank" and
(ii) First Federal to be merged into Webster Bank, which will be headquartered
in Waterbury, Connecticut. Webster Bank's deposits will be insured by the
FDIC/BIF, with approximately 63% of such deposits assessed at BIF premium rates
and approximately 37% of such deposits assessed at SAIF premium rates. Webster,
as a holding company, is regulated primarily by the OTS at the federal level and
by the Connecticut Commissioner.
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Through First Federal and Bristol, Webster currently serves customers
from 39 banking offices located in New Haven, Fairfield, Litchfield and Hartford
Counties in Connecticut. At March 31, 1995, Webster had total consolidated
assets of $2.8 billion, deposits of $2.2 billion, and shareholders' equity of
$143.4 million. At March 31, 1995, Webster had gross loans receivable (excluding
Segregated Assets) of $1.6 billion, which included $1.37 billion in residential
mortgage loans, $108.5 million in commercial real estate loans, $58.4 million in
commercial and industrial loans and $143.2 million in consumer loans (consisting
primarily of home equity loans). At March 31, 1995, nonaccrual loans and other
real estate owned ("OREO") were $55.4 million. At that date, Webster's allowance
for loan losses was $42.8 million, or 127.4% of nonaccrual loans, and its total
allowance for loan and OREO losses was $44.4 million, or 77.9% of nonaccrual
loans and OREO. Additional information regarding Webster is incorporated herein
by reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Merger Sub. Merger Sub, a Delaware corporation, is a wholly-owned
subsidiary of Webster formed to facilitate the Merger. The separate corporate
existence of Merger Sub will terminate upon its merger into Shelton.
Shelton. Shelton, a Delaware corporation, is the holding company of
Shelton Bank, a state-chartered savings bank headquartered in Shelton,
Connecticut. Deposits at Shelton Bank are FDIC/BIF insured. Shelton, as a
holding company, is regulated primarily by the OTS at the federal level and by
the Connecticut Commissioner. Shelton Bank is regulated by the Connecticut
Commissioner and by the FDIC.
Shelton through Shelton Bank currently serves customers from six
banking offices located in Ansonia, Bethany, Oxford and Shelton. Its general
market area is eastern Fairfield and southwestern New Haven County. At March 31,
1995, Shelton had total consolidated assets of $295.0 million, deposits of
$270.1 million, and shareholders' equity of $19.5 million. At March 31, 1995,
Shelton had gross loans receivable of $221.8 million, which included $191.1
million in residential mortgage loans, $5.6 million in commercial real estate
loans and $25.1 million in home equity credit lines and consumer installment
loans. At March 31, 1995, nonaccrual loans and OREO were $2.6 million. At that
date, Shelton's allowance for loan losses was $1.4 million, or 79% of nonaccrual
loans, and its total allowance for loan losses and OREO was $1.4 million, or 56%
of nonaccrual loans and OREO. Through its Trust Department, Shelton Bank also
provides advisory and management services to retail and corporate customers. At
March 31, 1995, assets managed by its Trust Department totaled $12.7 million.
See "SHELTON BANCORP, INC."
Background of the Merger
In October 1993, Shelton engaged Alex. Brown as its financial adviser
in order to provide it with general strategic and business planning
consultation.
In July 1994, Shelton entered into a further agreement with Alex. Brown
pursuant to which it engaged Alex. Brown (i) to conduct a thorough due diligence
review of Shelton in order to render a preliminary valuation of Shelton, (ii) to
identify potential candidates for an acquisition transaction of Shelton, and
(iii) to prepare information packages with respect to Shelton for distribution,
after approval of its Board of Directors, to certain potential acquirors of
Shelton in order to obtain indications of interest from such parties as to a
potential acquisition of Shelton.
In August 1994, after review of the preliminary valuation report of
Alex. Brown, Shelton's Board of Directors authorized Alex. Brown to prepare
information packages and distribute the packages to certain institutions
identified by Alex. Brown as potentially interested in engaging in an
acquisition transaction of Shelton. After a series of discussions with a number
of financial institutions, two preliminary acquisition proposals were received
from potential acquirors. At a Board meeting held on October 31, 1994, the Board
authorized Shelton's senior management and Alex. Brown to proceed with
preliminary discussions with such institutions.
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As a result of further preliminary discussions, it was determined that
Shelton should proceed to negotiate with Webster as to a proposed acquisition of
Shelton by Webster. These discussions resulted in draft acquisition documents
being prepared, which were considered by Shelton's Board of Directors at a
meeting on November 17, 1994. At its meeting on November 21, 1994, Shelton's
Board determined on the basis of a number of considerations, primarily the
current market price of the Webster Stock, not to accept Webster's acquisition
proposal. At that time, Shelton's Board also concluded to discontinue all
aquisition negotiations.
Subsequent to November 21, 1994, informal discussions were held
periodically by the senior managements of Shelton and Webster. Additional
proposals by Webster were considered by Shelton's Board of Directors on several
occasions, but were not then approved. At its June 20, 1995 meeting, the Shelton
Board unanimously approved acquisition proposal from Webster and authorized the
execution of the Merger Agreement. The market price of Webster Stock had
increased from $18.25 per share on November 21, 1994 to $24-1/8 per share on
June 20, 1995.
Recommendation of the Shelton Board of Directors and Reasons for the Merger
The Shelton Board of Directors has unanimously approved the Merger
Agreement and has determined that the Merger is fair to, and in the best
interests of, Shelton and its shareholders. The Shelton Board therefore
unanimously recommends that holders of Shelton Stock vote to approve and adopt
the Merger Agreement. The Shelton Board believes that the Merger will enable
holders of Shelton Stock to realize significant value and also may enable such
shareholders to participate in opportunities for growth and capital appreciation
of Webster that the Shelton Board believes will be enhanced by the Merger. See
"- Background of the Merger" above and " - Opinion of Financial Adviser" below.
In reaching its decision to approve the Merger Agreement, the Shelton Board
consulted with its legal advisers regarding the legal terms of the Merger and
the Shelton Board's fiduciary obligations in its consideration of the proposed
Merger, its financial advisers regarding the financial aspects and fairness of
the proposed Merger, as well as with management of Shelton, and, without
assigning any relative or specific weight, considered the following material
factors, both from a short-term and long-term prospective.
(i) The Shelton Board's familiarity with, and review of,
Shelton's business, financial condition, results of
operations and prospects, including, but not limited
to, its potential growth, development, productivity
and profitability and the business risks associated
therewith;
(ii) The current and prospective environment in which
Shelton operates, including national and local
economic conditions, the highly competitive
environment for financial institutions generally, the
increased regulatory burden on financial
institutions, and the trend toward consolidation in
the financial services industry;
(iii) The potential appreciation in market and book value
of Shelton Stock on both the short- and long-term
basis, as a stand alone entity;
(iv) Information concerning the business, financial
condition, results of operations, asset quality and
prospects of Webster, including the long-term growth
potential of Webster Stock, the future growth
prospects of Webster, combined with Shelton,
following the proposed Merger and the potential
synergies expected from the Merger and the business
risks associated therewith;
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(v) The potential for appreciation and growth for the
market and book value of Webster Stock, following the
proposed Merger;
(vi) The oral presentation and opinion of Alex. Brown that
the Exchange Ratio is fair to the holders of Shelton
Stock from a financial point of view (see " - Opinion
of Financial Adviser" below);
(vii) The financial and other significant terms of the
proposed Merger including the terms and conditions of
the Merger Agreement and the Option Agreement;
(viii) The benefits of the business combination with a
larger bank holding company, such as Webster, with a
significant presence in southwestern Connecticut;
(ix) The expectation that Webster will continue to provide
quality service to the communities and customers
served by Shelton and Webster's capacity, as a larger
institution with a larger capital base, to provide a
wider range of services, enhanced access to credit,
and greater convenience to such customers and
communities;
(x) The compatibility with respect to businesses and
management philosophies of Shelton and Webster and
Webster's strong commitment to the Connecticut
communities it serves;
(xi) The fact that Shelton had conducted an extensive
solicitation of interest from other likely potential
acquirors of Shelton; and
(xii) Shelton's belief that further delay in approving the
Merger might result in Webster's withdrawing its
acquisition proposal.
Purpose and Effects of the Merger
The purpose of the Merger Agreement is to enable Webster to acquire the
assets and business of Shelton and Shelton Bank. After the Merger, Shelton
Bank's banking offices will be operated as banking offices of Webster Bank.
The Merger will result in an expansion of Webster's primary market area
to include Shelton Bank's six banking offices in Ansonia, Bethany, Oxford and
Shelton, Connecticut. These towns are contiguous to Webster's current market
area. These six banking offices will broaden Webster's existing operations in
Fairfield and New Haven Counties in Connecticut where Webster currently has 26
banking offices. Webster expects to achieve reductions in the current operating
expenses of Shelton upon the consolidation of Shelton Bank's operations into
Webster Bank, which would cause certain reductions in administrative and support
personnel. Upon consummation of the Merger, all of the issued and outstanding
shares of Shelton Stock will automatically be converted into Webster Stock based
on the .92 Exchange Ratio.
Structure
The Merger will be effected by merging Merger Sub, a wholly-owned
subsidiary of Webster formed to facilitate the Merger, into Shelton, as the
surviving corporation. Immediately after the consummation of the Merger, Shelton
(which will then be a wholly-owned subsidiary of Webster) will be merged into
Webster, as the surviving corporation (the "Holding Company Merger").
Immediately after the Holding Company Merger, Shelton Bank (which will then be a
wholly-owned subsidiary of Webster) will be merged into Webster Bank (the
"Shelton Bank Merger"). Webster Bank will be the renamed federal savings bank
resulting from the conversion of Bristol from a state to a federal charter
followed by a merger of First Federal into such converted federal savings bank.
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Notwithstanding any provision of the Merger Agreement to the contrary,
Webster may elect to modify the structure of the transactions described above so
long as (i) there are no material adverse federal income tax consequences to
Shelton and its shareholders as a result of such modification; (ii) the
consideration to be paid to holders of Shelton Stock under the Merger Agreement
is not thereby changed or reduced in amount; and (iii) such modification will
not be reasonably likely to delay materially or jeopardize receipt of any
required regulatory approvals.
In addition, if it appears reasonably likely that regulatory approvals
for the conversion of Bristol to federal charter will not be received on a
timely basis, Webster and Shelton will make appropriate modifications to the
structure of the Bank Merger in order to obtain required regulatory approvals.
Exchange Ratio
As provided in the Merger Agreement, upon consummation of the Merger
each outstanding share of Shelton Stock will be automatically converted into .92
of a share of Webster Stock, plus cash in lieu of fractional shares. The
Exchange Ratio is fixed and not subject to market price adjustment. Based on the
last sale price of Webster Stock of $___ per share on August __, 1995, as
reported on the Nasdaq National Market, and the Exchange Ratio, Shelton
shareholders would receive $___ in market price of Webster Stock per Shelton
share (i.e., $___ times .92). The market price of the Webster Stock at the time
the Merger is consummated may vary materially from the $___ per share market
price on August __, 1995, and such variance would not alter the Exchange Ratio
or Webster's or Shelton's obligation to consummate the Merger. Based on the
1,343,341 currently outstanding shares of Shelton Stock, Webster would issue up
to 1,235,874 shares of Webster Stock to the Shelton shareholders in the Merger,
plus cash in lieu of fractional shares. These numbers do not reflect additional
shares of Webster Stock to be issued in the event of the exercise prior to the
Merger of the 110,591 existing stock options held by directors, officers and
employees of Shelton.
Certificates for fractions of shares of Webster Stock will not be
issued. Under the Merger Agreement, in lieu of a fractional share of Webster
Stock, each holder of Shelton Stock will be entitled to receive an amount of
cash equal to the fraction of a share of Webster Stock to which such holder
would otherwise be entitled, multiplied by the average of the high and low sales
prices of the Webster Stock, as reported on the Nasdaq National Market, during
the five trading days immediately preceding the first trading day before the
Effective Time. Following consummation of the Merger, no holder of Shelton Stock
would be entitled to any dividends or other rights in respect of any such
fraction. The aggregate number of shares of Webster Stock, along with any cash
to be paid in lieu of a fraction of a share of Webster Stock, payable to each
holder of Shelton Stock, is hereinafter referred to as the "Purchase Price."
The conversion of Shelton Stock held by shareholders of Shelton into
shares of Webster Stock at the Exchange Ratio will occur automatically upon the
Merger. Pursuant to the Merger Agreement, on or after the Effective Time,
Webster will cause the Exchange Agent to make payment of the Purchase Price to
each holder of shares of Shelton Stock who surrenders the certificate or
certificates representing such shares to the Exchange Agent, together with a
duly executed letter of transmittal.
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The Exchange Agent will mail a letter of transmittal as soon as
practicable after the Effective Time to each holder of record of Shelton Stock
immediately prior to the Effective Time. Webster will cause to be deposited with
the Exchange Agent a certificate representing the aggregate number of shares of
Webster Stock to be issued to Shelton shareholders, along with the cash to be
paid in lieu of fractions of shares. The Exchange Agent shall not be obligated,
however, to deliver or cause to be delivered the Purchase Price to which any
holder of Shelton Stock would otherwise be entitled as a result of the Merger
until such holder surrenders the certificate or certificates representing the
shares of Shelton Stock for exchange, or, if not available, an appropriate
affidavit of loss and indemnity agreement and/or a bond as may be required by
Webster. Likewise, no dividends or distributions with respect to Webster Stock
payable to any such holder will be paid until such holder surrenders the
certificate or certificates representing the shares of Shelton Stock for
exchange. No interest will be paid or accrued to Shelton's shareholders on
amounts received by the Exchange Agent from Webster.
If any payment for shares of Shelton Stock is to be made in a name
other than that in which the certificate for such shares surrendered in exchange
is registered, it shall be a condition of such payment that the certificate so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall either (i) pay to the
Exchange Agent any transfer or other taxes required by reason of the payment to
a person other than the registered holder of the certificate surrendered or (ii)
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable. After the close of business on the business day immediately
preceding the Effective Time, there shall be no transfers on the stock transfer
books of Shelton of the shares of Shelton Stock outstanding immediately prior to
the Effective Time and any such shares presented to the Exchange Agent after the
Effective Time shall be canceled and exchanged for the Purchase Price.
Any portion of the Purchase Price made available to the Exchange Agent
that remains unclaimed by Shelton's shareholders one year after the Effective
Time will be returned to Webster, upon demand, and any shareholder of Shelton
who has not exchanged shares of Shelton Stock for the Purchase Price in
accordance with the Merger Agreement prior to that time shall thereafter look
only to Webster for payment of the Purchase Price in respect of such shares,
subject to applicable escheat laws. Notwithstanding the foregoing, Webster will
not be liable to any shareholder of Shelton for any amount paid to a public
official pursuant to applicable abandoned property laws.
STOCK CERTIFICATES FOR SHARES OF SHELTON STOCK SHOULD NOT BE RETURNED
TO SHELTON WITH THE PROXY CARD AND SHOULD ONLY BE FORWARDED TO THE EXCHANGE
AGENT AFTER RECEIPT OF THE LETTER OF TRANSMITTAL.
Regulatory Approvals
Consummation of the Merger is conditioned upon the receipt of required
regulatory approvals of the OTS and the Connecticut Commissioner for the
transactions contemplated thereby, including the holding company application to
approve the acquisition of Shelton by Webster through the Merger and the merger
application for the Merger of Shelton Bank into Webster Bank.
Prior to the Merger with Shelton, Webster currently intends to convert
Bristol from a state to a federal charter, rename Bristol as "Webster Bank" as
part of the charter conversion, and merge First Federal into Webster Bank.
Approval of the OTS and the Connecticut Commissioner would be required for the
charter conversion of Bristol to a federal savings bank charter under the
Webster Bank name. Approval of the OTS would be required for the merger of First
Federal into Webster Bank following such charter conversion. The Merger is also
conditioned upon the receipt of such regulatory approvals.
Alternatively, under the Merger Agreement, Webster could elect to merge
Shelton Bank into First Federal or to convert Shelton Bank to federal charter
and then merge First Federal into Shelton, as a federal savings bank which then
would be renamed either "First Federal Bank" or "Webster Bank" or such other
name as Webster selects. Webster currently anticipates retaining the structure
described in the previous paragraph. However, if either of the alternatives
described in this paragraph are elected, various regulatory approvals of the OTS
and the Connecticut Commissioner would be required. However, no additional
approvals of the shareholders of Shelton or Webster would be required for these
alternatives.
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No other regulatory approvals are required to effect the Merger
pursuant to the Merger Agreement. Applications for the required regulatory
approvals are pending. Neither Shelton nor Webster is aware of any reasons why
all required regulatory approvals should not be obtained. See "-- Conditions to
the Merger."
Conditions to the Merger
The respective obligations of the parties under the Merger Agreement to
consummate the Merger are subject to the satisfaction of the following
conditions: (i) the Merger Agreement shall not have been terminated on or before
the Effective Time; (ii) all required regulatory approvals shall have been
obtained and no such regulatory approvals shall contain any condition that
Webster reasonably deems to be burdensome; (iii) all regulatory approvals shall
remain in full force and effect and all conditions and requirements set forth in
any regulatory approvals that are required to be satisfied on or before the
Effective Time, including the expiration of any waiting periods, shall have been
satisfied or properly waived; (iv) the Merger Agreement shall have been approved
by an affirmative vote of not less than two-thirds of the votes entitled to vote
by the Shelton shareholders at the Shelton Meeting; (v) approval by a majority
vote of the votes cast by the Webster shareholders at the Webster Meeting for
the issuance of the additional shares of Webster Stock to the Shelton
shareholders as part of the Merger, with a majority of the outstanding Webster
Stock being represented thereat; (vi) the Registration Statement shall remain
effective and shall not be subject to a stop order or any threatened stop order;
(vii) the Webster Stock (including the shares to be issued in the Merger) shall
continue to be approved for quotation on the Nasdaq National Market; (viii) no
injunction preventing consummation of the Merger shall be in effect and such
consummation continues to be legal; and (ix) a favorable tax opinion from
Webster's counsel shall have been received by Webster and Shelton (which opinion
was received).
The obligations of Webster under the Merger Agreement to consummate the
Merger are subject further to the satisfaction of certain conditions, including
the following: (i) the representations and warranties of Shelton contained in
the Merger Agreement shall be true, correct and complete in all material
respects when made on the date of the Merger Agreement and as of the Effective
Time, except where such failure or failures would not have a material adverse
effect on Shelton; (ii) Shelton shall have obtained the consent or approval of
other persons required under any lease or other agreement to consummate the
Merger; (iii) Webster shall have received a favorable accounting opinion from
KPMG Peat Marwick LLP as to the Merger being accounted for as a pooling of
interests, and such opinion shall not have been withdrawn (such opinion was
received); (iv) a specified legal opinion of Shelton's counsel and comfort
letter of Shelton's independent public accountants shall have been received by
Webster; (v) no proceeding initiated by any governmental entity seeking an
injunction shall be pending; and (vi) Shelton shall have in all material
respects performed all covenants and agreements contained in the Merger
Agreement to be performed by Shelton on or prior to the Effective Time.
The obligations of Shelton under the Merger Agreement to consummate the
Merger are subject further to the satisfaction of certain conditions, including
the following: (i) the representations and warranties of Webster contained in
the Merger Agreement shall be true, correct and complete in all material
respects when made on the date of the Merger Agreement and on the Effective
Time, except where such failure or failures would not have a material adverse
effect on Webster; (ii) Webster shall have obtained the consent or approval of
other persons required under any lease or other agreement to consummate the
Merger; (iii) no proceeding initiated by any governmental entity seeking an
injunction shall be pending; (iv) a specified legal opinion of Webster's counsel
shall have been received by Shelton; and (v) Webster shall have in all material
respects performed all covenants and agreements contained in the Merger
Agreement to be performed by Webster on or prior to the Effective Time.
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Conduct of Business Pending the Merger
The Merger Agreement contains various restrictions on the operations of
Shelton while the Merger is pending. In general, the Merger Agreement obligates
Shelton to continue to carry on its business in the ordinary course consistent
with past practices and consistent with prudent banking practices, with certain
specific limitations on Shelton's lending activities and restrictions on
additional branching without Webster's consent. Shelton also is prohibited by
the Merger Agreement from increasing the dividends on the Shelton Stock,
splitting or combining any Shelton Stock, repurchasing any Shelton Stock, or
issuing any equity securities, other than the issuance of additional shares of
Shelton Stock upon exercise of existing stock options held by directors,
officers and employees of Shelton or the Option held by Webster. Also, under the
terms of the Merger Agreement, Shelton may not amend its certificate of
incorporation or by-laws, nor may it change its method of accounting in effect
at June 30, 1994, except as required by changes in regulatory or generally
accepted accounting principles. In addition, the Merger Agreement restricts
Shelton from increasing employee or director benefit arrangements or
compensation other than annual increases for employees in the ordinary course
consistent with past practices, granting any stock options, entering into any
new employment or severance agreements, or after December 31, 1994, paying any
bonuses above specified amounts and consistent with past practices to Messrs.
Schaible, Nimons or Rodriguez.
Third Party Proposals
The Merger Agreement provides generally that Shelton shall not, nor
shall Shelton authorize or permit any of its directors, officers, employees or
agents, to solicit, initiate or encourage any inquiries relating to, or the
making of, any third party takeover proposal. There is a similar prohibition as
to any negotiation, discussion, recommendation or endorsement of any third party
takeover proposal, or providing third parties with any nonpublic information
relating to such inquiry or proposal, except to the extent legally required
based on a written opinion of Shelton's counsel. The Merger Agreement does not
preclude the Board of Directors of Shelton from communicating information about
any such takeover proposal to shareholders of Shelton based on a written opinion
of Shelton's counsel that such communication is required by applicable law.
Expenses; Breakup Fee
The Merger Agreement generally provides for Webster and Shelton to pay
their own expenses relating to the Merger, with an equal sharing of the costs of
printing and mailing this Joint Proxy Statement/Prospectus and Webster paying
the SEC filing fees for registering the Webster Stock to be issued in the
Merger. However, if the Merger Agreement is terminated by Webster or Shelton as
a result of a material breach of a representation, warranty, covenant or other
agreement contained therein by the other party, or if Webster terminates the
Merger Agreement by reason of Shelton failing to hold the Shelton Meeting on a
timely basis, or failing to recommend to its shareholders approval of the Merger
Agreement, or to oppose any third party takeover proposal, or as a result of
Shelton violating the restrictions on third party takeover proposals (without
regard to the fiduciary duty exception), the Merger Agreement provides for the
non-terminating party to pay all expenses of the terminating party up to
$250,000, plus a breakup fee of $500,000, unless the material breach is not
willful or intentional, in which case the breakup fee would be $250,000. If the
Merger Agreement is terminated by either Webster or Shelton as a result of the
non-terminating party failing to obtain the approval of its shareholders
necessary to consummate the Merger, the terminating party is entitled to have
all of its expenses up to $250,000 paid by the non-terminating party. In the
event of a failure by the Shelton shareholders to approve the Merger Agreement,
Shelton would also be obligated to pay a breakup fee of $250,000 (which would be
a credit against any other breakup fee owed by Shelton) to Webster, if prior to
the Shelton Meeting any third party takeover proposal has become publicly known
or if Shelton agrees to any third party takeover proposal within six months of
the termination of the Merger Agreement. The events described above that would
permit Webster to terminate the Merger Agreement would also constitute
preliminary purchase events under the Option. See "THE MERGER -- Option
Agreement."
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<PAGE>
Opinion of Financial Advisor
Pursuant to a letter agreement dated July 27, 1994 (the "Alex. Brown
Agreement"), Shelton retained Alex. Brown as its financial advisor in connection
with the proposed sale of Shelton. Alex. Brown is a recognized investment
banking firm and as a customary part of its investment banking business is
engaged in the valuation of securities of financial institutions in connection
with acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for various other
purposes. As specialists in the securities of bank and savings bank entities,
Alex. Brown has experience in, and knowledge of, the valuation of financial
institutions. Shelton selected Alex. Brown on the basis of its abilities to
evaluate the fairness of the transaction from a financial point of view, its
qualifications, its previous experience, and its reputation in the banking and
investment communities. Alex. Brown has acted exclusively for Shelton in
rendering its fairness opinion and will receive a fee from Shelton for its
services.
On June 20, 1995, Alex. Brown delivered its written opinion to the
Board of Directors of Shelton that, as of the date of such opinion, the terms of
the Merger Agreement were fair from a financial point of view to Shelton and its
shareholders. Receipt of such opinion was a condition to Shelton's obligation to
proceed with the Merger. No updating of such opinion is provided for under the
Merger Agreement. Shelton's Board of Directors did not provide Alex. Brown with
instructions or limitations for the purpose of preparing such opinion. The full
text of Alex. Brown's fairness opinion is attached to this Joint Proxy
Statement/Prospectus as Appendix A and is incorporated herein by reference.
Shelton shareholders are urged to read Alex. Brown's fairness opinion in its
entirety for a description of the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review undertaken by Alex.
Brown in connection therewith. The following summary of Alex. Brown's fairness
opinion is qualified in its entirety by reference to the full text. The per
share Exchange Ratio was determined by negotiation between Webster and Shelton
and was not determined by Alex. Brown.
In rendering its opinion, Alex. Brown (a) reviewed the Merger
Agreement, certain publicly available business and financial information
concerning Shelton and Webster, and certain internal financial analyses and
forecasts for Shelton prepared by Shelton's management; (b) held discussion with
members of Shelton senior management regarding the past and current business
operations, financial conditions, and future prospects of Shelton; (c) reviewed
the reported price and trading activity information for Shelton and Webster and
similar information for certain other companies the securities of which are
publicly traded; (d) reviewed the financial terms of certain recent business
combinations which Alex. Brown deemed comparable in whole or in part; and (e)
performed such other studies and analyses as Alex. Brown deemed appropriate.
Alex. Brown relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its fairness opinion. With respect to the
financial forecasts reviewed by Alex. Brown in rendering its fairness opinion,
Alex. Brown assumed that such financial forecasts were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of Shelton as to the future financial performance of Shelton. Alex.
Brown did not make an independent evaluation or appraisals of the assets or
liabilities of Shelton nor was it furnished with any such appraisals.
The summary set forth below does not purport to be a complete
description of the analyses performed by Alex. Brown in this regard. The
preparation of a fairness opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Accordingly, notwithstanding the
separate factors discussed below, Alex. Brown believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. Not
one of the analyses performed by Alex. Brown was assigned a greater significance
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond Shelton or Webster's control. The analyses
performed by Alex. Brown are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
or to reflect the prices at which businesses actually may be sold.
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<PAGE>
Analysis of Selected Publicly Traded Companies. In preparing the Alex.
Brown's fairness opinion, Alex. Brown using publicly available information,
compared selected financial information, including stated book value, tangible
book value, recent earnings, capital ratios and profitability levels, for
Shelton and a group of selected thrift institutions.
The group was comprised of 13 thrift institutions located in the New
England region of the United States (i.e., Connecticut, Vermont, New Hampshire
and Massachusetts) that (i) possessed an asset base between $150 million and
$550 million, and (ii) were judged to have similar business characteristics and
financial performance as Shelton (the "Selected Group"). The Selected Group
included (in alphabetical order) Abington Savings Bank, Central Co-Operative
Bank, Community Bankshares, Inc., Grove Bank, Home Port Bancorp, Inc., Lawrence
Savings Bank, Marble Financial Corp., MidConn Bank, New Hampshire Thrift
Bancshares, NewMil Bancorp, Inc., People's Savings Financial Corporation,
Portsmouth Bank Shares, and Sandwich Co-Operative Bank. As of June 16, 1995, the
relative multiples of the market price of Shelton and the mean market price of
the Selected Group was: to stated book value, 119.6% for Shelton and 91.1% for
the Selected Group; to tangible book value, 119.6% for Shelton and 95.8% for the
Selected Group; to "latest 12 months" earnings, 10.4% for Shelton and 11.1% for
the Selected Group; and to total assets, 7.92% for Shelton and 9.01% for the
Selected Group. It should be noted that Shelton's equity-to-assets ratio of 6.6%
and first quarter 1995 annualized return on average assets ("ROAA") of 0.78%
were each below the 9.5% mean equity level and the 0.91% first quarter 1995
annualized ROAA of the Selected Group.
Relative Contribution. Alex. Brown analyzed the balance sheet and
income statement contribution of Shelton to the combined company on a pro forma
basis for the quarter ended March 31, 1995. Of the combined company, Shelton
would have represented between 9.6% and 13.6% in the balance sheet categories of
assets, loans, deposits and stated equity as of March 31, 1995. On a pro forma
basis, Shelton would have contributed 10.4% and 14.5% of the combined company's
net interest income and net income available to common shareholders,
respectively, for the quarter ended March 31, 1995. Based on the Exchange Ratio,
Shelton shareholders would own 19.3% of the combined company on a fully diluted
basis.
Analysis of Comparable Acquisition Transactions. In preparing the Alex.
Brown fairness opinion, Alex. Brown analyzed certain comparable merger and
acquisition transactions for thrift institutions based upon the acquisition
price relative to stated book value, latest 12 months earnings per share, total
assets, premium to core deposits, and premium to common stock price (one month
prior to the acquisition announcement). The analysis included a review and
comparison of the mean multiples represented by a sample of recently effected or
pending thrift acquisitions nationwide having a transaction value between $15
million and $75 million, which were announced since January 1, 1994 ("National
Transactions" - a total of 57 transactions), as segmented into: (a) recently
announced thrift acquisitions in New England - four transactions ("Regional
Transactions"); (b) transactions in which the selling thrift institution
generated a return on average assets between 0.50% and 1.00% in the year of the
announced acquisition - 21 transactions ("Profitability-Segmented Trans-
actions"); and (c) transactions in which the selling thrift institution had a
ratio of non-performing assets-to-total assets between 0.50% and 1.20% in the
year of the announced transaction ("Asset Quality-Segmented Transactions").
Based on the closing stock price of Webster Stock on June 20, 1995
($24.125), the value to be issued in Webster Stock pursuant to the Merger
Agreement was $22.15 per Shelton share (the "Comparison Value"). The relative
multiples implied by the Comparison Value and each of the comparable acquisition
transaction segmentations are provided in the following table:
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<PAGE>
<TABLE>
<CAPTION>
LTM
Earnings Total Core Deposit Market
Transaction Group Book Value Per Share Assets Premiums Premium
- ----------------- ----------- ---------- ------- ------------- ---------
<S> <C> <C> <C> <C> <C>
COMPARISON VALUE 151.7% 13.2x 10.7% 4.6% 38.7%
Comparable Acquisition Transactions:
Nationwide Transactions - Mean 153.8% 16.4x 15.1% 9.0% 31.9%
Nationwide Transactions - High 254.4% 34.9x 30.6% 13.7% 92.3%
Nationwide Transactions - Low 100.5% 3.7x 6.2% 0.0% 2.1%
Regional Transactions 149.1% 18.2x 18.3% 7.4% 53.7%
Profitability-Segmented
Transactions 151.8% 15.8% 15.3% 6.9% 31.2%
Assets Quality-Segmented
Transactions 149.1% 14.1% 12.1% 4.8% 26.9%
</TABLE>
Discounted Cash Flow Analysis. Using discounted cash flow analysis,
Alex. Brown estimated the present value of the future dividend streams that
Shelton could produce over a five year period if Shelton performed in accordance
with management's forecasts and certain variants thereof. Alex. Brown also
estimated the terminal value for Shelton's common equity after the five year
period by applying book value (145-160%) acquisition multiples currently being
received by thrift institutions deemed comparable to Shelton. The range of
multiples used reflected a variety of scenarios regarding the growth and
profitability prospects of Shelton. The dividend streams and terminal values
were then discounted to present values using discount rates ranging from 14.0%
to 16.0% which reflect different assumptions regarding the required rates of
returns of holders or prospective buyers of Shelton Stock.
Analysis Factors and Assumptions. No company or transaction used in the
above analysis as a comparison is identical to Shelton, Webster or the
contemplated transaction. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which they are compared. The results from any particular
analysis described should not be taken to be Alex. Brown's view of the actual
value of Shelton or Webster. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given more weight than any other analysis.
In performing its analyses, Alex. Brown made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Shelton and Webster. The
analyses performed by Alex. Brown are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, Alex. Brown's fairness opinion
and associated presentation to the Shelton's Board of Directors are just one of
many factors taken into consideration by the Shelton Board.
Compensation of Financial Advisor. Pursuant to the Alex. Brown
Agreement, Shelton agreed to pay Alex. Brown a fee of 1.375% of the aggregate
consideration to be paid in a transaction with per share merger consideration
less than $24 and 1.500% of the aggregate consideration to be paid in a
transaction with per share merger consideration between $24.000 and $24.999. A
credit of $50,000 (representing previous retainer fees paid by Shelton to Alex.
Brown) will be applied to the transaction fee. Assuming the consummation of the
Merger as of June 20, 1995 and based upon the value of the Merger at such time,
additional fees equal to approximately $400,000 would have been payable to Alex.
Brown. Shelton has also agreed to reimburse Alex. Brown for its reasonable
out-of-pocket expenses, including legal fees, incurred in connection with its
engagement and to indemnify Alex. Brown and its affiliates and their respective
directors, officers, employees, agents and controlling persons against certain
expenses and liabilities.
34
<PAGE>
Certain Provisions of the Merger Agreement
Under the Merger Agreement, Shelton has made certain representations
and warranties to Webster. The material representations and warranties of
Shelton are those with regard to (i) the due organization and good standing of
Shelton; (ii) capitalization; (iii) the corporate power and authority of
Shelton; (iv) the execution and delivery of the Merger Agreement and the Option
Agreement; (v) consents and approvals required for the Merger; (vi) loan
portfolio and reserves of Shelton; (vii) financial statements and books and
records of Shelton; (viii) brokers' fees; (ix) absence of any material adverse
change in Shelton; (x) legal proceedings; (xi) tax matters; (xii) employee
benefit plans; (xiii) certain contracts; (xiv) certain regulatory matters and
reports; (xv) state takeover laws; (xvi) environmental matters; (xvii) loan
reserves; (xviii) properties and assets of Shelton; (xix) insurance matters;
(xx) liquidation account of Shelton Bank; (xxi) compliance with applicable laws;
(xxii) loan information; and (xxiii) agreements with directors and executive
officers.
Under the Merger Agreement, Webster has made certain representations
and warranties to Shelton. The material representations and warranties of
Webster are those with regard to (i) the due organization and good standing of
Webster; (ii) capitalization; (iii) the corporate power and authority of
Webster; (iv) the execution and delivery of the Merger Agreement and the Option
Agreement; (v) certain regulatory matters and reports; (vi) financial statements
of Webster; (vii) the absence of any material adverse change in Webster; (viii)
compliance with applicable laws; (ix) ownership of Shelton Stock; (x) employee
benefit matters; (xi) loan reserves; and (xii) legal proceedings.
Termination and Amendment of the Merger Agreement
The Merger Agreement may be terminated by Webster or Shelton (provided
the terminating party is not in violation of the Merger Agreement) as summarized
below:
(i) by mutual written consent of Webster and Shelton;
(ii) by Webster or Shelton if (a) the Closing has not
occurred on or before March 31, 1996; (b) Shelton's shareholders fail to approve
the Merger Agreement or Webster's shareholders fail to approve the issuance of
the additional shares of Webster Stock to the Shelton shareholders as part of
the Merger; or (c) 30 days after any required regulatory approval is denied or
regulatory application withdrawn at regulatory request, unless action is timely
taken for a rehearing or to file an amended application;
(iii) by Webster, in the event of a breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement by Shelton, if such breach or breaches would have a material adverse
effect on Shelton;
(iv) by Shelton, in the event of a breach of any
representation, warranty, covenant or agreement contained in the Merger
Agreement by Webster, if such breach or breaches would have a material adverse
effect on Webster;
(v) by Webster, if Shelton or its Board of Directors fails
to hold the Shelton Meeting on a timely basis, fails to recommend to Shelton's
shareholders the approval of the Merger Agreement, fails to oppose any third
party takeover proposals, or violates the covenant relating to third party
proposals (without regard to the fiduciary duty exception).
The Merger Agreement also provides that subject to applicable law the
Board of Directors of Webster and Shelton may (i) amend the Merger Agreement
except as provided below, (ii) extend the time for the performance of any of the
obligations or other acts of the other party thereto, (iii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto, or (iv) waive
compliance with any of the agreements and conditions contained in the Merger
Agreement. After approval of the Merger Agreement by Shelton's shareholders, no
amendment of the Merger Agreement may be made without further shareholder
approval, if the amendment would reduce the amount or change the form of the
consideration to be delivered to the Shelton shareholders in the Merger. After
approval by Webster's shareholders of the issuance of the shares of Webster
Stock to the Shelton shareholders as part of the Merger, no amendment of the
Merger Agreement may be made without further shareholder approval, if the
amendment would increase the number of shares of Webster Stock to be issued in
the Merger.
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<PAGE>
Certain Federal Income Tax Consequences
It is intended and expected that the Merger will constitute a tax-free
exchange for federal income tax purposes. If the Merger does so qualify,
generally (i) no gain or loss will be recognized by the Shelton shareholders
upon the receipt of Webster Stock in exchange for Shelton Stock (except as
discussed below with respect to cash received in lieu of a fractional share of
Webster Stock), (ii) the basis of the Webster Stock received by the Shelton
shareholders will be the same as the basis of the Shelton Stock surrendered in
exchange therefor (reduced by any amount allocable to a fractional share for
which cash is received) and (iii) the holding period of Webster Stock received
by the Shelton shareholders will include the holding period of the Shelton Stock
surrendered in exchange therefor, provided the shares of Shelton Stock are held
as a capital asset as of the Effective Time. A Shelton shareholder who is
entitled to receive cash in lieu of a fractional share of Webster Stock in
connection with the Merger will recognize gain (or loss) equal to the difference
between such cash amount and the shareholder's basis in the fractional share,
and any gain or loss recognized will be capital gain (or loss) if the Shelton
Stock held by such shareholder is a capital asset at the Effective Time.
Consummation of the Merger is subject to prior receipt by Webster and
Shelton of an opinion of Webster's counsel, Hogan & Hartson L.L.P., as to
federal income taxation consequences of the Merger. This opinion of counsel will
be subject to certain assumptions and qualifications, including an assumption as
to the accuracy of representations to the effect that there is no plan or
intention on the part of the Shelton shareholders to sell Webster Stock to be
received in the Merger in an amount that would result in the Merger failing to
satisfy the "continuity of proprietary interest" requirement that is a
prerequisite to tax-free treatment for the Merger.
The foregoing is a summary of the anticipated federal income tax
consequences of the Merger and is for general information only. It does not
include consequences of foreign, state, local or other tax laws or special
consequences to particular Shelton shareholders having special situations.
Shelton shareholders should consult their own tax advisors regarding specific
tax consequences of the Merger to them, including the application and effect of
federal, foreign, state and local tax laws and tax consequences of subsequent
sales of Webster Stock.
Accounting Treatment
The Merger is intended to qualify as a pooling of interests for
accounting and financial reporting purposes. Under the pooling of interests
method of accounting, the recorded assets and liabilities of Shelton will be
carried forward to Webster at their recorded amounts. Revenues and expenses of
Webster will include revenues and expenses of Shelton for the entire fiscal year
of Webster in which the Merger occurs, and the reported revenues and expenses of
Shelton for prior periods will be combined with those of Webster, whose
financial statements will then be restated.
Webster has received an opinion of its independent accountants, KPMG
Peat Marwick LLP, to the effect that the Merger will be accounted for as a
pooling of interests. Webster's obligation to consummate the Merger is
conditioned upon such opinion not being withdrawn.
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<PAGE>
Resales of Webster Stock Received in the Merger
The shares of Webster Stock to be issued in the Merger will be
registered under the Securities Act and will be freely transferable under such
Act, except for shares issued to any Shelton shareholder who may be deemed to be
an "affiliate" of Shelton for purposes of Rule 145 under the Securities Act.
Affiliates may not sell their shares of Webster Stock acquired in connection
with the Merger, except pursuant to an effective registration statement under
the Securities Act covering such shares, in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
This Joint Proxy Statement/Prospectus does not cover any resales of Webster
Stock received by persons who may be deemed to be affiliates of Shelton. Persons
who may be deemed to be affiliates of Shelton generally include individuals or
entities who control, are controlled by or are under common control with
Shelton, and may include certain officers or directors as well as principal
shareholders of Shelton.
No Appraisal Rights
Pursuant to Section 262(b) of the Delaware General Corporation Law, the
shareholders of a constituent corporation in a merger generally are not entitled
to appraisal rights if the shares of stock they own are, as of the record date
fixed to determine shareholders entitled to notice of and to vote at the meeting
to act upon the agreement providing for such merger, either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc., or held of record by more than 2,000 shareholders.
Since the Webster Stock is traded on the Nasdaq National Market, there
will be no dissenters' appraisal rights for the Shelton shareholders with
respect to the Merger. There are also no dissenters' appraisal rights for the
Webster shareholders with respect to the Merger.
Interests of Certain Persons in the Merger
Under the Merger Agreement, any employee of Shelton who is terminated
other than for cause within six months after the consummation of the Merger will
receive severance benefits, in the case of exempt employees, equal to two weeks'
base salary for each full year of service with Shelton or, in the case of
nonexempt employees, one week of average weekly hourly wages as to hourly
employees and one week of base salary as to salaried employees, for each full
year of employment with Shelton. Shelton employees receiving employment at
Webster Bank will be given credit for service at Shelton for eligibility
purposes under the employee benefit plans of Webster.
The Merger Agreement provides for one Shelton director, who will be
jointly selected by the Boards of Directors of Webster and Shelton, to be
elected to serve as a director of Webster Bank upon consummation of the Merger,
with such director to have an initial term expiring at Webster Bank's 1996
annual meeting and an intention by Webster to cause such director to be elected
to an additional three year term that would expire at Webster Bank's 1999 annual
meeting. All directors of Shelton will be invited to serve on an advisory board
to Webster Bank upon consummation of the Merger for a period of 40 months, with
their compensation as advisory directors to be based on a monthly retainer of
$650 and a monthly meeting attendance fee of $600, with such advisory directors
to be included in Webster's nonqualified deferred compensation plan. Such fees
will not be payable to the advisory director who also will serve as a Webster
Bank director, or to any advisory director serving as an officer or consultant
to Webster Bank, or to J. Allen Kosowsky who agreed to serve without fees. While
serving as consultants to Webster Bank, Messrs. Nimons and Rodriguez will also
serve as advisory directors.
Mr. Schaible has agreed to enter into an employment and consulting
agreement with Webster Bank upon consummation of the Merger (the "Schaible
Agreement"). The Schaible Agreement provides for Mr. Schaible to serve as a
senior vice president of Webster Bank for a period of six months to assist in an
efficient and orderly transition and integration of Shelton's assets, business,
operations, customers and employees with those of Webster Bank, including the
maintenance and expansion of existing depositor and borrowing relationships
especially in the areas previously served by Shelton. During this six-month
period, Mr. Schaible's compensation will be $10,000 per month. Thereafter, Mr.
Schaible has agreed to serve as a consultant on a part-time basis to Webster
Bank for three years, with compensation at the annual rate of $50,000 for the
first year, $40,000 for the second year and $30,000 for the third year. While
serving as a consultant, Mr. Schaible may accept other employment or engagements
that do not interfere with his ability to perform services for Webster Bank,
except with a significant competitor. Under the Schaible Agreement, Mr. Schaible
will also serve as chairman of the advisory board to Webster Bank, without
additional compensation. Mr. Schaible may terminate the Schaible Agreement upon
30 days notice.
37
<PAGE>
Mr. Nimons has agreed to enter into a consulting agreement with Webster
Bank upon consummation of the Merger (the "Nimons Agreement"). The Nimons
Agreement provides for Mr. Nimons to serve as a part-time consultant to Webster
Bank for a period of eight months following the termination of his employment
upon consummation of the Merger, with a consulting fee of $7,500 per month. As a
consultant, Mr. Nimons' services will include assisting Webster Bank in
accomplishing an efficient and orderly transition and integration of Shelton's
assets, business, operations, customers and employees with those of Webster
Bank, with particular emphasis on credit and loan administration matters. While
serving as a consultant, Mr. Nimons may also accept other employment or
engagements, with certain specified limitations. Mr. Nimons may terminate the
Nimons Agreement upon 15 days notice. While serving as a consultant, Mr. Nimons
will also be an advisory director of Webster Bank, without additional
compensation.
Mr. Rodriguez has agreed to enter into a consulting agreement with
Webster Bank upon consummation of the Merger (the "Rodriguez Agreement"). The
Rodriguez Agreement is the same as the Nimons Agreement, except that Mr.
Rodriguez's consulting fee will be $5,000 per month and the particular emphasis
of his consulting will be financial reporting matters.
The Schaible, Nimons and Rodriguez Agreements will replace and
supersede their existing employment agreements with Shelton and Shelton Bank,
and will provide for them to receive upon consummation of the Merger a severance
payment equal to three times their respective average annual compensation that
was paid by Shelton and includible in their gross income for federal income tax
payments for the calendar years 1990 through 1994, reduced by $1.00, which
payments would equal $450,978 for Mr. Schaible, $336,176 for Mr. Nimons and
$209,953 for Mr. Rodriguez. These severance payments are less than the amounts
which Messrs. Schaible, Nimons and Rodriguez would have been entitled to receive
under their existing employment agreements upon termination of their employment
following a change in control of Shelton. Messrs. Schaible, Nimons and Rodriguez
have agreed to have their severance payments limited by Section 280G of the
Code, whereas their existing employment agreements do not contain a Section 280G
limitation.
There are outstanding options to purchase 110,591 shares of Shelton
Stock at an average exercise price of $10.43 per share. These options are held
as follows: 25,475 options by non-employee directors; 47,507 options by Mr.
Schaible; 13,759 options by Mr. Nimons; 8,247 options by Mr. Rodriguez; and
15,603 options by other officers and employees. All options to purchase Shelton
Stock will become options to purchase Webster Stock, with adjustment in number
of shares and exercise price to reflect the Exchange Ratio. The duration and
other terms of these options will otherwise be unchanged, except that options
held by the non-employee directors of Shelton will be modified to expire at the
earlier of their original terms or three months after they cease to serve as
advisory directors of Webster Bank (or in the case of the Shelton director who
will be elected to the Board of Directors of Webster Bank, three months after
such director ceases to serve as director of Webster Bank or as an advisory
director of Webster Bank, whichever is later). Otherwise, such options would
have expired three months after the non-employee directors of Shelton ceased to
serve as directors of Shelton and Shelton Bank upon consummation of the Merger.
In the case of Mr. Schaible, his options will expire three months after he
ceases to serve as a senior vice president of Webster Bank, which would be nine
months after the consummation of the Merger. The options held by Messrs. Nimons
and Rodriguez will expire three months after the termination of their employment
upon consummation of the Merger. Service as a consultant by Messrs. Schaible,
Nimons and Rodriguez will not constitute continued service for purpose of
exercise of their options. Options held by other officers and employees of
Shelton will continue in effect for their original terms as long as they are
employees of Webster Bank or, if earlier, three months after termination of such
employment.
38
<PAGE>
Option Agreement
In consideration of Webster's entering into the Merger Agreement,
Webster and Shelton entered into the Option Agreement immediately after the
execution of the Merger Agreement. Pursuant to the Option Agreement, Shelton
granted Webster the Option, which entitles Webster to purchase up to 267,324
fully paid and nonassessable shares of Shelton Stock, or approximately 19.9% of
the shares of Shelton Stock then outstanding, under the circumstances described
below at a price of $17.00 per share, subject to adjustment in certain
circumstances. The Option Agreement is intended to increase the likelihood that
the Merger will be consummated in accordance with the terms of the Merger
Agreement, and is likely to discourage third parties from proposing a competing
offer to acquire Shelton, even if such offer involves a higher price per share
for the Shelton Stock than the per share consideration to be paid pursuant to
the Merger Agreement. The existence of the Option would significantly increase
the cost to a potential third party of acquiring Shelton compared to its cost
had Shelton not entered into the Option Agreement.
The following brief summary of certain provisions of the Option
Agreement is qualified in its entirety by reference to the Option Agreement,
which was filed as an exhibit to Webster's report on Form 8-K/A, dated July 27,
1995, with the SEC and is incorporated herein by reference. See "INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE."
Subject to applicable law and regulatory restrictions, Webster may
exercise the Option, in whole or in part, if, but only if, a "Purchase Event"
(as defined below) occurs prior to the occurrence of an "Exercise Termination
Event" (as defined below). "Purchase Event" means, in substance, either (i) the
acquisition by any third party of beneficial ownership of 25% or more of the
outstanding Shelton Stock or (ii) the entry by Shelton into a letter of intent
or definitive agreement to engage in an Acquisition Transaction (as defined
below) with any third party, or the recommendation by the Board of Directors of
Shelton that its shareholders approve or accept any Acquisition Transaction with
any third party.
For purposes of the Option Agreement, "Acquisition Transaction" means
(x) a merger, consolidation or other business combination, involving Shelton,
(y) a purchase, lease or other acquisition of all or substantially all of the
assets of Shelton, or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of beneficial ownership of
25% or more of the voting power of Shelton as to a Purchase Event or 11% as to a
Preliminary Purchase Event.
The Option Agreement defines an "Exercise Termination Event" to mean
the earliest to occur of the following: (i) the time immediately preceding the
consummation of the Merger, (ii) 12 months after the first occurrence of a
Purchase Event, (iii) 12 months after the termination of the Merger Agreement
following the occurrence of a Preliminary Purchase Event, (iv) upon the
termination of the Merger Agreement, prior to the occurrence of a Purchase Event
or Preliminary Purchase Event, (A) by both parties, if the Merger Agreement is
terminated by mutual consent, (B) by either Webster or Shelton, if the Merger
has not have occurred by March 31, 1996, or if the Merger Agreement has been
terminated as a result of regulatory denial or requested withdrawal of a
regulatory approval application, or if the Merger Agreement is terminated as a
result of Webster's shareholders failing to approve the issuance of the shares
of Webster Stock to the Shelton shareholders as part of the Merger, or (C) by
Shelton, if the Merger Agreement is terminated by Shelton as a result of a
material breach or breaches of any representation, warranty, covenant or other
agreement by Webster, (v) six months after the termination of the Merger
Agreement, if the Shelton shareholders have failed to approve the Merger
Agreement and no Purchase Event or Preliminary Purchase Event has occurred prior
to the Shelton Meeting, (vi) nine months after the termination of the Merger
Agreement by Webster as a result of a material breach or breaches of any
representation, warranty, covenant or other agreement by Shelton, if such breach
or breaches were not willful or intentional by Shelton, or (vii) 18 months after
the termination of the Merger Agreement by Webster (A) as a result of a willful
or intentional material breach or breaches of any representation, warranty,
covenant or agreement by Shelton, or (B) as a result of a failure of Shelton or
its Board of Directors to hold the Shelton Meeting on a timely basis, to
recommend to Shelton's shareholders that they approve the Merger Agreement, or
to oppose any third party takeover proposal, or based on a violation by Shelton
of the covenant on third party takeover proposals (without regard to the
fiduciary duty exception).
39
<PAGE>
"Preliminary Purchase Event", as defined in the Option Agreement,
includes (i) an acquisition by any third party of beneficial ownership of 11% or
more of the outstanding Shelton Stock; (ii) the entry by Shelton into a letter
of intent or definitive agreement to engage in an Acquisition Transaction with
any third party, or the recommendation by the Board of Directors of Shelton that
its shareholders approve or accept any Acquisition Transaction with any third
party; (iii) the making of a bona fide proposal for an Acquisition Transaction
by any third party to Shelton, or a public announcement or written communication
that is publicly disclosed to Shelton's shareholders as to a third party
engaging in an Acquisition Transaction; (iv) a willful or intentional material
breach or breaches by Shelton of any representation, warranty, covenant or
agreement that would entitle Webster to terminate the Merger Agreement; (v) a
failure by Shelton's shareholders to approve the Merger Agreement; (vi) a
withdrawal or modification in any manner adverse to Webster by Shelton's Board
of Directors of its approval recommendation as to the Merger Agreement, or a
failure by Shelton or its Board of Directors to oppose any third party takeover
proposal; or (vii) a filing by any third party of an application or notice with
any regulatory authority for approval to engage in an Acquisition Transaction.
The Option may not be assigned by Webster to any other person without
the express written consent of Shelton, except that Webster may assign its
rights under the Option Agreement in whole or in part after the occurrence of a
Preliminary Purchase Event. Shelton also has agreed to prepare and file a
registration statement with respect to the shares to be issued upon exercise of
the Option under applicable federal and state securities laws. Upon the
occurrence of a Purchase Event prior to an Exercise Termination Event, at the
request of Webster, Shelton will be obligated to repurchase the Option, and any
shares of Shelton Stock theretofore purchased pursuant to the Option, at prices
determined as set forth in the Option Agreement, except to the extent prohibited
by applicable law, regulation or administrative policy or to the extent that the
repurchase would cause Shelton Bank's capital to fall below the minimum level
required by the FDIC for Shelton Bank to be deemed a "well-capitalized
institution", or if such repurchase would preclude an Acquisition Transaction
from being accounted for as a pooling of interests.
In the event that prior to an Exercise Termination Event, Shelton
enters into an agreement (i) to consolidate or merge with any third party, and
Shelton is not the continuing or surviving corporation in such consolidation or
merger, (ii) to permit any third party to merge into Shelton and Shelton is the
continuing or surviving corporation, but, in connection with such merger, the
then outstanding shares of Shelton Stock are changed into or exchanged for stock
or other securities of any third party or cash or any other property or the then
outstanding shares of Shelton Stock will after such merger represent less than
50% of the outstanding shares and share equivalents of the merged company or
(iii) to sell or otherwise transfer all or substantially all of its assets to
any third party, then, and in each such case, the agreement governing such
transaction must make proper provision so that the Option shall, upon the
consummation of such transaction, be converted into, or exchanged for, an option
(the "Substitute Option"), at the election of Webster, of either (x) the
acquiring corporation or (y) any person that controls the acquiring corporation.
The Substitute Option will be exercisable for shares of the issuer's common
stock in such number and at such exercise price as is set forth in the Option
Agreement and will otherwise have the same terms as the Option, except that the
number of shares subject to the Substitute Option may not exceed 19.9% of the
issuer's outstanding shares of common stock.
40
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Pro Forma Combined Statement of Financial Condition as of
March 31, 1995 combines the historical consolidated statements of financial
condition of Webster and Shelton as if the Merger had occurred on March 31,
1995, after giving effect to pro forma adjustments described in the accompanying
notes. The Pro Forma Combined Statements of Income for the three months ended
March 31, 1995 and for the years ended December 31, 1994, 1993 and 1992 are
presented as if the Merger had been consummated at the beginning of each period
presented.
Webster's fiscal year ends December 31 and Shelton's fiscal year ends
June 30. In the Pro Forma Combined Statements of Income, Shelton's results of
operations are presented consistent with the fiscal year of Webster, so that the
Pro Forma Combined Statements of Income for the years ended December 31, 1994,
1993 and 1992 are for Webster's 1994, 1993 and 1992 fiscal years and a
restatement of Shelton's results for each of such years on a 12-month ended
December 31 basis.
The pro forma combined financial statements should be read in
conjunction with the separate historical consolidated financial statements and
notes of Webster and of Shelton incorporated by reference or appearing elsewhere
herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" as to Webster and
"SHELTON CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30 YEAR END" and "SHELTON
CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31 UNAUDITED" attached hereto as
Appendix B and Appendix C, respectively. The pro forma combined financial
statements are not necessarily indicative of the consolidated financial position
or results of future operations of the combined entity or of the actual results
that would have been achieved had the Merger been consummated prior to the
periods indicated.
41
<PAGE>
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF CONDITION
MARCH 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Webster Shelton Pro Forma Pro Forma
(historical) (historical) Adjustments Combined
------------ ------------ ------------ ----------
(In Thousands)
ASSETS
<S> <C> <C> <C> <C>
Cash and Due from Depository Institutions........... $ 34,374 $ 7,809 $ --- $ 42,183
Interest-bearing Deposits........................... 47,443 36 --- 47,479
Securities.......................................... 145,321 41,636 --- 186,957
Mortgage-backed Securities.......................... 687,616 14,356 --- 701,972
Loans Receivable, Net............................... 1,642,197 220,378 --- 1,862,575
Accrued Interest Receivable......................... 16,738 1,842 --- 18,580
Premises and Equipment, Net......................... 30,727 5,524 --- 36,251
Segregated Assets, Net.............................. 130,919 --- --- 130,919
Other Real Estate Acquired Through
Foreclosure and In-Substance Foreclosure, Net..... 21,832 766 --- 22,598
Prepaid Expenses and Other Assets................... 28,921 2,651 --- 31,572
------ ----- --- ------
TOTAL ASSETS.................................... $ 2,786,088 $ 294,998 $ --- $ 3,081,086
========= ======= === = =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................ $ 2,171,305 $ 270,141 --- $ 2,441,446
Federal Home Loan Bank Advances..................... 382,000 3,700 --- 385,700
Other Borrowings.................................... 43,130 --- --- 43,130
Advance Payments by Borrowers for Taxes
and Insurance..................................... 7,734 1,279 --- 9,013
Accrued Expenses and Other Liabilities.............. 38,527 344 2,060(a) 40,931
------ --- ----- ------
Total Liabilities............................... 2,642,696 275,464 2,060 2,920,220
--------- ------- ----- ---------
SHAREHOLDERS' EQUITY
Common Stock...................................... 62 1,439 (1,426)(b) 75
Paid in Capital................................... 96,481 7,942 676 (b) 105,099
Retained Earnings................................. 53,740 10,903 (2,060)(b) 62,583
Less Treasury Stock at Cost....................... (3,684) (750) 750 (b) (3,684)
Less Employee Stock Ownership Plan
Shares Purchased with Debt....................... (3,207) --- --- (3,207)
------ --- --- ------
Total Shareholders' Equity....................... 143,392 19,534 (2,060) 160,866
------- ------ ------ -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........................... $ 2,786,088 $ 294,998 $ --- $ 3,081,086
========= ======= === = =========
</TABLE>
The pro forma combined statement of condition has not been adjusted to
reflect any of the improvements in operating efficiencies that Webster
anticipates may occur in the future due to the Merger with Shelton.
42
<PAGE>
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
Combined
Webster Shelton Webster
(In Thousands) (historical) (historical) and Shelton
-------------- ------------ -------------
<S> <C> <C> <C>
Interest Income:
Loans and Segregated Assets....................... $ 33,437 $ 3,866 $ 37,303
Mortgage-backed Securities........................ 10,348 851 11,199
Securities and Interest-bearing Deposits.......... 2,400 52 2,452
----- -- -----
Total Interest Income........................... 46,185 4,769 50,954
Interest Expense:
Interest on Deposits.............................. 19,688 2,492 22,180
Interest on Borrowings............................ 6,657 70 6,727
----- -- -----
Total Interest Expense.......................... 26,345 2,562 28,907
------ ----- ------
Net Interest Expense.............................. 19,840 2,207 22,047
Provision for Loan Losses........................... 280 105 385
--- --- ---
Net Interest Income After Provision for
Loan Losses...................................... 19,560 2,102 21,662
Noninterest Income:
Fees and Service Charges.......................... 3,197 318 3,515
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 311 26 337
Other Noninterest Income.......................... 890 48 938
--- -- ---
Total Noninterest Income........................ 4,398 392 4,790
----- --- -----
Noninterest Expenses:
Salaries and Employee Benefits.................... 8,449 738 9,187
Occupancy Expense of Premises..................... 1,414 22 1,436
Furniture and Equipment Expenses.................. 1,378 212 1,590
Federal Insurance Premiums........................ 1,262 182 1,444
Other Real Estate Owned Expenses and
Provisions, Net.................................. 1,322 13 1,335
Other Operating Expenses.......................... 3,309 422 3,731
----- --- -----
Total Noninterest Expenses...................... 17,134 1,589 18,723
------ ----- ------
Income Before Income Taxes.......................... 6,824 905 7,729
Income Taxes Expense................................ 2,160 335 2,495
----- --- -----
Net Income ......................................... 4,664 570 5,234
Preferred Stock Dividends........................... 324 --- 324
--- --- ---
Net Income Available to Common
Shareholders...................................... $ 4,340 $ 570 $ 4,910
===== === =====
Net Income Per Common Share (c):
Primary........................................... $ 0.71
====
Fully Diluted..................................... $ 0.67
====
</TABLE>
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
43
<PAGE>
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Combined
Webster Shelton Webster
(In Thousands) (historical) (historical) and Shelton
-------------- ------------ -------------
<S> <C> <C> <C>
Interest Income:
Loans and Segregated Assets....................... $ 125,760 $ 13,888 $ 139,648
Mortgage-backed Securities........................ 37,984 802 38,786
Securities and Interest-bearing Deposits.......... 9,506 2,880 12,386
----- ----- ------
Total Interest Income........................... 173,250 17,570 190,820
Interest Expense:
Interest on Deposits.............................. 68,229 8,606 76,835
Interest on Borrowings............................ 21,284 345 21,629
------ --- ------
Total Interest Expense.......................... 89,513 8,951 98,464
------ ----- ------
Net Interest Income............................. 83,737 8,619 92,356
Provision for Loan Losses........................... 2,900 255 3,155
----- --- -----
Net Interest Income After Provision for
Loan Losses..................................... 80,837 8,364 89,201
Noninterest Income:
Fees and Service Charges.......................... 11,233 955 12,188
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. (1,073) (109) (1,182)
Other Noninterest Income.......................... 2,207 416 2,623
----- --- -----
Total Noninterest Income........................ 12,367 1,262 13,629
------ ----- ------
Noninterest Expenses:
Salaries and Employee Benefits.................... 31,995 2,948 34,943
Occupancy Expense of Premises..................... 5,517 179 5,696
Furniture and Equipment Expenses.................. 5,582 394 5,976
Federal Deposit Insurance Premiums................ 5,185 557 5,742
Other Real Estate Owned Expenses
and Provisions, Net.............................. 6,852 97 6,949
Other Operating Expenses.......................... 17,931 2,058 19,989
------ ----- ------
Total Noninterest Expenses...................... 73,062 6,233 79,295
------ ----- ------
Income Before Income Taxes ......................... 20,142 3,393 23,535
Income Taxes Expense................................ 3,657 1,193 4,850
----- ----- -----
Net Income ......................................... 16,485 2,200 18,685
Preferred Stock Dividends........................... 1,716 --- 1,716
----- --- -----
Net Income Available to Common
Shareholders...................................... $ 14,769 $ 2,200 $ 16,969
====== ===== ======
Net Income Per Common Share (c):
Primary........................................... $ 2.69
====
Fully Diluted..................................... $ 2.44
====
</TABLE>
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
44
<PAGE>
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Combined
Webster Shelton Webster
(In Thousands) (historical) (historical) and Shelton
-------------- ------------ -------------
<S> <C> <C> <C>
Interest Income:
Loans and Segregated Assets....................... $ 108,084 $ 13,288 $ 121,372
Mortgage-backed Securities........................ 24,448 329 24,777
Securities and Interest-bearing Deposits.......... 5,275 3,165 8,440
----- ----- -----
Total Interest Income........................... 137,807 16,782 154,589
Interest Expense:
Interest on Deposits.............................. 60,156 8,531 68,687
Interest on Borrowings............................ 11,836 280 12,116
------ --- ------
Total Interest Expense.......................... 71,992 8,811 80,803
------ ----- ------
Net Interest Income............................. 65,815 7,971 73,786
Provision for Loan Losses........................... 4,447 150 4,597
----- --- -----
Net Interest Income After Provision for
Loan Losses..................................... 61,368 7,821 69,189
Noninterest Income:
Fees and Service Charges.......................... 7,055 857 7,912
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 937 943 1,880
Other Noninterest Income.......................... 782 129 911
--- --- ---
Total Noninterest Income........................ 8,774 1,929 10,703
----- ----- ------
Noninterest Expenses:
Salaries and Employee Benefits.................... 19,603 2,733 22,336
Occupancy Expense of Premises..................... 4,455 302 4,757
Furniture and Equipment Expenses.................. 3,634 432 4,066
Federal Deposit Insurance Premiums................ 3,354 567 3,921
Other Real Estate Owned Expenses
and Provisions, Net.............................. 4,556 529 5,085
Other Operating Expenses.......................... 12,843 1,989 14,832
------ ----- ------
Total Noninterest Expenses...................... 48,445 6,552 54,997
------ ----- ------
Income Before Income Taxes ......................... 21,697 3,198 24,895
Income Taxes Expense................................ 9,160 1,435 10,595
----- ----- ------
Income Before Cumulative Effect of Change
in Method of Accounting for Income Taxes.......... 12,537 1,763 14,300
Cumulative Effect of Change in Method of
Accounting for Income Taxes....................... 4,300 275 4,575
----- --- -----
Net Income.......................................... 16,837 2,038 18,875
Preferred Stock Dividends........................... 2,653 --- 2,653
----- --- -----
Net Income Available to Common
Shareholders...................................... $ 14,184 $ 2,038 $ 16,222
====== ===== ======
Net Income Per Common Share Before Cumulative
Effect of Change in Method of
Accounting for Income Taxes (c):
Primary........................................... $ 2.25
====
Fully Diluted..................................... $ 2.04
====
Net Income Per Common Share After Cumulative
Effect of Change in Method of
Accounting for Income Taxes (c):
Primary........................................... $ 3.13
====
Fully Diluted..................................... $ 2.73
====
</TABLE>
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
45
<PAGE>
WEBSTER FINANCIAL CORPORATION
SHELTON BANCORP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Combined
Webster Shelton Webster
(In Thousands) (historical) (historical) and Shelton
-------------- ------------ -------------
<S> <C> <C> <C>
Interest Income:
Loans and Segregated Assets....................... $ 68,918 $ 14,731 $ 83,649
Mortgage-backed Securities........................ 19,202 537 19,739
Securities and Interest-bearing Deposits.......... 4,282 3,351 7,633
----- ----- -----
Total Interest Income........................... 92,402 18,619 111,021
Interest Expense:
Interest on Deposits.............................. 44,803 10,075 54,878
Interest on Borrowings............................ 5,897 430 6,327
----- --- -----
Total Interest Expense.......................... 50,700 10,505 61,205
------ ------ ------
Net Interest Income............................. 41,702 8,114 49,816
Provision for Loan Losses........................... 4,336 1,238 5,574
----- ----- -----
Net Interest Income After Provision for
Loan Losses..................................... 37,366 6,876 44,242
Noninterest Income:
Fees and Service Charges.......................... 4,857 820 5,677
Gain on Sale of Loans, Securities and
Mortgage-backed Securities, Net.................. 952 1,010 1,962
Other Noninterest Income.......................... 429 339 768
--- --- ---
Total Noninterest Income........................ 6,238 2,169 8,407
----- ----- -----
Noninterest Expenses:
Salaries and Employee Benefits.................... 12,064 2,482 14,546
Occupancy Expense of Premises..................... 2,466 269 2,735
Furniture and Equipment Expenses.................. 2,367 375 2,742
Federal Deposit Insurance Premiums................ 1,775 491 2,266
Other Real Estate Owned Expenses
and Provisions, Net.............................. 5,661 474 6,135
Other Operating Expenses.......................... 9,038 1,691 10,729
----- ----- ------
Total Noninterest Expenses...................... 33,371 5,782 39,153
------ ----- ------
Income Before Income Taxes.......................... 10,233 3,263 13,496
Income Taxes Expense ............................... 5,446 1,637 7,083
----- ----- -----
Net Income ......................................... 4,787 1,626 6,413
Preferred Stock Dividends........................... 581 --- 581
--- --- ---
Net Income Available to Common
Shareholders...................................... $ 4,206 $ 1,626 $ 5,832
===== ===== =====
Net Income Per Common Share (c):
Primary........................................... $ 1.18
====
Fully Diluted..................................... $ 1.16
====
</TABLE>
The pro forma combined statement of income has not been adjusted to reflect
any of the improvements in operating efficiencies that Webster anticipates may
occur in the future due to the Merger with Shelton.
46
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) Represents the estimated merger costs that will be incurred by Webster and
Shelton. These costs are not reflected in the Pro Forma Combined Statements of
Income since these items do not have a continuing impact upon Webster. The
following table summarizes the financial impact of the additional accruals as
reflected in the Pro Forma Combined Statement of Financial Condition (in
thousands):
Compensation (severance and related costs) $ 1,500
Transaction costs (including investment bankers,
attorneys and accountants) 650
Computer conversion costs (including consultants and the
transfer of customer records) 350
Redundant data processing hardware and software 125
Miscellaneous expenses 375
----
Total pre-tax adjustments $ 3,000
Income tax effect (940)
-----
Net after tax adjustments $ 2,060
=======
All of the accrual adjustments noted above are deemed to be period
costs and will be expensed in the quarter in which the Merger is consummated.
(b) Represents the elimination of Shelton's historical aggregate $1.00 per share
par value of $1.4 million, the issuance of Webster Stock at aggregate $0.01 per
share par value of $13,000, the elimination of Shelton's Treasury Stock and the
net effect on Paid in Capital.
(c) Pro Forma Combined Webster and Shelton Net Income per Common Share data have
been determined based upon (i) the combined historical net income of Webster and
Shelton and (ii) the combined historical weighted average common equivalent
shares of Webster and Shelton. For purposes of this determination, Shelton's
historical weighted average common shares outstanding were multiplied by the .92
Exchange Ratio.
47
<PAGE>
SHELTON BANCORP, INC.
General
Shelton, headquartered in Shelton, Connecticut, is a unitary savings
and loan holding company incorporated in Delaware. In 1989, Shelton became the
holding company of Shelton Bank, which is Shelton's sole subsidiary. Shelton's
principal business activity is the holding of Shelton Bank's outstanding common
stock. All of Shelton's income is derived from Shelton Bank.
Shelton Bank was founded in 1919, as a Connecticut-chartered mutual
savings and loan association. In 1986, Shelton Bank converted to stock
ownership. In 1988, Shelton Bank converted from a capital stock savings and loan
association to a capital stock savings bank, and adopted its current name.
Shelton Bank is headquartered in Shelton, and has branch offices in the towns of
Ansonia, Bethany, Oxford and Shelton. Shelton Bank's general market area is in
eastern Fairfield and southwestern New Haven Counties. Through its six
full-service offices, Shelton Bank provides a wide range of retail deposit and
credit services, with special emphasis on residential real estate lending.
Through its Trust Department, Shelton Bank provides investment advisory and
management services to both retail and corporate customers. Shelton Bank also
engages in the development and sale of residential real estate. As required by
federal regulations, Shelton Bank must divest all of its real estate investments
by December 19, 1996. Shelton Bank has approximately 80 full-time equivalent
employees, none of whom is represented by a collective bargaining agreement.
Management considers its relations with its employees to be excellent.
Competition
Shelton Bank operates in a highly competitive market area with
competitors that include savings bank, savings and loan associations, commercial
banks, mortgage companies, credit unions, consumer finance companies, insurance
companies, brokerage firms and mutual fund companies. Most of these competitors
have financial resources that are far greater than Shelton Bank's. Shelton
anticipates further increases in competition as the result of growing interstate
banking activity. Changes in the financial services industry resulting from
fluctuating interest rates, technological changes, and deregulation have
resulted in an increase in competition, cost of funds, merger activity and
customer awareness of product and service differences among competitors.
During the three years ended December 31, 1993, approximately 40
Connecticut-based banking institutions failed. Several of these institutions
operated in Shelton's market area and such failures have resulted in, through
resolution transactions with the FDIC, the entrance of at least two substantial
out-of-state financial institutions into Connecticut. The number of bank
failures has reflected both the difficult economic conditions that Shelton
currently faces in its market area and the competition experienced by such
institutions in an industry which state and federal bank may have substantial
over capacity. The consolidation of financial institutions will likely continue
and particularly affect banks.
Regulation
Both Shelton and Shelton Bank are subject to extensive supervision and
regulation, which focus on the protection of depositors' funds.
As a savings and loan holding company, Shelton is subject to regulation
by the OTS, a department of the U.S. Treasury. As a unitary savings and loan
holding company, Shelton is currently permitted to engage in a broad range of
activities, including direct investments in real estate. Bank holding companies
registered with the Federal Reserve Board (the "FRB") are, among other things,
restricted from making direct investments in real estate. If Shelton Bank fails
to keep at least 70% of its total assets invested in residential real estate and
other specified assets, Shelton would lose its status as a savings and loan
holding company, and would be required to register with the FRB as a bank
holding company. In management's opinion, Shelton Bank will have no difficulty
in maintaining a level of qualified investments in excess of 70% of total assets
in the foreseeable future.
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As a Connecticut-chartered savings bank, Shelton Bank is governed by
Connecticut banking law and to regulation by the Connecticut Commissioner.
Deposits at Shelton Bank are insured by the Bank Insurance Fund (the "BIF") of
the FDIC, making Shelton Bank subject to FDIC regulations. As the result of an
increase in the number of bank failures, the cost of FDIC deposit insurance
premiums has increased dramatically during the past several years. However, with
the BIF reaching its required funding level it is anticipated that the cost of
deposit insurance will likely decrease. As a member of the Federal Home Loan
Bank ("FHLB") System, Shelton Bank is required to maintain a specified level of
liquid assets, and to own shares of stock in its regional FHLB equal to the
greater of 1% of outstanding residential mortgage loans, or 5% of outstanding
borrowings from its regional FHLB. Shelton Bank is also required by the Board of
Governors of the Federal Reserve System to maintain cash reserves against its
deposits. After exhausting all other sources of funds, Shelton Bank may borrow
from the Federal Reserve.
Economic Conditions and Governmental Policy
The profitability of Shelton is affected by general economic conditions
and governmental policies. Similar to all of New England, the recovery from the
1990-1991 recession has been slow. Despite the region's recent job turnaround,
traditional economic drivers are in disarray, and the industries that are now
growing seem less predictable. No local engine of growth has yet surfaced to get
the region moving, so expansion is dependent on the pace of the national
recovery. Ongoing cuts in defense contracts will be a drag on Connecticut's
economy throughout the 1990s because private jobs in the region are more
defense-dependent than in most other regions on the country. However, over the
past few years a favorable interest rate environment and moderate improvements
in Connecticut's economy, including stability in the region's real estate
market, have led Shelton to record earnings and appreciated shareholder value.
Shelton has also experienced a sharp decline in non-performing assets, loan loss
provision, loan charge-offs and expenses related to non-performing assets. It is
anticipated that as the general economic environment of Connecticut improves
that it will be reflected in Shelton's operations.
Taxation
Shelton and Shelton Bank file a consolidated Federal and State of
Connecticut tax returns. Taxation of savings institutions is essentially the
same as that of other corporations, except that Shelton Bank can compute its
deduction for bad debts utilizing the percentage of taxable income method,
subject to its ability to meet certain requirements. Shelton is also subject to
Delaware state franchise taxes. Shelton's tax returns have been audited, or
closed without audit, by the Internal Revenue Service through the year ended
June 30, 1989.
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MARKET PRICES AND DIVIDENDS
Webster Stock
The following sets forth the range of high and low sale prices of
Webster Stock as reported on the Nasdaq National Market, as well as cash
dividends paid during the periods indicated:
<TABLE>
<CAPTION>
Market Price Cash
High Low Dividends Paid
<S> <C> <C> <C>
Quarter Ended:
March 31, 1992 $12 3/4 $10 1/2 $0.12
June 30, 1992 12 7/8 10 1/2 0.12
September 30, 1992 14 1/2 11 7/8 0.12
December 31, 1992 17 1/4 12 3/4 0.12
March 31, 1993 19 1/8 16 3/8 0.12
June 30, 1993 18 1/2 15 3/8 0.12
September 30, 1993 21 17 3/4 0.13
December 31, 1993 25 20 1/4 0.13
March 31, 1994 22 1/4 18 1/2 0.13
June 30, 1994 24 3/4 18 3/8 0.13
September 30, 1994 25 1/2 22 1/2 0.13
December 31, 1994 23 1/2 17 1/4 0.13
March 31, 1995 22 1/4 18 1/2 0.16
June 30, 1995 25 3/4 21 1/2 0.16
September 30, 1995
(through August ___)
</TABLE>
On June 20, 1995, the last trading day prior to the public announcement
of the Merger, the closing price of Webster Stock on the Nasdaq National Market
was $24 1/8. On August ____, 1995 (the most recent practical date prior to the
printing of this Joint Proxy Statement/Prospectus), the closing price of Webster
Stock on the Nasdaq National Market was $_______.
Webster paid a 10% stock dividend on June 4, 1993. The per share data
shown above and elsewhere in this Joint Proxy Statement/Prospectus have been
adjusted to reflect such 10% stock dividend.
50
<PAGE>
Shelton Stock
<TABLE>
<CAPTION>
Market Price Cash
High Low Dividends Paid
<S> <C> <C> <C>
Quarter Ended:
March 31, 1992 $ 9.46 $ 6.58 $0.12
June 30, 1992 9.98 9.05 0.12
September 30, 1992 11.45 9.26 0.11
December 31, 1992 10.80 9.50 0.12
March 31, 1993 11.88 9.93 0.11
June 30, 1993 14.04 9.75 0.11
September 30, 1993 14.06 10.43 0.12
December 31, 1993 15.875 12.93 0.12
March 31, 1994 15.875 14.29 0.12
June 30, 1994 20.25 14.05 0.13
September 30, 1994 19.75 17.50 0.15
December 31, 1994 18.875 15.00 0.15
March 31, 1995 16.00 14.00 0.16
June 30, 1995 20.75 14.00 0.16
September 30, 1995
(through August ___)
</TABLE>
On June 20, 1995, the last trading day prior to the public announcement
of the Merger, the closing price of Shelton Stock on the Nasdaq National Market
was $17.50. On August ____, 1995 (the most recent practical date prior to the
printing of this Joint Proxy Statement/Prospectus) the closing price of Shelton
Stock on the Nasdaq National Market was $_______.
Shelton paid 5% stock dividends on each of August 3, 1992, April 30,
1993, October 27, 1993 and April 27, 1994. The per share data shown above and
elsewhere in this Joint Proxy Statement/Prospectus have been adjusted to reflect
such 5% stock dividends.
Shareholders are advised to obtain current market quotations for
Webster Stock. It is expected that the market price of Webster Stock will
fluctuate between the date of this Joint Proxy Statement/Prospectus and the date
on which the Merger is consummated. Because the number of shares of Webster
Stock to be received by Shelton shareholders in the Merger is fixed, the value
of the shares of Webster Stock that the holders of Shelton Stock would receive
in the Merger may increase or decrease prior to or after the Merger.
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<PAGE>
SHELTON STOCK OWNERSHIP BY CERTAIN PERSONS
The following table sets forth the beneficial ownership of Shelton
Stock as of the Shelton Record Date by (i) each person known by Shelton to be
the beneficial owner of more than five percent of Shelton Stock, (ii) directors
and executive officers of Shelton, and (iii) directors and executive officers of
Shelton, as a group. Unless otherwise indicated, the persons listed below have
sole voting and investment power.
<TABLE>
<CAPTION>
Number of Number of
Name Shares Beneficially Shares Beneficially
Owned (Excluding Percent Owned (Including Percent
Stock Options) of Class Stock Options) of Class
<S> <C> <C> <C> <C>
LeRoy T. Glover 18,148 1.4% 21,429 1.5%
J. Allen Kosowsky 49,446 3.7 57,137 3.9
Samuel Kreiger 24,370 1.8 27,651 1.9
William C. Nimons 30,415 2.3 44,174 3.0
Joseph A. Pagliaro 40,036 3.0 40,286 2.8
Ralph J. Rodriguez 8,998 .7 17,245 1.2
Kenneth E. Schaible 15,141 1.1 62,648 4.3
Donald W. Smith 14,641 1.1 22,332 1.5
Charles H. Sullivan 1,116 .1 1,366 .1
Directors and Executive
Officers as a Group
(9 persons) 202,311 15.6 294,268 20.5
</TABLE>
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF SHAREHOLDER RIGHTS
Set forth below is a description of Webster's capital stock, as well as
a summary of the material differences between the rights of holders of Shelton
Stock and their prospective rights as holders of Webster Stock. If the Merger
Agreement is approved and adopted and the Merger consummated, the holders of
Shelton Stock will become holders of Webster Stock. As a result, Webster's
certificate of incorporation and bylaws, and the applicable provisions of
Delaware law, will govern the rights of current shareholders of Shelton Stock.
The rights of those shareholders are currently governed by the certificate of
incorporation and bylaws of Shelton, and the applicable provisions of Delaware
law.
The following comparison is based on the current terms of the governing
documents of Webster and Shelton and on the provisions of Delaware law, which is
applicable to both Webster and Shelton. The discussion is intended to highlight
important similarities and differences between the rights of holders of Webster
Stock and Shelton Stock.
Webster Stock
Webster is authorized to issue 14,000,000 shares of Webster Stock, of
which 5,498,142 are currently issued and outstanding. After giving effect to the
conversion of the outstanding Series B Stock of Webster described below, there
would then be 986,062 additional shares of Webster Stock, or a total of
6,484,204 shares of the Webster Stock then outstanding. Webster has outstanding
stock options granted to directors, officers and other employees for 546,298
shares of Webster Stock. Each share of Webster Stock has the same relative
rights and is identical in all respects to each other share of Webster Stock.
The Webster Stock is non-withdrawable capital, is not of an insurable type and
is not insured by the FDIC or any other governmental entity.
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<PAGE>
Holders of Webster Stock are entitled to one vote per share on each
matter properly submitted to shareholders for their vote, including the election
of directors. Holders of Webster Stock do not have the right to cumulate their
votes for the election of directors, and they have no pre-emptive or conversion
rights with respect to any shares that may be issued. Webster Stock is not
subject to additional calls or assessments by Webster, and all shares of Webster
Stock currently outstanding are fully paid and nonassessable.
Holders of Webster Stock are entitled to receive dividends when and as
declared by the Board of Directors of Webster out of funds legally available for
distribution. No dividends or other distributions may be declared or paid on
Webster Stock, however, unless all accumulated dividends have been paid
concurrently on the Series B Stock. In addition, as described below, the
indenture for the Senior Notes places certain restrictions on Webster's ability
to pay dividends on Webster Stock. See "-- Senior Notes."
In the unlikely event of any liquidation or dissolution of Webster, the
holders of Webster Stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of Webster and after payment
of the liquidation preferences of all outstanding shares of preferred stock, all
remaining assets of Webster available for distribution, in cash or in kind.
Series B Stock
Webster's certificate of incorporation authorizes its Board of
Directors, without further shareholder approval, to issue up to 3,000,000 shares
of serial preferred stock for any proper corporate purpose. In approving any
issuance of serial preferred stock, the Board of Directors has broad authority
to determine the rights and preferences of the serial preferred stock, which may
be issued in one or more series. These rights and preferences may include
voting, dividend, conversion and liquidation rights that may be senior to the
Webster Stock.
Of the 3,000,000 authorized shares of serial preferred stock, 171,869
shares of Series B 7 1/2% Cumulative Convertible Preferred Stock (the "Series B
Stock") are outstanding. The Series B Stock ranks prior to the Webster Stock
with respect to dividends and amounts distributable upon liquidation. The Series
B Stock is entitled to receive, when declared by the Board of Directors out of
funds of Webster legally available therefor, cumulative quarterly cash dividends
at an annual rate of 7 1/2%. Unless full cumulative dividends on the Series B
Stock have been paid, dividends (other than in Webster Stock) may not be paid or
declared upon the Webster Stock. Upon any liquidation of Webster, the holders of
the Series B Stock will be entitled to receive out of the assets of Webster
available for distribution to its shareholders before any distribution is made
to holders of the Webster Stock an amount equal to $100 per share, plus an
amount equal to all dividends accumulated and unpaid on the Series B Stock to
the date of final distribution.
Except as indicated below or as required by law, holders of the Series
B Stock have no voting rights. If at any time six quarterly dividends payable on
the Series B Stock are accrued and unpaid, the number of directors of Webster is
required to be increased by two and the holders of all the Series B Stock,
voting as a single class, will be entitled to elect the additional two directors
until all dividends accumulated on the Series B Stock have been paid in full. In
addition, without the vote or consent of the holders of at least two-thirds of
the Series B Stock then outstanding, Webster may not (i) amend, alter or repeal
any of the provisions of its certificate of incorporation or certificate of
designation so as to affect adversely the preference or power of the Series B
Stock, (ii) authorize any reclassification of the Series B Stock, or (iii) issue
any shares of any class or series of stock of Webster ranking prior to the
shares of the Series B Stock as to dividends or upon liquidation, or reclassify
any authorized stock of Webster into any such prior shares or issue any
obligation or security convertible into or evidencing the right to purchase any
such prior shares. Accordingly, the voting rights of the holders of Series B
Stock could under certain circumstances operate to restrict the flexibility
which Webster would otherwise have in connection with any future issuances of
equity securities or changes to its capital structure.
53
<PAGE>
The Series B Stock is not subject to any mandatory redemption at the
election of the holder or sinking fund provision. The Series B Stock may be
redeemed for cash at the option of Webster, in whole or in part, at any time on
or after January 15, 1997, at the applicable redemption price, plus accumulated
and unpaid dividends. The redemption price initially will be $104.50 per share
effective as of January 15, 1997 and will decline to $100.00 after January 15,
2003. Holders of Series B Stock have the right, at their option, at any time to
convert the Series B Stock into a number of fully paid and nonassessable shares
of Webster Stock equal to $100.00 for each share surrendered for conversion
divided by the conversion price, subject to certain exceptions following a
notice of redemption by Webster.
Senior Notes
The 8 3/4% Senior Notes due 2000 (the "Senior Notes") were issued by
Webster in an aggregate principal amount of $40,000,000 pursuant to an Indenture
(the "Indenture"), dated as of June 15, 1993, between Webster and Chemical Bank,
as trustee (the "Trustee"). Certain provisions of the Indenture are summarized
below because of their impact on the Webster Stock. The Senior Notes bear
interest at 8 3/4% payable semi-annually on each June 30 and December 30 until
maturity on June 30, 2000. The Senior Notes are unsecured general obligations
only of Webster and not of its subsidiaries. The Senior Notes may not be
redeemed by Webster prior to maturity. This provision is not expected to have an
anti-takeover effect, since the Notes would be assumed by any acquirer of
Webster. The Indenture contains covenants that limit Webster's ability at the
holding company level to incur additional Funded Indebtedness (as defined
below), to make Restricted Distributions (as defined below), to engage in
certain dispositions affecting First Federal or its voting stock, to create
certain liens upon Webster's assets at the holding company level (including a
negative pledge clause), and to engage in mergers, consolidations, or sale of
substantially all of Webster's assets unless certain conditions are satisfied.
The Indenture also requires that Webster maintain a specified level of liquid
assets at the holding company level.
Restrictions on Additional Indebtedness. The Indenture limits the
amount of Funded Indebtedness which Webster may incur or guarantee at the
holding company level. Funded Indebtedness includes any obligation of Webster
with a maturity in excess of one year for borrowed money, for the deferred
purchase price of property or services, for capital lease payments, or related
to the guarantee of such obligations. Webster may not incur or guarantee any
Funded Indebtedness if, immediately after giving effect thereto, the amount of
Funded Indebtedness of Webster at the holding company level, including the
Senior Notes, would be greater than 90% of Webster's consolidated net worth. As
of March 31, 1995, Webster's consolidated net worth was $143.4 million and it
had $43.2 million of Funded Indebtedness.
Restricted Distributions. Under the Indenture, Webster may not,
directly or indirectly, make any Restricted Distribution (as defined below),
except in capital stock of Webster, if, at the time or after giving effect
thereto: (a) an event of default shall have occurred and be continuing under the
Indenture; (b) First Federal would fail to meet any of the applicable minimum
capital requirements under OTS regulations; (c) Webster would fail to maintain
sufficient liquid assets to comply with the terms of the covenant described
under "Liquidity Maintenance" below; or (d) the aggregate amount of all
Restricted Distributions subsequent to March 31, 1993 would exceed the sum of
(i) $5 million, plus (ii) 75% of Webster's aggregate consolidated net income (or
if such aggregate consolidated net income shall be a deficit, minus 100% of such
deficit) accrued on a cumulative basis in the period commencing on March 31,
1993 and ending on the last day of the fiscal quarter immediately preceding the
date of the Restricted Distribution, and plus (iii) 100% of the net proceeds
received by Webster from any capital stock issued by Webster (other than to a
subsidiary) subsequent to March 31, 1993. As of March 31, 1995, Webster had the
ability to pay $49.9 million in Restricted Distributions.
54
<PAGE>
Restricted Distribution means: (a) any dividend, distribution or other
payment (except for dividends, distributions or payments payable in capital
stock or dividends on the Series B Stock) on the capital stock of Webster or any
subsidiary (other than a wholly owned subsidiary); (b) any payment to purchase,
redeem, acquire or retire any capital stock of Webster (other than the Series A
Stock, which was previously redeemed), the capital stock of any subsidiary
(other than a wholly-owned subsidiary); and (c) any payment by Webster of
principal (whether a prepayment, redemption or at maturity) of, or to acquire,
any indebtedness for borrowed money issued or guaranteed by Webster (other than
the Senior Notes or pursuant to a guarantee by Webster of any borrowing by any
ESOP established by Webster or a wholly owned subsidiary), except that any such
payment of, or to acquire, any such indebtedness for borrowed money that is not
subordinated to the Senior Notes will not constitute a Restricted Distribution,
if such indebtedness was issued or guaranteed by Webster at a time when the
Senior Notes were rated in the same or higher rating category as the rating
assigned to the Senior Notes by Standard & Poor's ("S&P") at the time the Senior
Notes were issued.
Liquidity Maintenance. The Indenture requires that Webster maintain at
all times, on an unconsolidated basis, liquid assets in an amount equal to or
greater than 150% of the aggregate interest expense on the Senior Notes and all
other indebtedness for borrowed money of Webster for 12 full calendar months
immediately following each determination date under the Indenture provided, that
Webster will not be required to maintain such liquid assets once the Senior
Notes have been rated "BBB-" or higher by S&P for six calendar months and remain
rated in such category.
Certificate of Incorporation and Bylaw Provisions
General. Certain provisions included in Webster's certificate of
incorporation and bylaws may serve to entrench current management and to prevent
a change in control of Webster even if desired by a majority of shareholders.
These provisions are designed to encourage potential acquirers to negotiate
directly with the Board of Directors of Webster and to discourage other takeover
attempts. The following discussion is a general summary of certain provisions of
Webster's certificate of incorporation and bylaws, and a comparison of those
provisions to similar types of provisions in Shelton's certificate of
incorporation and bylaws. The discussion is necessarily general and, with
respect to provisions contained in Webster's certificate of incorporation and
bylaws, reference should be made to the document in question, each of which is
an exhibit to Webster's registration statement.
Directors. Certain provisions of Webster's certificate of incorporation
and bylaws will impede changes in majority control of Webster's Board of
Directors. The certificate of incorporation provides that the Board of Directors
will be divided into three classes, with directors in each class elected for
three-year staggered terms. The bylaws provide that the size of the Board of
Directors, within the seven to 15 range specified in the certificate of
incorporation, may be increased or decreased only by a two-thirds vote of the
Board of Directors and by a vote of two-thirds of the shares eligible to be
voted at a duly constituted meeting of shareholders called for such purpose. The
certificate of incorporation provides that a vacancy occurring in the Board of
Directors, including a vacancy created by any increase in the number of
directors, may be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. The bylaws also impose certain
restrictions on the nomination by shareholders of candidates for election to the
Board of Directors or the proposal by shareholders of business to be acted upon
at an annual meeting of shareholders.
Webster's certificate of incorporation provides that a director may be
removed only for cause and then only by the affirmative vote of two-thirds of
the total shares eligible to vote at a duly constituted meeting of the
shareholders called expressly for that purpose. The certificate of incorporation
also provides that 30 days' written notice must be provided to any director or
directors whose removal is to be considered at a shareholders' meeting called
for such purpose.
The provisions of Shelton's certificate of incorporation and bylaws
with regard to directors are substantially identical as those of Webster's,
except that the range as to the number of directors is six to 12 in Shelton's
certificate of incorporation.
55
<PAGE>
Call of Special Meetings. Webster's certificate of incorporation
contains a provision which provides that a special meeting of shareholders may
be called at any time but only by the chairman of the board or the president of
Webster or by its Board of Directors. Shareholders are not authorized to call a
special meeting. Shelton's certificate of incorporation is the same as to
special meetings.
Cumulative Voting. The certificate of incorporation of both Webster and
Shelton deny cumulative voting rights in the election of directors.
Authorized and Outstanding Common Stock. See "-- Webster Stock" as to
authorized and currently outstanding shares of common stock of Webster, par
value $.01 per share. Shelton has 5,000,000 authorized shares of common stock,
par value $1.00 per share, of which 1,343,341 shares are currently outstanding.
Shelton has outstanding stock options granted to directors, officers and other
employees for 110,591 shares of Shelton Stock, plus the Option for 267,324
shares of Shelton Stock granted to Webster in connection with the Merger.
Authorized and Outstanding Serial Preferred Stock. See "---- Series B
Stock" as to authorized and currently outstanding shares of serial preferred
stock of Webster. Shelton's certificate of incorporation authorizes 1,000,000
shares of serial preferred stock, $1.00 par value, of which no shares are
outstanding.
Approvals for Acquisitions of Control. Webster's certificate of
incorporation prohibits any person (whether an individual, company or group
acting in concert) from acquiring beneficial ownership of 10% or more of
Webster's voting stock, unless the acquisition has received the prior approvals
of two-thirds of Webster's outstanding voting shares and of all required federal
regulatory authorities. Furthermore, no person may make an offer to acquire 10%
or more of Webster's voting stock without obtaining prior approval of the offer
by a two-thirds vote of Webster's Board of Directors or, alternatively, before
the offer is made, obtaining approval of the acquisition from the OTS. These
provisions do not apply to the purchase of shares by underwriters in connection
with a public offering, and the provisions remain effective only so long as an
insured institution is a majority-owned subsidiary of Webster. Shares acquired
in excess of these limitations are not entitled to vote or take other
shareholder action or be counted in determining the total number of outstanding
shares of voting stock in connection with any matter involving shareholder
action. These excess shares are also subject to transfer to a trustee, selected
by Webster, for the sale on the open market or otherwise, with the expenses of
the trustee to be paid out of the proceeds of such sale. These limitations on
offers and purchases do not apply to the ESOP or other employee benefits plans
of Webster.
Shelton's certificate of incorporation contains substantially identical
provisions as to approvals for acquisition of control of Shelton, except that
regulatory approvals of both the Connecticut Department of Banking and the OTS
are required.
Procedures for Certain Business Combinations. Webster's certificate of
incorporation requires that certain business combinations between Webster (or
any majority-owned subsidiary thereof) and a 10% or more shareholder or its
affiliates (collectively, the "Interested Shareholder") either (i) be approved
by at least 80% of the total number of outstanding voting shares of Webster, or
(ii) either be approved by two-thirds of Webster's continuing Board of Directors
(persons serving prior to the 10% shareholder becoming such) or involve
consideration per share generally equal to that paid by the 10% shareholder when
it acquired its block of stock. The types of business combinations with an
Interested Shareholder covered by this provision include: mergers,
consolidations, stock exchanges; a sale, lease, exchange, mortgage, pledge or
other transfer of assets other than in the usual and regular course of business;
an issuance by Webster of its equity securities having a market value in excess
of 5% of aggregate market value of its outstanding shares; the adoption of any
plan of liquidation of Webster or any subsidiary proposed by an Interested
Shareholder; and any reclassification of securities or recapitalization of
Webster which has the effect of increasing the proportionate equity ownership
interest of the Interested Shareholder. Shelton's certificate of incorporation
contains a substantially identical provision as to business combinations.
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<PAGE>
Anti-Greenmail. Webster's certificate of incorporation requires
approval by a majority of the outstanding voting stock before Webster may
directly or indirectly purchase or otherwise acquire any voting stock
beneficially owned by a holder of 5% percent or more of Webster's voting stock,
if such holder has owned the shares for less than two years. Any shares
beneficially held by such person would be excluded in calculating majority
shareholder approval. This provision would not apply to a pro rata offer made by
Webster to all of its shareholders in compliance with the Exchange Act and the
rules and regulations thereunder or a purchase of voting stock by Webster if the
Board of Directors has determined that the purchase price per share does not
exceed the fair market value of such voting stock. Shelton's certificate of
incorporation contains no similar provision.
Criteria for Evaluating Offers. Webster's certificate of incorporation
provides that the Board of Directors, when evaluating any acquisition offers,
shall give due consideration to all relevant factors, including, without
limitation, the economic effects of acceptance of the offer on depositors,
borrowers and employees of its insured institution subsidiaries and on the
communities in which such subsidiaries operate or are located, as well as on the
ability of such subsidiaries to fulfill the objectives of insured institutions
under applicable federal statutes and regulations. Shelton's certificate of
incorporation contains a substantially identical provision as to Shelton Bank.
Amendment to Certificate of Incorporation and Bylaws. Amendments to
Webster's certificate of incorporation must be approved by a two-thirds vote of
Webster's Board of Directors and also by a majority of the outstanding shares of
Webster's voting stock, provided, however, that approval by two-thirds of the
outstanding voting stock is generally required for certain provisions. In
addition, the provisions regarding certain business combinations may be amended
only by the same "80 percent" shareholder vote required to approve a business
combination with a 10% shareholder. Webster's bylaws may be amended by a
two-thirds vote of the Board of Directors or a two-thirds vote of the total
shares eligible to be voted at a duly constituted meeting of shareholders.
Amendments to Shelton's certificate of incorporation and by laws are subject to
substantially identical provisions as those of Webster's.
Applicable Law
The following discussion is a general summary of certain provisions of
Delaware, Connecticut and federal statutory and regulatory provisions that may
be deemed to have an "anti-takeover" effect.
Delaware Takeover Statute. Section 203 of the Delaware General
Corporation Law (the "Delaware Takeover Statute") applies to Delaware
corporations with a class of voting stock listed on a national securities
exchange, authorized for quotation on an inter-dealer quotation system, or held
of record by 2,000 or more persons, and restricts transactions which may be
entered into by such a corporation and certain of its shareholders. The Delaware
Takeover Statute provides, in essence, that a shareholder acquiring more than 15
percent of the outstanding voting shares of a corporation subject to the statute
(an "Interested Person") but less than 85 percent of such shares may not engage
in certain "Business Combinations" (as defined) with the corporation for a
period of three years subsequent to the date on which the shareholder became an
Interested Shareholder unless (i) prior to such date the corporation's board of
directors approved either the Business Combination or the transaction in which
the shareholder became an Interested Person or (ii) the Business Combination is
approved by the corporation's board of directors and authorized by a vote of at
least two-thirds of the outstanding voting stock of the corporation not owned by
the Interested Person.
The Delaware Takeover Statute defines the term "Business Combination"
to encompass a wide variety of transactions with or caused by an Interested
Person in which the Interested Person receives or could receive a benefit on
other than a pro rata basis with other shareholders, including mergers, certain
asset sales, certain issuances of additional shares to the Interested Person,
transactions with the corporation which increase the proportionate interest of
the Interested Person or transactions in which the Interested Shareholder
receives certain other benefits.
57
<PAGE>
Connecticut Regulatory Restrictions on Acquisitions of Stock.
Connecticut banking statutes prohibit any person from directly or indirectly
offering to acquire or acquiring voting stock of a Connecticut-chartered bank
(such as Shelton Bank), a federal savings bank having its principal office in
Connecticut (such as Webster Bank) or a holding company of any such entity (such
as Webster or Shelton), that would result in such person becoming, directly or
indirectly, the beneficial owner of more than 10% of any class of voting stock
of such savings bank unless such person had previously filed an acquisition
statement with the Connecticut Commissioner and such offer or acquisition has
not been disapproved by the Connecticut Commissioner.
Federal Law. Federal law provides that, subject to certain exemptions,
no person acting directly or indirectly or through or in concert with one or
more other persons may acquire "control" of an insured institution or holding
company thereof, without giving at least 60 days prior written notice providing
specified information to the appropriate federal banking agency (i.e., the OTS
in the case of Webster and Webster Bank and the FDIC in the case of Shelton and
Shelton Bank). "Control" is defined for this purpose as the power, directly or
indirectly, to direct the management or policies of an insured institution or to
vote 25 percent or more of any class of voting securities of an insured
institution. Control is presumed to exist where the acquiring party has voting
control of at least 10 percent of any class of the institution's voting
securities which is registered under Section 12 of the Exchange Act and is
actively traded. The term "actively traded" is defined in the regulation to mean
securities that are either listed on a securities exchange or quoted on the
Nasdaq National Market. The OTS or FDIC may prohibit the acquisition of control
it finds among other things that (i) the acquisition would result in a monopoly
or substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the institution or
(iii) the competence, experience or integrity of any acquiring person or any of
the proposed management personnel indicates that it would not be in the interest
of the depositors or the public to permit the acquisition of control by such
person.
LEGAL MATTERS
The validity of the Webster Stock to be issued in the Merger will be
passed upon by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements of Webster at December 31, 1994
and 1993, and for each of the years in the three year period ended December 31,
1994, incorporated by reference into the Registration Statement, have been so
incorporated in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated herein by reference and upon the
authority of said firm as experts in accounting and auditing. The report refers
to the fact that Webster adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 109
"Accounting for Income Taxes" and No. 115 "Accounting for Certain Debt and
Equity Securities" in 1993.
The financial statements of Shelton at June 30, 1994 and 1993, and for
each of the three years in the period ended June 30, 1994, included in this
Joint Proxy Statement/Prospectus, have been included herein in reliance upon the
report of Coopers & Lybrand, independent certified public accountants, given on
the authority of that firm as experts in accounting and auditing. The report
refers to the fact that Shelton changed its methods of accounting for
investments and income taxes during the year ended June 30, 1994.
--------------------
58
<PAGE>
APPENDIX A
ALEX. BROWN & SONS
[LOGO] INCORPORATED
ESTABLISHED 1800 AMERICA'S OLDEST INVESTMENT BANKING FIRM
REPLY TO: P.O. BOX 515
MEMBER NEW YORK STOCK EXCHANGE, INC. AND OTHER LEADING EXCHANGES
BALTIMORE, MD 21203
June 20, 1995
The Board of Directors
of Shelton Bancorp, Inc.
375 Bridgeport Avenue
Shelton, CT 06484
Dear Sirs:
You have requested our opinion as to the fairness from a financial of
view to the holders of the outstanding shares of Common Stock, $1.00 par value
per share (the "Shares") of Shelton Bancorp, Inc. (the "Company") of the
Exchange Ratio (as hereinafter defined) to be received by the Company's
shareholders pursuant to the Agreement and Plan of Merger By and Between Webster
Financial Corporation ("Webster") and the Company dated June 20, 1995 (the
"Agreement"). Pursuant to the Agreement, each of the Shares will receive 0.92
shares Webster Common Stock, par value $0.01 per share ("Webster Common Stock")
(the "Exchange Ratio").
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for estate, corporate and other purposes. We have
acted as financial advisor to the Board of Directors of the Company in
connection with the transactions described above and will receive a fee for our
services, a significant portion of which is contingent upon the consummation of
the transaction contemplated by the Agreement. Alex. Brown & Sons Incorporated
regularly publishes research reports regarding the financial services industry
and the businesses and securities of publicly owned companies in that industry.
In connection with this opinion, we have reviewed certain publicly
available financial information concerning the Company and Webster and certain
internal financial analyses and other information furnished to us by the Company
and Webster. We have also held discussions with members of the senior management
of the Company regarding the business and prospects of the Company. In addition,
we have (i) reviewed the reported price and trading activity for the Shares and
Webster Common Stock, (ii) compared certain financial and stock market
information for the Company and Webster, respectively, with similar information
for certain comparable companies whose securities are publicly traded, (iii)
reviewed the Agreement and compared the financial terms of the Agreement with
those of certain recent business combinations of other savings banks which we
deemed comparable in whole or in part and (iv) performed such other studies and
analyses and considered such other factors as we deemed appropriate.
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of the
Company, we have assumed that such information reflects the best currently
available estimates and judgments of the management of the Company, as to the
likely future financial performance of the Company. In addition, we have not
made an independent evaluation or appraisal of the assets or liabilities of the
Company or Webster, nor have we been
A-1
<PAGE>
furnished with any such evaluation or appraisal. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Exchange Ratio is fair, from a financial point of
view, to the holders of Shares.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By:
--------------------------
J. Adam Hitt
Principal
A-1
<PAGE>
APPENDIX B
SHELTON CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30 YEAR END
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Condition as of June 30, 1994 and 1993 ........................................ B-2
Consolidated Statements of Income for the years ended June 30, 1994, 1993 and 1992 ....................... B-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 1994, 1993 and 1992 .......................................................................... B-4
Consolidated Statements of Cash Flows for the years ended June 30, 1994, 1993 and 1992.................... B-5
Notes to Consolidated Financial Statements ............................................................... B-6
Report of Coopers & Lybrand .............................................................................. B-22
Management Discussion and Analysis of Year End Consolidated Financial Statements.......................... B-24
</TABLE>
<PAGE>
Consolidated Statement of Condition of Shelton Bancorp, Inc.
<TABLE>
<CAPTION>
(In thousands) June 30, 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Loans:
Real estate $184,433 $165,041
Consumer installment 6,068 5,444
Real estate loans held for sale (fair value $2,896) -- 2,813
- ----------------------------------------------------------------------------------------------------------------
Total loans 190,501 173,298
Less allowance for loan losses 1,273 1,406
- ----------------------------------------------------------------------------------------------------------------
Net loans 189,228 171,892
- ----------------------------------------------------------------------------------------------------------------
Securities:
Held to maturity (fair value $39,727-1994; $60,971-1993) 40,949 59,312
Available for sale, at fair value 20,751 --
Money market investments 4,792 8,316
Trading account, at fair value 107 276
- ----------------------------------------------------------------------------------------------------------------
Total securities 66,599 67,904
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing assets 255,827 239,796
Cash and due from banks 8,459 5,575
Premises and equipment 5,634 5,734
Accrued interest receivable 1,661 1,882
Investments in real estate 1,517 2,892
Other real estate owned 1,030 2,451
Other assets 1,875 1,538
- ----------------------------------------------------------------------------------------------------------------
Total assets $276,003 $259,868
- ----------------------------------------------------------------------------------------------------------------
Liabilities and stockholder's equity
Liabilities:
Deposits:
Time certificates $120,578 $115,967
Savings and NOW 86,673 83,137
Money market 28,576 28,020
Demand 16,219 12,380
- ----------------------------------------------------------------------------------------------------------------
Total deposits 252,046 239,504
Borrowings 5,200 3,200
Accrued taxes and other liabilities 495 739
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 257,741 243,443
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 6)
Stockholders' equity:
Preferred stock, $1.00 par value; authorized -
1,000,000 shares; none issued -- --
Common stock, $1.00 par value; authorized -
5,000,000 shares; issued: 1,403,956 shares 1994;
1,255,589 shares 1993 1,404 1,256
Additional paid-in capital 7,730 7,434
Retained earnings 9,914 8,428
Unrealized holding loss on securities available for
sale, net of taxes (93) --
Treasury stock at cost - (99,800 shares) (693) (693)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 18,262 16,425
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $276,003 $259,868
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-2
<PAGE>
Consolidated Statements of Income of Shelton Bancorp, Inc.
<TABLE>
<CAPTION>
(In thousands, except per share data) June 30, 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 13,122 $ 14,214 $ 14,891
Securities 3,413 2,905 3,048
Money market and other 204 497 1,093
- ----------------------------------------------------------------------------------------------------------------
Total interest income 16,739 17,616 19,032
- ----------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 8,170 9,192 11,317
Borrowings 306 327 490
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 8,476 9,519 11,807
- ----------------------------------------------------------------------------------------------------------------
Net interest income 8,263 8,097 7,225
Provision for loan losses 150 793 875
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,113 7,304 6,350
- ----------------------------------------------------------------------------------------------------------------
Non-interest income
Banking service charges 892 858 783
Securities gains (losses) 235 541 (56)
Loan servicing fees 197 6 74
Gains on sale of loans 84 763 648
Income (loss) from real estate investments 56 151 (76)
Trading account gains (losses) (22) 40 (18)
Other 191 108 82
- ----------------------------------------------------------------------------------------------------------------
Total non-interest income 1,633 2,467 1,437
- ----------------------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,995 2,610 2,223
Equipment 909 859 783
Professional services 735 724 496
Insurance premiums 701 642 529
Other real estate owned 257 579 413
Occupancy 228 236 335
Other 646 610 500
- ----------------------------------------------------------------------------------------------------------------
Total non-interest expense 6,471 6,260 5,279
- ----------------------------------------------------------------------------------------------------------------
Earnings
Income before income taxes and accounting change 3,275 3,511 2,508
Provision for income taxes 1,300 1,591 1,297
- ----------------------------------------------------------------------------------------------------------------
Income before accounting change 1,975 1,920 1,211
Cumulative effect of change in accounting for income taxes 275 -- --
- ----------------------------------------------------------------------------------------------------------------
Net income $ 2,250 $ 1,920 $ 1,211
- ----------------------------------------------------------------------------------------------------------------
Primary income per share Income before accounting change $ 1.53 $ 1.52 $ 0.96
Net income 1.74 1.52 0.96 Fully diluted income per share Income before
accounting change 1.50 1.52 0.96 Net income 1.71 1.52 0.96
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-3
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity of Shelton
Bancorp, Inc.
<TABLE>
<CAPTION>
Common Additional Retained Net Treasury
Stock Paid-in Earnings Unrealized Stock
Capital Loss on
Securities
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1991 $ 1,137 $ 7,358 $ 6,460 $ (210) $ (693)
Net income -- -- 1,211 -- --
Cash dividends ($0.40 per share) -- -- (503) -- --
Decrease in net unrealized loss on
marketable equity securities -- -- -- 210 --
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1992 1,137 7,358 7,168 -- (693)
Net income -- -- 1,920 -- --
Options exercised 12 76 -- -- --
10% stock dividend, including cash
payment for fractional shares 107 -- (120) -- --
Cash dividends ($0.43 per share) -- -- (540) -- --
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 1,256 7,434 8,428 -- (693)
Net income -- -- 2,250 -- --
Options exercised 28 296 -- -- --
10% stock dividend, including cash
payment for fractional shares 120 -- (133) -- --
Cash dividends ($0.49 per share) -- -- (631) -- --
Unrealized holding loss on securities
available for sale, net of taxes -- -- -- (93) --
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 $ 1,404 $ 7,730 $ 9,914 $ (93) $ (693)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-4
<PAGE>
Consolidated Statements of Cash Flows of Shelton Bancorp, Inc.
<TABLE>
<CAPTION>
(In thousands) Year ended June 30, 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,250 $ 1,920 $ 1,211
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
(Gains) losses on sale of:
Other real estate owned (44) (17) (3)
Investments in real estate (56) (151) (82)
Loans held for sale (84) (763) (648)
Investment securities (235) (541) 56
Loss provisions 591 1,429 1,250
Depreciation and amortization 472 407 314
Deferred income taxes 196 138 44
Amortization of premium on mortgage-backed securities 189 17 --
Trading account losses (gains) 22 (40) 18
Change in accounting for income taxes (275) -- --
Amortization of deferred loan origination fees (285) (565) (366)
Changes in operating assets and liabilities:
Accrued interest receivable 221 96 (458)
Trading account securities 147 635 (124)
Accrued taxes and other liabilities (244) (537) (347)
Other assets (1,421) (2,966) (3,472)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,444 (938) (2,607)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Loans for portfolio
Net (increase) decrease (14,546) 7,779 (15,576)
Purchases (5,468) (9,399) --
Loans held for sale
Proceeds from sales 16,473 22,110 18,550
Net increase (13,576) (24,160) (17,902)
Mortgage-backed securities
Repayments 4,070 251 1,679
Purchases (10,073) (10,417) --
Investment securities
Proceeds from sales 8,793 9,404 7,407
Proceeds from maturities 6,748 12,101 4,512
Purchases (11,973) (26,943) (25,332)
Net (increase) decrease in money market investments 3,524 8,445 (7,579)
Proceeds from sale of other real estate owned 2,394 2,741 1,585
Proceeds from sale of real estate investments 2,248 3,035 1,969
Purchase of premises and equipment (372) (1,204) (2,356)
Additions to investments in real estate (1,024) (1,836) (1,142)
Net cash acquired in excess of payment
for Housatonic Bank -- -- 40,221
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (12,782) (8,093) 6,036
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Borrowings
Proceeds from short-term borrowings 3,000 -- --
Repayment of long-term borrowings -- (1,500) (1,000)
Repayment of short-term borrowings (1,000) -- --
Net increase (decrease) in time certificates of deposit 4,611 (1,485) (28,306)
Net increase in other deposit accounts 7,931 13,324 27,242
Options exercised 324 88 --
Dividends paid (644) (553) (503)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 14,222 9,874 (2,567)
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and due from banks 2,884 843 862
Cash and due from banks at beginning of period 5,575 4,732 3,870
- -----------------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 8,459 $ 5,575 $ 4,732
===========================================================================================================
Supplemental information
Cash paid during the period for:
Interest $ 8,454 $ 9,594 $ 11,825
Income taxes 1,007 1,610 1,755
Noncash investing activities:
Transfer from investment securities to
securities available for sale 20,751 -- --
Loans transferred to other real estate owned 1,024 3,199 2,011
Unrealized holding loss on securities available
for sale, net of taxes 93 -- --
Decrease in net unrealized loss on
marketable equity securities -- -- 210
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
B-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF SHELTON BANCORP, INC.
1. Significant Accounting Policies
Basis of presentation: The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
the accounts of Shelton Bancorp, Inc. ("Bancorp"), and its wholly-owned
subsidiary, Shelton Savings Bank ("Shelton Bank"), collectively referred to as
"Shelton." All significant intercompany accounts and transactions have been
eliminated from the consolidated financial statements.
Reclassifications have been made to the prior years' consolidated
financial statements to conform to the current reporting presentation.
The consolidated financial statements necessarily include some amounts
that are based on estimates, the most significant of which relate to the
adequacy of the allowance for loan losses, and the valuation of investments in
real estate and other real estate owned ("OREO"). As these estimates are highly
susceptible to future changes in the state of the general economic environment,
actual results could differ significantly from such estimates.
Loans: Loans, with the exception of real estate loans held for sale,
are carried at their unpaid principal balance, net of deferred loan origination
fees and costs.
Real estate loans held for sale are carried at the lower of aggregate
cost or fair value. Unrealized holding losses are included in gains and losses
on the sale of loans. Gains and losses on the sale of loans are calculated
utilizing the cost basis of the specific loans sold.
Interest on loans is accrued into income utilizing the simple interest
method. Loan origination fees and costs are deferred and amortized into income
over the contractual life of the related loan utilizing the level yield method.
When a loan is prepaid or sold, any remaining unamortized fees and costs are
amortized into income at that time. The accrual of interest income is
discontinued when a loan is past due 90 days or more, or earlier when doubt
exists as to its ultimate collectibility. When the accrual of interest income is
discontinued, all previously accrued and uncollected interest is generally
reversed against the current period's interest income. The accrual of interest
on loans past due 90 days or more may be continued when the net realizable value
of the property collateralizing the loan is sufficient to discharge all
principal and accrued interest income due on the loan. A nonaccrual loan is
restored to accrual status when it is no longer delinquent and collectibility of
interest and principal is no longer in doubt.
In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("FAS 114"). FAS 114 requires, among other things, that
certain impaired loans be valued based on the present value of expected future
cash flows. Shelton will adopt FAS 114 in the first quarter of fiscal 1996.
Although the initial effect of adopting FAS 114 is dependent on the level of
actual outstanding impaired loans on adoption, current estimates indicate that
the adoption of FAS 114 will not have a material impact on Shelton's financial
position or results of operations.
The cost of purchased mortgage servicing rights ("PMSRs") is amortized
over the estimated lives of the loans serviced, utilizing the level yield
method. When a periodic evaluation indicates that the carrying value of PMSRs
exceeds the net present value of estimated future loan servicing income, the
carrying value is written down. The amortization rate is changed prospectively
when the carrying value is below the net present value of estimated future loan
servicing income. Writedowns and amortization are charged to loan servicing
fees.
B-6
<PAGE>
Allowance for loan losses: The allowance for loan losses is established
through charges against income and maintained at a level that management
considers adequate to absorb potential losses in the loan portfolio.
Management's estimate of the adequacy of the allowance for loan losses is based
on evaluations of individual loans, estimates of current collateral values,
delinquency trends, the results of regulatory examinations, the general risk
characteristics inherent in the loan portfolio, concentrations of credit risk,
prevailing and anticipated economic conditions, and historical loan loss
experience. Loans are charged against the allowance for loan losses when
management believes that collection is unlikely. Any subsequent recoveries are
credited to the allowance for loan losses when received.
Other real estate owned: When, among other factors, management
estimates that the borrower has no remaining equity in the property
collateralizing the loan and repayment of the loan can be expected to come only
from the sale of the property, the property is considered to be foreclosed in
substance. In-substance foreclosures and real estate formally acquired in
settlement of loans are initially transferred to OREO at the lower of the loan
balance or the estimated fair value of the property constructively or formally
received. If, on the date of transfer, the loan balance exceeds the estimated
fair value of the property, the excess is charged-off against the allowance for
loan losses. An allowance for OREO losses is established whenever the carrying
value of an individual property exceeds its current fair value, net of estimated
selling costs.
Securities: On June 30, 1994 Shelton adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Under FAS 115 debt and equity securities are
classified into one of three categories.
Debt securities that Shelton has the intent and ability to hold until
maturity are classified as held to maturity and carried at amortized cost.
Securities purchased for resale, in anticipation of short-term gains,
are classified as trading and carried at fair value. Both realized and
unrealized holding gains and losses are included in trading account gains and
losses.
All other debt and equity securities are classified as available for
sale. Securities in this classification may be sold in response to changes in a
number of factors, including Shelton's liquidity needs and market interest
rates. Available for sale securities are carried at fair value and unrealized
holding gains and losses, net of income taxes, are reported as a separate
component of stockholders' equity.
Gains and losses on the sale of securities are recorded on the trade
date, and are calculated utilizing the cost basis of the specific security sold.
The cost basis of a security that has experienced other than a temporary decline
in fair value is written down to fair value by a charge to security gains and
losses.
Upon adoption of FAS 115, Shelton transferred $20.8 million in
securities to the available for sale classification and recorded a net
unrealized loss of $93,000, net of $66,000 in tax benefits.
Investments in real estate: Investments in real estate are carried at
the lower of cost or estimated fair value, net of estimated selling costs. An
allowance for losses on real estate investments is established whenever the cost
basis of an individual property exceeds its estimated net realizable value.
Construction and development costs, including interest expense and property
taxes, are capitalized to the extent realizable. General and administrative
expenses are charged to expense as incurred.
Premises and equipment: Premises, equipment and leasehold improvements
are stated at cost, net of accumulated depreciation and amortization. Major
improvements are capitalized.
B-7
<PAGE>
Maintenance and repairs are charged to expense as incurred. Depreciation is
computed utilizing the straight-line method over the estimated useful lives of
the assets. Estimated lives range from ten to fifty years for buildings and
improvements, and from three to ten years for equipment. Leasehold improvements
are amortized over the shorter of the term of the related lease or the useful
life of the improvements.
Income taxes: Effective July 1, 1993, Shelton adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS
109"). The cumulative effect of this accounting method change was a $275,000
credit to earnings. FAS 109 was adopted on a prospective basis and amounts
presented for prior years have not been restated.
As required by FAS 109, Shelton changed its method of accounting for
income taxes from the deferred method to the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using tax rates and laws currently in effect for the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in enacted tax
rates or laws is recognized in the period that includes the enactment date. A
valuation allowance is established when it is more likely than not that all or a
portion of Shelton's deferred tax assets will not be realized.
Prior to the adoption of FAS 109, income taxes on temporary differences
were measured using the tax rate and laws in effect in the year in which the
temporary difference originated.
Net income per share: Net income per share has been calculated by
dividing net income by the weighted average number of common shares outstanding
during the year, including common share equivalents when dilutive. The latter
consists of shares issuable upon the exercise of stock options. The dilutive
effect of stock options on primary net income per share is computed utilizing
the average market price of Shelton's common stock during the period. When
calculating fully diluted net income per share, the dilutive effect of stock
options is computed utilizing the greater of the closing market price or the
average market price during the period. All per share amounts have been adjusted
to reflect the 5% stock dividends distributed on November 4, 1993 and May 9,
1994.
The weighted average number of shares utilized in the computation of
net income per share were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Primary net income per share................ 1,294,909 1,263,273 1,261,233
Fully diluted net income per share.......... 1,316,635 1,263,273 1,261,233
</TABLE>
2. Acquisition
On July 26, 1991, Shelton Bank acquired certain assets and liabilities
of the former Housatonic Bank & Trust Company ("HBT") from the FDIC. HBT's sole
office, which was located in Ansonia, Connecticut, reopened as a branch of
Shelton Bank on July 29, 1991. Shelton Bank acquired approximately $40.2 million
in cash, $16.3 million in securities, $6 million in performing loans and $0.5
million in other assets. Shelton Bank also assumed $63 million in liabilities
which consisted of $62 million in deposits, and $1 million in accrued interest
payable and other liabilities. As part of the transaction, Shelton Bank paid the
FDIC a $150,000 premium.
B-8
<PAGE>
3. Loans
Loans consisted of the following:
<TABLE>
<CAPTION>
At June 30,
-------------------------------
1994 1993
---- ----
(In thousands)
<S> <C> <C>
Real estate loans:
First mortgages.............................................................. $ 159,401 $ 139,189
Home equity credit lines..................................................... 18,796 19,603
Construction and land development............................................ 5,139 4,830
Real estate loans held for sale.............................................. -- 2,813
Second mortgages............................................................. 1,097 1,419
----- -----
Total real estate loans.................................................... 184,433 167,854
Consumer installment loans................................................... 6,068 5,444
----- -----
Total loans................................................................ $ 190,501 $ 173,298
======= =======
</TABLE>
Nonaccrual and restructured loans, and related interest income were as follows:
<TABLE>
<CAPTION>
(In thousands) June 30, 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 1,094 $ 953 $ 2,796
Restructured loans 102 -- --
================================================================================================================
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Year ended June 30, 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
Interest income recorded:
Nonaccrual loans $ 17 $ 30 $ 132
Restructured loans 1 -- --
Interest income under original contract terms:
Nonaccrual loans 111 131 482
Restructured loans 8 -- --
================================================================================================================
</TABLE>
At June 30, 1994 Shelton had no outstanding commitments to lend
additional funds to borrowers whose loans have been restructured.
Directors, executive officers, principal holders of Shelton's stock,
and certain of their associates, were customers of and had other transactions
with Shelton Bank in the ordinary course of business. As of June 30, 1994 and
1993, loans to these individuals totaled $1,183,000 and $1,259,000,
respectively, and were performing currently. During the year ended June 30,
1994, $21,000 in new loans were granted to these individuals and payments of
$97,000 were received.
Shelton sells mortgage loans in the secondary market and retains the
servicing rights. Loans serviced for others totaled $83,538,000 and
$100,846,000, at June 30, 1994 and 1993, respectively.
The changes in PMSRs were as follows:
<TABLE>
<CAPTION>
(In thousands) Year ended June 30, 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $ 432 $ 760 $ --
Purchases -- -- 760
Amortization and write-downs 154 328 --
- ----------------------------------------------------------------------------------------------------------------
Ending balance $ 278 $ 432 $ 760
================================================================================================================
</TABLE>
B-9
<PAGE>
4. Allowance for Loan Losses
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1994 1993 1992
---- ----- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance................................................. $ 1,406 $ 1,062 $ 477
Provision charged to expense...................................... 150 793 875
Allowance for loan losses on loans purchased as part of
HBT acquisition................................................ -- -- 150
Charge-offs....................................................... (290) (460) (443)
Recoveries........................................................ 7 11 3
------ ------- -------
Ending balance.................................................... $1,273 $ 1,406 $ 1,062
====== ======= =======
</TABLE>
5. Concentrations of Credit Risk
The profitability of Shelton is heavily dependent on the state of the
general economic environment within Connecticut. Shelton specializes in
residential real estate lending and also engages in the development and sale of
residential real estate. Essentially all of Shelton's business is conducted in
Connecticut, specifically within the general market area of eastern Fairfield
and southwestern New Haven counties. Loans collateralized by real estate located
in Connecticut and direct investments in local real estate development projects
comprise most of Shelton's total assets. This concentration is the result of
Shelton targeting its lending and development activities to the geographic area
where management is familiar with housing and economic trends, combined with
Shelton's long standing commitment to meeting the credit needs of the
communities from which it obtains deposit funds.
6. Contingencies, Commitments & Financial Instruments With Off-Balance
Sheet Credit Risk
In the normal course of business, Shelton enters into agreements to
extend credit which are not reflected in the accompanying consolidated financial
statements.
Commitments to extend credit consisted of the following:
<TABLE>
<CAPTION>
June 30, 1994 1993
--------------------------------------- ----------------------------------------
(In thousands)
Fixed Variable or Fixed Variable or
Interest Adjustable Interest Adjustable
Rate Interest Rate Total Rate Interest Rate Total
------- ------------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans............ $ 393 $ 9,913 $ 10,306 $ 761 $ 5,451 $ 6,212
Home equity
credit lines........... -- 8,365 8,365 -- 7,947 7,947
Letters of credit...... -- 1,337 1,337 -- 932 932
Personal credit lines.. 753 -- 753 986 -- 986
------- ------- -------- --------- -------- ---------
Total..................... $ 1,146 $ 19,615 $ 20,761 $ 1,747 $ 14,330 $ 16,077
======= ======= ======== ========= ======== =========
</TABLE>
Since Shelton can terminate a loan commitment if the borrower does not
comply with the terms of the contract, and some of the agreements may expire
without being drawn upon, they do not necessarily represent a future cash
requirement of Shelton. Prior to entering into any agreement to extend credit,
Shelton evaluates the borrower's creditworthiness in accordance with Shelton's
loan
B-10
<PAGE>
underwriting standards. In most cases the agreements are collateralized with
real estate and the borrower is required to pay a non-refundable fee. Shelton's
maximum exposure to credit loss is the total contract amount of the agreements.
In addition, the possibility of future increases in market interest rates may
result in a decline in the market value of fixed rate loans. Management does
not, however, anticipate any material losses as a result of these agreements and
does not consider them to represent an undue level of credit, interest or
liquidity risk for Shelton.
Commitments to purchase adjustable rate loans totaled $5.5 million at
June 30, 1994.
To reduce the risk of a potential decline in the market value of fixed
rate loans being originated for sale, Shelton enters into contracts to sell such
loans at a pre-agreed upon price and date. The primary risk from these contracts
is the potential inability of Shelton to deliver such loans in accordance with
the terms of the contract, in which case Shelton would be obligated to
compensate the buyer for any decline that occurred in the market value of the
contractual amount of loans that were not delivered. At June 30, 1994 and 1993,
Shelton had no outstanding commitments to sell loans.
Shelton is a party to various legal proceedings incident to its
business. In the opinion of management, the resolution of these proceedings will
not have a material effect on Shelton.
7. Other Real Estate Owned
OREO consisted of the following:
<TABLE>
<CAPTION>
At June 30,
---------------------------
1994 1993
------ ------
(In thousands)
<S> <C> <C>
Property type:
Single-family homes.............................................................. $ 655 $ 1,625
Multi-family homes............................................................... 228 133
Residential land................................................................. 170 414
Condominiums..................................................................... 31 146
Commercial land.................................................................. -- 297
Allowance for OREO losses........................................................... (54) (164)
--- ----
OREO................................................................................ $ 1,030 $ 2,451
======= ========
</TABLE>
The changes in the allowance for losses on OREO were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1994 1993 1992
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance................................................. $ 164 $ 192 $ 47
Provision charged to expense...................................... 234 466 275
Net charge-offs................................................... (344) (494) (130)
---- ---- ----
Ending balance.................................................... $ 54 $ 164 $ 192
====== ====== =====
</TABLE>
B-11
<PAGE>
8. Securities
The cost, fair value, and gross unrealized gains and losses on
securities held to maturity were as follows:
<TABLE>
<CAPTION>
At June 30, 1994
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury...................................... $ 19,392 $ 46 $ 449 $ 18,989
U.S. agencies and corporations:
Mortgage-backed................................. 15,991 -- 716 15,275
Other........................................... 2,099 -- 67 2,032
Corporate bonds, notes and debentures.............. 3,467 23 59 3,431
----- ----- -------- ---------
Securities held to maturity........................ $ 40,949 $ 69 $ 1,291 $ 39,727
===== ===== ======== =========
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1993
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury...................................... $ 34,328 $ 1,292 $ -- $ 35,620
U.S. agencies and corporations:
Mortgage-backed................................. 10,177 1 19 10,159
Other........................................... 3,780 83 1 3,862
Corporate bonds, notes and debentures.............. 6,593 154 4 6,743
Equity securities.................................. 4,434 155 2 4,587
----- ----- -------- ---------
Securities held to maturity........................ $ 59,312 $ 1,685 $ 26 $ 60,971
===== ===== ======== =========
</TABLE>
The cost, fair value, and gross unrealized gains and losses on
securities available for sale were as follows:
<TABLE>
<CAPTION>
At June 30, 1994
-------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
----- ----- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury...................................... $ 12,429 $ 26 $ 139 $ 12,316
U.S. agencies and corporations..................... 1,001 5 1 1,005
Corporate bonds, notes and debentures.............. 722 2 -- 724
Equity securities.................................. 6,758 46 98 6,706
----- -- -- -----
Securities available for sale...................... $ 20,910 $ 79 $ 238 $ 20,751
===== == == =====
</TABLE>
B-12
<PAGE>
Cost and fair value of debt securities, by contractual maturity, were
as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
--------------------------- -----------------------------
Cost Fair Value Cost Fair Value
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less............................ $ -- $ -- $ 3,423 $ 3,408
After one year through five years.................. 19,624 19,270 10,729 10,637
After five years through ten years................. 5,133 4,980 -- --
After ten years.................................... 201 202 -- --
--- --- -- --
Total........................................... 24,958 24,452 14,152 14,045
Mortgage-backed.................................... 15,991 15,275 -- --
------ ------ -- --
Total debt securities.............................. $ 40,949 $ 39,727 $ 14,152 $ 14,045
</TABLE>
Mortgage-backed securities have been disclosed separately as they are
not due at a single maturity date.
Proceeds and gross realized gains and losses from the sale of
securities were as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------------
Debt Securities Equity Securities
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales proceeds...................... $ 7,464 $ 8,830 $ 7,295 $ 1,094 $ -- $ 168
Realized gains...................... 172 574 120 68 -- 92
Realized losses..................... -- -- -- 5 -- 268
</TABLE>
Unrealized holding losses on trading securities totaled $105,000,
$137,000 and $150,000 during the years ended June 30, 1994,1993 and 1992,
respectively.
During the year ended June 30, 1993 Shelton recognized a $33,000
holding period loss on equity securities.
At June 30, 1994 and 1993, U.S. Treasury securities with a book value
of $1,441,000 and $1,195,000, respectively, were pledged to collateralize public
deposits. The market value of these securities was $1,488,000 and $1,223,000 at
June 30, 1994 and 1993, respectively.
B-13
<PAGE>
9. Investments in Real Estate
Investments in real estate consisted of the following:
<TABLE>
<CAPTION>
At June 30,
--------------------------
1994 1993
--------- ------
(In thousands)
<S> <C> <C>
Direct:
Riggs Street (30 lot residential subdivision).................................... $ 877 $ 827
Owl Hill (25 unit residential housing)........................................... 390 1,601
Allowance for losses............................................................. (34) (170)
Joint ventures:
Walnut Estates (19 lot residential subdivision).................................. 284 579
High Vista (22 lot residential subdivision)...................................... -- 55
-- --
Investments in real estate.......................................................... $ 1,517 $ 2,892
= ===== = =====
</TABLE>
Income (loss) from real estate investments consisted of the following:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1994 1993 1992
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Joint ventures.................................................... $ 283 $ 106 $ 1
Direct ......................................................... (20) 215 52
Limited partnership............................................... -- -- (29)
Provision for losses.............................................. (207) (170) (100)
----- ----- -----
Income (loss) from real estate investments........................ $ 56 $ 151 $ (76)
= == = === = ====
</TABLE>
Summarized combined financial statements of the joint ventures were as
follows:
Statements of Income
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1994 1993 1992
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Sales............................................................. $ 1,229 $ 955 $ 527
Cost of sales..................................................... 669 781 527
--- --- ---
Gross margin................................................... 560 174 --
Miscellaneous income.............................................. 6 l 2
General and administrative expenses............................... -- -- --
-- -- --
Net income........................................................ $ 566 $ 175 $ 2
= === = === = =
</TABLE>
Statements of Condition
<TABLE>
<CAPTION>
At June 30,
----------------------------
1994 1993
----- -----
(In thousands)
<S> <C> <C>
Assets:Investment in real estate.................................................... $ 542 $ 1,195
Cash ............................................................................. 26 78
-- --
Total assets........................................................................ $ 568 $ 1,273
- --- - -----
Partners' capital accounts.......................................................... $ 568 $ 1,273
= === - -----
</TABLE>
B-14
<PAGE>
The Owl Hill project, located in Shelton, Connecticut, entered the
sales phase in fiscal 1992. Current projections indicate that the remaining 2
units will be sold within the next 3 months at a loss, which has been provided
for.
The Riggs Street project is located in Oxford, Connecticut. The
construction phase will be completed by the second quarter of fiscal 1995. Sales
are expected to commence shortly thereafter, with an average of approximately
one sale per month anticipated during the project's sales phase.
As an equity partner in joint ventures with local developers, Shelton
typically receives 50% of the venture's net profits. Both Shelton and its
partner are generally required to make contributions, in equal amounts, to the
venture.
Shelton's sole remaining joint venture, Walnut Estates, is located in
Shelton, Connecticut. The construction phase has been completed and 11 lots have
been sold. Shelton anticipates that the remaining 8 lots will be sold in fiscal
1995.
Capitalized interest expense on investments in real estate totaled
$37,000 during the year ended June 30, 1992. No interest expense was capitalized
during the years ended June 30, 1994 and 1993.
10. Premises and Equipment
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
At June 30,
--------------------------
1994 1993
------ ------
(In thousands)
<S> <C> <C>
Land and buildings.................................................................. $ 5,635 $ 5,330
Equipment........................................................................... 2,037 2,241
Leasehold improvements.............................................................. 68 68
-- --
Total............................................................................ 7,740 7,639
Less accumulated depreciation and amortization...................................... 2,106 1,905
----- -----
Premises and equipment.............................................................. $ 5,634 $ 5,734
= ===== = =====
</TABLE>
For the years ended June 30, 1994, 1993 and 1992, depreciation and
amortization expense totaled $472,000, $407,000, and $314,000, respectively.
In addition to the executive office building, located at 375 Bridgeport
Avenue, Shelton, Connecticut, Shelton has five branch offices. Shelton owns the
executive office building and four of its branch offices with no encumbrances
that would affect their marketability.
One of Shelton's branch offices is occupied under a noncancelable
operating lease which expires in 1995. Assuming that Shelton exercises its
renewal option in 1995, during the five years ending June 30, 1999, Shelton will
be committed to make a total of $45,000 in rental payments under this lease.
Scheduled payments are $8,000 in 1995 and $9,000 per year in 1996 through 1999.
The lease contains renewal options and escalation clauses which provide for
increased rentals based on future increases in property taxes and other covered
expenses. For the years ended June 30, 1994, 1993 and 1992, lease rental expense
totaled $8,000, $10,000, and $46,000, respectively.
B-15
<PAGE>
11. Borrowings
Borrowings consisted of the following:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------
Weighted Weighted
Amount Rate Amount Rate
----- ---- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Borrowings from the FHLB due in the
year ending June 30,
1995...................................... $ 1,500 8.51% $ 1,500 8.51%
1997...................................... 1,000 8.61 1,000 8.61
1999...................................... 700 8.86 700 8.86
----- ---- ----- -----
Long-term borrowings............................... 3,200 8.62 3,200 8.62
Short-term borrowings.............................. 2,000 4.36 -- --
----- ---- ----- -----
Borrowings......................................... $ 5,200 6.98% $ 3,200 8.62%
= ===== ===== = ===== =====
</TABLE>
Shelton Bank is required to collateralize its borrowings from the
Federal Home Loan Bank ("the FHLB") with securities and mortgage loans. Based on
available collateral, at June 30, 1994 Shelton Bank had access to an additional
$ 154 million in financing from the FHLB.
12. Regulatory Matters
On August 29, 1986, Shelton Bank converted from mutual to stock
ownership ("the Conversion"). At the time of the Conversion Shelton Bank
established a liquidation account in an amount equal to Shelton Bank's capital
accounts at March 31, 1986. The liquidation account is being maintained for the
benefit of those deposit account holders who qualified as eligible account
holders at the time of the Conversion and who have continued to maintain their
eligible deposit accounts with Shelton Bank following the Conversion. The
liquidation account, which totaled $384,000 at June 30, 1994, is reduced
annually by an amount proportionate to the decrease in the eligible deposit
accounts. In the event of a complete liquidation of Shelton Bank, each eligible
deposit account holder will be entitled to receive a liquidating distribution
equal to their proportionate interest in the liquidation account, after the
payment of all creditors' claims, but before any distributions on Shelton Bank's
common stock.
At June 30, 1994, retained earnings included approximately $2,488,000
for which no income taxes have been provided. This amount represents Shelton
Bank's cumulative annual bad debt deduction allowable in the determination of
taxable income for tax return purposes. In the unlikely event that the total
accumulated bad debt reserve is used for any purpose other than to absorb bad
debt losses, approximately $1,035,000 in taxes will be imposed on Shelton Bank,
based on current applicable tax rates.
Shelton Bank is Bancorp's sole source of funds for dividend payments to
its stockholders. Connecticut Banking Laws limit the amount of annual cash
dividends that Shelton Bank may pay to Bancorp to an amount which approximates
Shelton Bank's net income for the then current calendar year, plus Shelton
Bank's retained income for the prior two calendar years. Shelton Bank is also
prohibited from paying a cash dividend that would reduce its capital accounts
below minimum regulatory requirements, or below the amount required to be
maintained in the liquidation account.
In January, 1993 Shelton Bank entered into a Memorandum of
Understanding ("MOU") with the FDIC and the Connecticut Banking Commissioner to
enhance the financial condition and operations of Shelton Bank. Having complied
with all of the provisions of the MOU, in September, 1993 Shelton Bank was
released from the MOU.
B-16
<PAGE>
13. Employee Benefit Plans
Shelton's pension plan and Employee Stock Ownership Plan ("the ESOP")
cover all full-time employees who meet certain age and length of service
requirements.
Shelton is a participant in a noncontributory, defined benefit,
multi-employer pension plan. Pension expense totaled $109,000 during the year
ended June 30, 1994. As the plan had reached its full-funding limitation, no
contributions were made to the plan during the years ended June 30, 1993 and
1992. Information concerning the actuarial present value of accumulated plan
benefits, plan assets, or benefits attributable to individual organizations
participating in the plan is not provided by the plan's administrator, and is
therefore not presented in this report. The pension plan is the only
post-employment or post-retirement plan currently provided to employees.
Through June 30, 1994, the ESOP has purchased a total of 57,882 shares
of Shelton's common stock. Annual contributions by Shelton to the ESOP are
discretionary, but are generally made in an amount sufficient to enable the ESOP
to meet its current obligations. Contributions to the ESOP for the years ended
June 30, 1994, 1993 and 1992 were $72,000, $75,000, and $44,000, respectively.
Shelton has stock option plans which provide for the granting of
incentive stock options and non-qualified stock options to key personnel. A
total of 235,970 shares of Shelton's common stock were originally reserved for
issuance under the plans. Options are granted at the market value of the shares
on the date of grant, have a maximum term of ten years and are fully vested at
the date of grant. Although none have been granted, the plan also provides that
stock appreciation rights ("SAR") relating to options may be granted. The grant
of a SAR permits the optionee to surrender an option and receive in exchange
cash or, if specified in the option agreement, shares of Shelton's common stock
with a value equal to the excess of the fair market value of the shares subject
to the option, over the option exercise price. At June 30, 1994, options for
151,934 shares were exercisable and 25,995 options were available for future
grants.
Stock option activity was as follows:
<TABLE>
<CAPTION>
Shares
------------------------------- Average
Qualified Non-Qualified Option Price
------ ------- ----------
<S> <C> <C> <C>
Outstanding June 30, 1991 and 1992..................... 86,318 31,171 $ 6.88
Exercised.............................................. (9,114) (4,922) 6.33
------ ------ ----
Outstanding June 30, 1993.............................. 77,204 26,249 6.95
Granted................................................ 46,302 33,068 12.07
Exercised.............................................. (9,561) (21,328) 7.26
------ ------- ----
Outstanding June 30, 1994.............................. 113,945 37,989 $ 9.50
======= ====== = ====
</TABLE>
B-17
<PAGE>
14. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1994 1993 1992
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Current income taxes:
Federal........................................................ $ 743 $ 1,020 $ 851
State.......................................................... 361 433 402
--- --- ---
Total current income taxes................................... 1,104 1,453 1,253
----- ----- -----
Deferred income taxes:
Federal........................................................ 187 95 30
State.......................................................... 9 43 14
- -- --
Total deferred income taxes.................................. 196 138 44
--- --- --
Provision for income taxes..................................... $ 1,300 $ 1,591 $ 1,297
= ===== = ===== = =====
</TABLE>
The net deferred tax asset was attributable to the following temporary
differences:
<TABLE>
<CAPTION>
Year ended June 30, 1994
-----------------------------
(In thousands)
<S> <C>
Deferred tax assets:
Allowance for losses on loans, OREO and investments in real estate............... $ 566
Deferred loan origination fees................................................... 287
Other............................................................................ 210
---
Gross deferred tax assets........................................................ 1,063
Valuation allowance................................................................. (31)
----
Deferred tax assets, net of valuation allowance.................................. 1,032
-----
Less deferred tax liabilities:
Premises and equipment........................................................... 70
Excess of tax bad debt reserve over base year reserve............................ 27
Other............................................................................ 41
--
Deferred tax liabilities......................................................... 138
---
Net deferred tax asset.............................................................. $ 894
= ===
</TABLE>
A valuation allowance has been established for capital loss
carryforwards, that Shelton may not recover. The valuation allowance was $31,000
at June 30, 1994, down $65,000 from $96,000 at July 1, 1993.
The sources of deferred income taxes (benefit) were as follows:
<TABLE>
<CAPTION>
At June 30,
-----------------------
1993 1992
------ --------
(In thousands)
<S> <C> <C>
Interest and fees on loans.......................................................... $ 156 $ 52
Income from real estate investments................................................. 13 (85)
Security transactions............................................................... (9) 11
Accelerated depreciation............................................................ (9) 4
Accrued expenses.................................................................... -- 71
Other, net.......................................................................... (13) (9)
---- ---
Total ............................................................................. $ 138 $ 44
= === = ==
</TABLE>
B-18
<PAGE>
Shelton's effective tax rate differed from the statutory federal tax
rate for the following reasons:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------------------------------------
1994 1993 1992
---- ---- ----
As a % of As a % of As a % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ --------- -------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory
federal rate....................... $ 1,113 34.0% $ 1,194 34.0% $ 853 34.0%
Increase (decrease) in taxes resulting from:
State taxes, net of
federal income
tax benefit...................... 243 7.4 314 8.9 275 10.9
Bad debt deduction.................... -- -- 124 3.5 148 5.9
Loss on real estate
investments....................... -- -- -- -- 34 1.4
Other, net............................ (56) (1.7) (41) (1.1) (13) (0.5)
------ ----- ----- ----- ----- -----
Provision for
income taxes....................... $ 1,300 39.7% $ 1,591 45.3% $ 1,297 51.7%
= ===== ===== = ===== ===== = ===== ====
</TABLE>
15. Parent Company Financial Statements
The financial statements of Shelton Bancorp, Inc. were as follows:
Statements of Income
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1994 1993 1992
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Dividend payments from Shelton Savings Bank....................... $ 1,029 $ 326 $ 601
Equity in undistributed income of Shelton Savings Bank............ 1,246 1,624 639
----- ----- ---
Total income................................................... 2,275 1,950 1,240
Operating expenses................................................ 14 24 24
-- -- --
Income before income taxes..................................... 2,261 1,926 1,216
Provision for income taxes........................................ 11 6 5
-- - -
Net income........................................................ $ 2,250 $ 1,920 $ 1,211
= ===== = ===== = =====
</TABLE>
Statements of Condition
<TABLE>
<CAPTION>
At June 30,
----------------------------
1994 1993
---- ----
(In thousands)
Assets:
<S> <C> <C>
Cash............................................................................. $ 900 $ 283
Investment in Shelton Savings Bank............................................... 17,275 16,122
Deferred organizational expenses................................................. -- 14
-- --
Total assets..................................................................... $ 18,175 $ 16,419
- ------ - ------
Liabilities and stockholders' equity:
Accrued tax benefit.............................................................. $ (87) $ (6)
Stockholders' equity............................................................. 18,262 16,425
------ ------
Total liabilities and stockholders' equity....................................... $ 18,175 $ 16,419
= ====== = ======
</TABLE>
B-19
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------
1994 1993 1992
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net income........................................................ $ 2,250 $ 1,920 $ 1,211
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred organizational expenses............. 14 24 24
Increase (decrease) in accrued taxes......................... (81) (10) 2
Equity in undistributed income of Shelton
Savings Bank............................................... (1,246) (1,624) (639)
------- ------- -----
Net cash provided by operating activities.................. 937 310 598
Financing activities:
Issuance of common stock....................................... 324 88 --
Cash dividends paid............................................ (644) (553) (503)
----- ----- -----
Net increase (decrease) in cash............................ 617 (155) 95
Cash at beginning of period....................................... 283 438 343
--- --- ---
Cash at end of period............................................. $ 900 $ 283 $ 438
- --- - --- - ---
Supplemental information:
Cash paid during the year for income taxes..................... $ 14 $ 16 $ 19
= == = == = ==
</TABLE>
16. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("FAS 107"), requires the disclosure of
fair value for certain financial instruments. When quoted market values are not
available, FAS 107 requires that fair value be estimated utilizing an
appropriate valuation technique. Given the numerous acceptable valuation
techniques available, and the subjectivity of the underlying assumptions,
reasonable comparisons between Shelton's fair value information and that of
other financial institutions cannot necessarily be made. In addition, since
there are no quoted market prices for most of Shelton's financial instruments,
the fair values shown below are not necessarily indicative of the underlying net
asset value of Shelton.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Financial assets: The fair value of mortgages held for sale is based on
quoted prices in the secondary market. The fair value of fixed rate mortgage
loans collateralized by 1-4 family residential properties is based on quoted
prices in the secondary market for similar loans. The fair value of all other
loans has been estimated by discounting future cash flows utilizing interest
rates that consider the estimated credit and interest rate risk inherent in the
loans. The fair value of investment securities is principally based on quoted
market prices. Trading account securities are carried at quoted market prices.
Given their short-term nature, the carrying amount of cash and due from banks
and money market investments is a reasonable estimate of fair value.
Financial liabilities: The fair value of time certificates of deposit
has been estimated by discounting future cash flows using the rates currently
offered by the Company on time certificates of deposit with similar remaining
maturities. The carrying amount of all other deposit accounts is a reasonable
estimate of fair value. The fair value of long-term borrowings has been
estimated by discounting future cash flows at rates currently available to
Shelton for debt with similar terms and remaining maturities.
B-20
<PAGE>
Unrecognized financial instruments: The fair value of commitments to
extend credit has been estimated using the fees currently charged by Shelton to
enter into similar agreements, taking into account the remaining terms of the
agreements and the creditworthiness of the customer. For fixed rate loan
commitments, fair value also considers the difference between current interest
rates and the committed rates. The fair value of letters of credit is based on
fees currently charged for similar agreements.
The following table presents a comparison of the carrying value and
estimated fair value of Shelton's financial instruments at June 30, 1994 and
1993:
<TABLE>
<CAPTION>
At June 30,
-----------
1994 1993
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Real estate loans.................................. $ 184,433 $ 176,665 $ 165,041 $ 167,495
Consumer installment loans......................... 6,068 6,023 5,444 5,555
Real estate loans held for sale.................... -- -- 2,813 2,896
Allowance for loan losses.......................... (1,273) -- (1,406) --
Securities held to maturity........................ 40,949 39,727 59,312 60,971
Securities available for sale...................... 20,751 20,751 -- --
Money market investments........................... 4,792 4,792 8,316 8,316
Trading account securities......................... 107 107 276 276
Cash and due from banks............................ 8,459 8,459 5,575 5,575
Financial liabilities:
Deposits:
Time certificates............................... 120,578 121,687 115,967 116,589
Savings and NOW................................. 86,673 86,673 83,137 83,137
Money market.................................... 28,576 28,576 28,020 28,020
Demand.......................................... 16,219 16,219 12,380 12,380
Borrowings......................................... 5,200 5,754 3,200 4,002
Unrecognized financial instruments:
Commitments to extend credit....................... -- 14 -- 43
Letters of credit.................................. -- (26) -- (17)
</TABLE>
B-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Shelton Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition
of Shelton Bancorp, Inc. and subsidiary as of June 30, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Shelton
Bancorp, Inc. and subsidiary as of June 30, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1994 in conformity with generally accepted accounting
principles.
As discussed in Notes 1, 8 and 14 to the consolidated financial
statements, the Company changed its methods of accounting for investments and
income taxes in 1994.
COOPERS & LYBRAND
Hartford, Connecticut
July 21, 1994
B-22
<PAGE>
SELECTED UNAUDITED QUARTERLY DATA OF SHELTON BANCORP, INC.
<TABLE>
<CAPTION>
Quarter Ended
September December March June
(In thousands, except per share data) 1993 1993 1994 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $4,138 $4,188 $4,141 $4,272
Interest expense 2,188 2,079 2,051 2,158
- -------------------------------------------------------------------------------------------------------------------
Net interest income 1,950 2,109 2,090 2,114
Provision for loan losses 30 30 35 55
Securities gains (losses) 21 172 (4) 46
Gains on sale of loans 163 60 (79) (60)
Income (loss) from real estate investments 30 54 (50) 22
Trading account gains (losses) (16) 11 (6) (11)
Other non-interest income 283 297 318 382
Other real estate owned expense 95 104 41 17
Other non-interest expense 1,617 1,514 1,535 1,548
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and
accounting change 689 1,055 658 873
Provision for income taxes 342 507 165 286
- -------------------------------------------------------------------------------------------------------------------
Income before accounting change 347 548 493 587
Change in accounting for income taxes 275 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 622 $ 548 $ 493 $ 587
===================================================================================================================
Per share data:
Fully diluted net income $ 0.48 $ 0.41 $ 0.36 $ 0.43
High common stock price 14.06 15.94 15.94 20.25
Low common stock price 10.44 13.44 14.31 13.44
Cash dividends 0.12 0.12 0.12 0.13
- -------------------------------------------------------------------------------------------------------------------
Quarter Ended
September December March June
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1992 1992 1993 1993
- -------------------------------------------------------------------------------------------------------------------
Interest income $4,703 $4,457 $4,253 $4,203
Interest expense 2,588 2,387 2,290 2,254
- -------------------------------------------------------------------------------------------------------------------
Net interest income 2,115 2,070 1,963 1,949
Provision for loan losses 367 336 45 45
Securities gains (losses) 537 (9) -- 13
Gains on sale of loans -- 266 377 120
Income (loss) from real estate investments 226 (2) -- (73)
Trading account gains (losses) 55 (37) 3 19
Other non-interest income 289 288 269 126
Other real estate owned expense 137 112 191 139
Other non-interest expense 1,401 1,388 1,414 1,478
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,317 740 962 492
Provision for income taxes 640 365 402 184
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 677 $ 375 $ 560 $ 308
===================================================================================================================
Per share data:
Fully diluted net income $ 0.54 $ 0.29 $ 0.44 $ 0.23
High common stock price 11.25 10.81 11.88 13.81
Low common stock price 9.25 9.50 9.94 10.44
Cash dividends 0.10 0.11 0.11 0.11
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The quarterly results of operations have not been audited. In the opinion of
management all material adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the periods indicated have been made.
B-23
<PAGE>
SHELTON MANAGEMENT DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL STATEMENTS - YEAR END JUNE 30
Overview
Shelton Bancorp ("Bancorp") is the parent company of Shelton Savings
Bank ("Shelton Bank"), collectively referred to as "Shelton." Shelton Bank is
headquartered in Shelton, Connecticut and operates six full service offices
within eastern Fairfield and southwestern New Haven counties. Since its founding
in 1919, Shelton Bank has specialized in retail banking with specific emphasis
on residential mortgage lending. Through its trust department, Shelton Bank
provides investment advisory and management services to both retail and
corporate customers.
Net income for the year ended June 30, 1994 was $2.3 million, or $1.71
per share, up 17% from $1.9 million, or $1.52 per share, in 1993. In addition to
being the most profitable year in Shelton's history, the year ended June 30,
1994 marked Shelton's 12th consecutive profitable year.
The major components of the increase in net income were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) Year ended June 30, 1994 1993 Change
Amount Percent
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $ 8,263 $ 8,097 $ 166 2%
Provision for loan losses 150 793 (643) (81)
Core non-interest income 1,280 972 308 32
Core non-interest expense 6,214 5,681 533 9
- -------------------------------------------------------------------------------------------------------------------
Core pre-tax earnings 3,179 2,595 584 23
Gains from asset sales 353 1,495 (1,142) (76)
Other real estate owned expense 257 579 (322) (56)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and accounting change 3,275 3,511 (236) (7)
Provision for income taxes 1,300 1,591 (291) (18)
Change in accounting for income taxes 275 - 275 n.a.
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2,250 $ 1,920 $ 330 17%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Dividends per share were $0.49 in 1994, up 14% from $0.43 in 1993. In
both years the dividend payout ratio was 28%.
In 1994 Shelton's total assets increased by $16.1 million, or 6%. Most
of the growth, which was concentrated in the loan portfolio, was funded by a
$12.5 million, or 5%, increase in deposits.
One of the most significant events during the past three years was the
acquisition of certain assets and liabilities of the former Housatonic Bank &
Trust Company ("HBT") from the Federal Deposit Insurance Corporation ("FDIC") in
July, 1991. Shelton Bank acquired HBT's sole branch office, $40 million in cash,
$16 million in securities, $6 million in performing loans and approximately $1
million in premises, equipment and other assets. Shelton Bank also assumed $62
million in deposits and $1 million in accrued interest payable and other
liabilities.
B-24
<PAGE>
Loans
As part of its interest rate risk management program, Shelton's lending
for portfolio centers on adjustable rate first mortgage loans ("ARMs")
collateralized by 1-4 family residential properties. The interest rate charged
on ARMs generally adjusts annually based on the National Monthly Median Cost of
Funds Index, an index that approximates Shelton's own cost of funds. Shelton has
also placed strong emphasis on the origination of floating rate home equity
credit lines. The rate on these credit lines is subject to monthly adjustment,
based on changes in the prime interest rate.
Shelton sells the majority of its fixed rate mortgage loan originations
in the secondary market.
As the table below shows, approximately 90% of Shelton's loan portfolio
consists of adjustable or floating rate loans. By focusing on adjustable rate
lending, Shelton can partially mitigate the adverse impact of increases in its
cost of funds, given that the rate charged on the majority of the loan portfolio
will also increase as market interest rates rise.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(In thousands) Time Remaining to Maturity at June 30, 1994
Under One to Over Total
One Year Five Years Five Years
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate loans:
First mortgages $ 4,770 $ 22,404 $ 132,227 $ 159,401
Home equity credit lines 18,796 - - 18,796
Construction and development 71 350 4,718 5,139
Second mortgages 178 919 - 1,097
Consumer installment 1,848 4,220 - 6,068
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 25,663 $ 27,893 $ 136,945 $ 190,501
- -------------------------------------------------------------------------------------------------------------------
Loans with floating or adjustable
interest rates $ 23,130 $ 20,263 $ 123,788 $ 167,181
Loans with predetermined interest rates 2,533 7,630 13,157 23,320
- -------------------------------------------------------------------------------------------------------------------
Total loans $ 25,663 $ 27,893 $ 136,945 $ 190,501
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Since ARMs are Shelton's primary lending product for portfolio, demand
for such loans generally drives Shelton's overall growth and is one of the
primary determinants of core profitability. Demand for ARMs generally increases
when their opening first year rate is significantly lower than that available on
a comparable fixed rate mortgage.
During the last half of Shelton's 1994 fiscal year, the Federal Reserve
Bank began to move interest rates up, a strategy aimed at reducing economic
growth and the accompanying potential threat of inflation. As a direct result of
the Federal Reserve's actions, market rates on fixed rate mortgage loans began a
steady climb. In sharp contrast, in fiscal 1993 the Federal Reserve's relaxed
monetary policies pushed fixed rate mortgage loan rates down to their lowest
point in 20 years.
With market interest rates on fixed rate mortgage loans increasing to
approximately twice the opening rate available on ARMs, consumer demand for ARMs
increased dramatically in 1994, fueling a 10% increase in total loans. In the
prior year demand for ARMs was minimal, a situation which held total growth at a
comparatively minor 3%.
B-25
<PAGE>
Loans consisted of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
($ in thousands) June 30, 1994 1993 1992 1991 1990
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
- ------------------------------------------------------------------------------------------------------------------
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgages $ 159,401 83% $142,002 82% $ 136,231 81% $ 117,800 80% $ 114,141 80%
Home equity
credit lines 18,796 10 19,603 11 20,283 12 20,283 14 19,904 14
Construction and
development 5,139 3 4,830 3 4,282 2 3,621 2 3,969 3
Second mortgages 1,097 1 1,419 1 1,717 1 1,570 1 1,617 1
- ------------------------------------------------------------------------------------------------------------------
Total real estate loans 184,433 97 167,854 97 162,513 96 143,274 97 139,631 98
Consumer installment 6,068 3 5,444 3 6,236 4 3,797 3 3,606 2
- ------------------------------------------------------------------------------------------------------------------
Total loans $ 190,501 100% $173,298 100% $ 168,749 100% $ 147,071 100% $ 143,237 100%
- ------------------------------------------------------------------------------------------------------------------
Average outstanding
loans $ 181,530 - $170,864 - $ 152,487 - $ 145,836 - $ 141,615 -
- ------------------------------------------------------------------------------------------------------------------
Loans to deposits at
year-end 76% - 72% - 74% - 88% - 103% -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-performing assets
As the table below shows, in 1994 Shelton achieved a $1.3 million, or
38%, decline in non-performing assets. The decline was primarily attributable to
$2.4 million in other real estate owned ("OREO") sales and $634,000 in
charge-offs.
The changes in non-performing assets were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(In thousands) Loans OREO Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1992 $ 3,524 $ 2,147 $ 5,671
Net increase in non-performing loans 1,088 - 1,088
Charge-offs (460) (494) (954)
Transfers to OREO (3,199) 3,199 -
Proceeds from sale of OREO - (2,724) (2,724)
Property improvements and change in allowance
for OREO losses - 323 323
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 953 2,451 3,404
Net increase in non-performing loans 1,455 - 1,455
Charge-offs (290) (344) (634)
Transfers to OREO (1,024) 1,024 -
Proceeds from sale of OREO - (2,354) (2,354)
Property improvements and change in allowance
for OREO losses - 253 253
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 $ 1,094 $ 1,030 $ 2,124
- ----------------------------------------------------------------------------------------------------------
</TABLE>
B-26
<PAGE>
Non-performing assets consisted of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
$ In thousands) June 30, 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more:
Nonaccrual $ 1,094 $ 953 $ 2,796 $ 2,867 $ 1,155
Accrual - - 728 854 -
- ----------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more 1,094 953 3,524 3,721 1,155
- ----------------------------------------------------------------------------------------------------------------
OREO:
Foreclosed properties 333 1,261 1,500 882 1,403
In-substance foreclosures 751 1,354 839 1,070 2,031
Allowance for OREO losses (54) (164) (192) (47) (34)
- ----------------------------------------------------------------------------------------------------------------
Total OREO 1,030 2,451 2,147 1,905 3,400
- ----------------------------------------------------------------------------------------------------------------
Non-performing assets $ 2,124 $ 3,404 $ 5,671 $ 5,626 $ 4,555
- ----------------------------------------------------------------------------------------------------------------
Restructured loans $ 102 $ - $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------
Non-performing assets to
total loans and OREO 1.11% 1.94% 3.32% 3.78% 3.11%
Allowance for loan losses to total loans
past due 90 days or more 116.36 147.53 30.14 12.82 29.96
As a percentage of total loans:
Loans past due 90 days or more 0.57 0.55 2.09 2.53 0.81
Allowance for loan losses 0.67 0.81 0.63 0.32 0.24
</TABLE>
Not included in the tables on the previous page are loans that, in the
opinion of management, warrant monitoring due to varying degrees of
documentation deficiencies supporting the borrowers' current financial position.
These deficiencies have created some uncertainty, but not serious doubt, as to
the borrowers' ability to comply with the loan repayment terms in the future.
Such loans totaled $866,000 at June 30, 1994.
The accrual of interest income is discontinued when a loan is past due
90 days or more, or earlier when doubt exists as to its ultimate collectibility.
When the accrual of interest income is discontinued, all previously accrued and
uncollected interest is generally reversed against the current period's interest
income. The accrual of interest on loans past due 90 days or more may be
continued when the fair value of the property, net of selling expenses,
collateralizing the loan is sufficient to discharge all principal and accrued
interest income due on the loan. A nonaccrual loan is restored to an accrual
status when it is no longer delinquent and the collectibility of interest and
principal is no longer in doubt.
At June 30, 1994 all loans that had been restructured to provide for a
reduction or deferral of interest or principal, as the result of a weakening in
the financial condition of the borrower, were performing in accordance with the
revised contract terms. Shelton has no outstanding commitments to lend
additional funds to borrowers whose loans have been restructured.
The amount of interest income recognized on nonaccrual and restructured
loans, versus the amount that would have been recognized under the original
contract terms was:
B-27
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income recorded:
Nonaccrual loans $ 17 $ 30 $ 132
Restructured loans 1 - -
Interest income under original contract terms:
Nonaccrual loans 111 131 482
Restructured loans 8 - -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Loans past due 90 days or more consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 Balance % of Total
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C>
1-4 family residential properties $ 935 86%
Commercial real estate 156 14
Consumer installment 3 -
- ---------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more $ 1,094 100%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
OREO consisted of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 Balance % of Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Single-family homes $ 655 64%
Multi-family homes 228 22
Residential land 170 16
Condominiums 31 3
Allowance for OREO losses (54) (5)
- ---------------------------------------------------------------------------------------------------------------
OREO $ 1,030 100%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Allowance for loan losses
The allowance for loan losses is established through charges against
income and maintained at a level that management considers adequate to absorb
potential losses in the loan portfolio. Management's estimate of the adequacy of
the allowance for loan losses is based on evaluations of individual loans,
estimates of current collateral values, delinquency trends and the results of
regulatory examinations. Management also evaluates the general risk
characteristics inherent in the loan portfolio, concentrations of credit risk,
prevailing and anticipated economic conditions, and historical loan loss
experience. Loans are charged against the allowance for loan losses when
management believes that collection is unlikely. Any subsequent recoveries are
credited to the allowance for loan losses when received.
B-28
<PAGE>
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,406 $ 1,062 $ 477 $ 346 $ 244
- -----------------------------------------------------------------------------------------------------------------
Real estate loan charge-offs (267) (369) (351) (159) (11)
Consumer loan charge-offs (23) (92) (92) (95) (29)
Real estate loan recoveries 1 - 1 - -
Consumer loan recoveries 6 12 2 5 2
- -----------------------------------------------------------------------------------------------------------------
Net loan charge-offs (283) (449) (440) (249) (38)
Provision for loan losses 150 793 875 380 140
Balance related to acquired loans - - 150 - -
- -----------------------------------------------------------------------------------------------------------------
Ending balance $ 1,273 $ 1,406 $ 1,062 $ 477 $ 346
- -----------------------------------------------------------------------------------------------------------------
Net loan charge-offs to average loans
outstanding 0.16% 0.26% 0.29% 0.17% 0.03%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As part of its analysis of the adequacy of the allowance for loan
losses, management allocates the allowance for loan losses to the major segments
of the loan portfolio. Although the allowance for loan losses has been allocated
as presented below, it is available to absorb potential losses from any segment
of the loan portfolio.
The allowance for loan losses was allocated as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(In thousands) June 30, 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans:
First mortgages $ 761 $ 725 $ 445 $ 40 $ -
Home equity credit lines 98 112 106 60 -
Construction and land development 79 132 13 - -
Second mortgages - 3 3 - -
- -----------------------------------------------------------------------------------------------------------------
Total real estate loans 938 972 567 100 -
Consumer installment 53 62 94 - -
Unallocated 282 372 401 377 346
- -----------------------------------------------------------------------------------------------------------------
Total $ 1,273 $ 1,406 $ 1,062 $ 477 $ 346
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Securities
The securities portfolio totaled $66.6 million at June 30, 1994, down
from $67.9 million at the same time last year. Shelton utilizes the securities
portfolio as a short to intermediate term investment vehicle, and as a source of
liquidity. Additional information on the composition of the securities portfolio
is included in Note 8 to the Consolidated Financial Statements.
B-29
<PAGE>
Securities consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury:
Held to maturity $ 19,392 $ 34,328 $ 18,506
Available for sale 12,316 - -
U.S. government agencies:
Held to maturity 18,090 13,957 11,827
Available for sale 1,005 - -
Corporate bonds, notes and debentures:
Held to maturity 3,467 6,593 9,036
Available for sale 724 - -
- --------------------------------------------------------------------------------------------------------------
Total debt securities:
Held to maturity 40,949 54,878 39,369
Available for sale 14,045 - -
Equities 6,706 4,434 3,815
Money market investments 4,792 8,316 16,761
Trading account 107 276 871
- --------------------------------------------------------------------------------------------------------------
Total securities $ 66,599 $ 67,904 $ 60,816
- --------------------------------------------------------------------------------------------------------------
Securities to total assets 24% 26% 24%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The maturity distribution and yields on securities at June 30, 1994 were
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Time Remaining to Maturity at June 30, 1994
($ In thousands) 1 Year Weighted Over 1 Weighted Over 5 Weighted After Weighted
or less Average to Average to Average 10 years Average
Yield 5 years Yield 10 years Yield Yield
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury:
Held to maturity $ - -% $ 15,358 6.27% $ 4,034 6.31% $ - -%
Available for sale 2,381 4.69 9,935 5.58 - - - -
U.S. government agencies:
Held to maturity - - 15,067 5.59 3,023 6.12 - -
Available for sale 302 6.84 703 6.40 - - - -
Corporate bonds, notes and debentures:
Held to maturity - - 3,167 6.49 100 6.17 200 8.23
Available for sale 724 6.85 - - - - - -
- -----------------------------------------------------------------------------------------------------------------
Total debt securities:
Held to maturity - - 33,592 5.99 7,157 6.23 200 8.23
Available for sale 3,407 5.33 10,638 5.64 - - - -
Equities 6,706 5.90 - - - - - -
Money market investments 4,792 3.80 - - - - - -
Trading account 107 3.28 - - - - - -
- -----------------------------------------------------------------------------------------------------------------
Total securities $ 15,012 5.08% $ 44,230 5.90% $ 7,157 6.23% $200 8.23%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As discussed in Notes 1 and 8 to the Consolidated Financial Statements,
on June 30, 1994 Shelton adopted Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities".
B-30
<PAGE>
Shelton utilizes securities that are classified as available for sale
as part of its asset/liability management program. These securities have
relatively short maturities and may be sold in response to changes in a number
of factors, including Shelton's liquidity needs and market interest rates. At
June 30, 1994, gross unrealized gains on available for sale securities totaled
$79,000 and gross unrealized losses were $238,000. The unrealized holding loss
of $93,000, net of income taxes, was reported as a separate component of
stockholders' equity.
Investments in real estate
As the result of sales activity, investments in real estate declined
from $2.9 million at June 30, 1993 to $1.5 million at year-end 1994.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Direct:
Riggs Street (30 lot residential subdivision) $ 877 $ 827
Owl Hill (25 Unit residential housing) 390 1,601
Allowance for losses (34) (170)
Joint ventures:
Walnut Estates (19 lot residential subdivision) 284 579
High Vista (22 lot residential subdivision) - 55
- -----------------------------------------------------------------------------------------------------------
Investments in real estate $ 1,517 $ 2,892
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Owl Hill project, located in Shelton, Connecticut, entered the
sales phase in fiscal 1992. Current projections indicate that the remaining 2
units will be sold within the next 3 months at a loss, which has been provided
for.
The Riggs Street project is located in Oxford, Connecticut. The
construction phase will be completed by the second quarter of fiscal 1995. Sales
are expected to commence shortly thereafter with an average of approximately one
sale per month anticipated during the project's sales phase.
As an equity partner in joint ventures with local developers, Shelton
typically receives 50% of the venture's net profits. Both Shelton and its
partner are generally required to make capital contributions, in equal amounts,
to the venture.
Shelton's sole remaining joint venture, Walnut Estates, is located in
Shelton, Connecticut. The construction phase has been completed and 11 lots have
been sold. Shelton anticipates that the remaining 8 lots will be sold in fiscal
1995.
Capitalized interest expense on investments in real estate totaled
$37,000 during the year ended June 30, 1992. No interest expense was capitalized
during the years ended June 30, 1994 and 1993.
A change in federal regulations has made it necessary for Shelton to
divest itself of all real estate investments by December 19, 1996. Given the
length of time remaining to complete such divestiture, Shelton has not found it
necessary to make significant changes in the timing of expenditures, the
determination of sales prices, or any other material aspect of its real estate
investments.
Additional information on the joint ventures is included in Note 9 to
the Consolidated Financial Statements.
B-31
<PAGE>
Other
The increase in other assets, from $1.5 million at June 30, 1993 to
$1.9 million at June 30, 1994, was primarily attributable to an increase in
receivables from loan servicing activities and from the sale of foreclosed
properties. At June 30, 1993, other liabilities included a $249,000 commitment
to purchase securities. As no similar commitments were outstanding at the end of
the current year, other liabilities declined from $739,000 at June 30, 1993, to
$495,000 at June 30, 1994.
Deposits
Deposits totaled $252.0 million at June 30, 1994, up $12.5 million, or
5%, from $239.5 million at year-end 1993.
Shelton's deposit acquisition strategies aim at attracting long-term
retail deposit relationships that are generally less sensitive to market
interest rate changes. In keeping with this strategy, Shelton does not currently
accept highly volatile brokered deposits. In addition, Shelton generally will
not pay a premium rate to attract or retain time deposits with balances of
$100,000 or more, as they are considered by management to be sensitive to even
moderate rate changes. As a result, time certificates with balances of $100,000
or more accounted for only 4% of total deposits at June 30, 1994.
The maturity distribution of time certificates of deposit issued in
amounts of $100,000 or more, and of other time deposits with balances of
$100,000 or more were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 Balance % of Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Time remaining to maturity:
Three months or less $ 2,039 21%
Over three months to six months 1,383 14
Over six months to twelve months 1,815 19
Over twelve months 4,476 46
- -------------------------------------------------------------------------------------------------------------------
Total $ 9,713 100%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Over the past several years, the Federal Reserve's relaxed monetary
policies produced a sharp decline in Shelton's cost of deposits. Average rates
paid on deposits fell from 5.59% in 1992, to 4.15% in 1993 and to 3.53% in 1994,
as shown below.
B-32
<PAGE>
Average deposits and average rates paid were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year ended June 30, 1994 1993 1992
($ In thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Time certificates $117,123 4.63% $115,032 5.06% $113,287 6.37%
Savings and NOW 83,617 2.02 76,902 2.89 58,086 4.32
Money market 30,593 3.46 29,701 3.87 31,091 5.14
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits $231,333 3.53% $221,635 4.15% $202,464 5.59%
- -------------------------------------------------------------------------------------------------------------
Non interest-bearing
demand deposits $ 13,105 -- $ 11,263 -- $9,243 --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Borrowings
At June 30, 1994 borrowings totaled $5.2 million, up from $3.2 million
at the same time last year. The $2.0 million increase was attributable to
additional short-term borrowings utilized to fund a portion of the $16.1 million
increase in total assets during 1994. All of Shelton's borrowings are subject to
significant prepayment penalties.
Average borrowings and average rates paid were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year ended June 30, 1994 1993 1992
($ In thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term borrowings $3,200 8.75% $3,553 9.20% $5,716 8.57%
Short-term borrowings 603 4.31 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total borrowings $3,803 8.05% $3,553 9.20% $5,716 8.57%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Asset/Liability management
Shelton's asset/liability management program focuses on minimizing
interest rate risk by maintaining what management considers to be an appropriate
balance between the volume of assets and liabilities maturing or subject to
repricing within the same time interval. In an effort to maximize the net
interest margin at all levels of the interest rate cycle, lending centers on
adjustable rate loans that float at a positive spread over the average cost of
the liabilities funding the loans. This strategy has been reasonably successful
in the past, evidenced by Shelton's ability to maintain the net interest margin
above 3.00% during each of the past five years. By comparison, the cost of funds
varied between a high of 7.93% and a low of 3.60% during the same period.
The following table presents Shelton's rate sensitivity GAP analysis at
June 30, 1994. GAP analysis is a basic interest rate risk measurement tool that
provides management with an indication of the effect that future interest rate
movements could have on Shelton. When liabilities reprice or mature at a faster
pace than assets, a negative GAP position exists. A negative rate sensitivity
GAP indicates that net interest income would tend to decrease as interest rates
increase, and increase as rates fall. Conversely, if a positive GAP position
exists, net interest income would tend to rise with increases in interest rates,
and fall as rates drop.
As savings and NOW accounts are subject to immediate repricing, they
have been classified as being subject to rate adjustments within six months or
less. However, their sensitivity to changes
B-33
<PAGE>
in market interest rates is relatively low in comparison to other deposit
products. Since these accounts are primarily utilized for liquidity and
bill-paying purposes, and not as investment vehicles, account holders are
somewhat indifferent to the interest rate being paid on these accounts given the
flexibility and convenience that they provide. Additionally, since savings and
NOW accounts are generally low balance accounts, the interest income that they
generate for most account holders is relatively insignificant under most rate
scenarios. Given all of these factors, the magnitude and speed of changes in
savings and NOW account rates tends to lag behind changes in market interest
rates.
As GAP analysis is only a static view of potential interest rate risk,
management also utilizes multiple simulation analysis techniques in an attempt
to estimate how the repricing and maturity mix of assets and liabilities could
change in response to interest rate changes, and the effect of such changes on
net interest income and liquidity. If these analyses indicate a high degree of
probability for a significant adverse change in net interest income or
liquidity, current funding strategies and asset mix would be changed to minimize
Shelton's potential risk exposure.
B-34
<PAGE>
The following table presents the expected maturities, or period to
repricing, of Shelton's assets and liabilities at June 30, 1994.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Rate Sensitive or Due in:
Six Months Over Six Total Within Over Total
or Less Months to One Year One Year
One Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing assets:
Loans $ 80,516 $ 68,288 $ 148,804 $ 41,697 $190,501
Securities 8,010 2,011 10,021 51,679 61,700
Money market and other securities 4,899 -- 4,899 -- 4,899
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing assets 93,425 70,299 163,724 93,376 257,100
Other assets, net -- -- -- 18,903 18,903
- ----------------------------------------------------------------------------------------------------------------
Total assets 93,425 70,299 163,724 112,279 276,003
- ----------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Time certificates 46,852 23,725 70,577 50,001 120,578
Regular savings 70,532 -- 70,532 -- 70,532
NOW accounts 16,141 -- 16,141 -- 16,141
Money market accounts 28,576 -- 28,576 -- 28,576
Borrowings 3,500 -- 3,500 1,700 5,200
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 165,601 23,725 189,326 51,701 241,027
Demand deposits -- -- -- 16,219 16,219
Other liabilities -- -- -- 495 495
Stockholders' equity -- -- -- 18,262 18,262
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity 165,601 23,725 189,326 86,677 276,003
- ----------------------------------------------------------------------------------------------------------------
Rate sensitivity GAP $ (72,716) $ 46,574 $ (25,602) $ 25,602 $ --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity
Shelton regularly monitors its ability to profitably fund both short
and long-term growth in its lending and other investment activities. Shelton
also monitors its capacity to fund any rapid unforeseen large cash outflows in
an orderly and cost effective manner.
As lending is Shelton's single largest investment activity, Shelton's
cash requirements are primarily determined by the level of loan demand. Loan
demand varies in response to changes in market interest rates, the state of the
economy and competition.
Shelton's second largest investment activity is the holding of
securities. The majority of Shelton's securities can either be sold or used as
collateral for short-term borrowings, providing a source of cash to fund
unforeseen rapid outflows of funds.
Deposits, specifically time certificates of deposit, are Shelton's
primary financing source. As Shelton does not accept brokered deposits or offer
premium rates to attract large denomination certificates of deposit, essentially
all of its deposit base is comprised of local retail deposit accounts. A local
retail deposit base tends to be somewhat insensitive to moderate interest rate
fluctuations, and provides a reasonably stable and cost-effective source of
funds.
Shelton may also borrow from the Federal Home Loan Bank ("the FHLB") on
both a short and long-term basis, and does so whenever the cash requirements of
is investing activities exceed
B-35
<PAGE>
deposit growth. Shelton's borrowings from the FHLB are limited to the amount of
qualified collateral that Shelton holds. Based on available collateral, at June
30, 1994, Shelton had potential access to approximately $154 million in
additional financing, an amount well in excess of its normal annual financing
requirements.
Federal regulations require that Shelton maintain reserves, in the form
of cash on hand or deposit balances at the Federal Reserve Bank, against certain
deposit liabilities. At June 30, 1994 Shelton's reserve requirement was $1.2
million.
Management is not aware of any known trends, events, uncertainties, or
proposed regulatory changes that are reasonably likely to have a material effect
on Shelton's liquidity, capital resources or operations.
Capital resources
Shelton Bank must maintain certain regulatory capital ratios. Depending
on the banking regulators overall quality rating of an institution, all but the
highest rated institutions must maintain a minimum Tier 1 leverage capital ratio
of between 4.00% to 5.00%. Shelton Bank is also required to meet supplemental
capital adequacy standards which measure qualifying capital against
risk-weighted assets plus off-balance sheet items such as outstanding loan
commitments and letters of credit. At June 30, 1994 Shelton Bank's total
risk-based capital was in excess of the 8.00% minimum requirement.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
($ In thousands) June 30, 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank's capital components:
Tier 1 capital (Stockholders' equity) $ 17,244 $ 16,122
Tier 2 capital (Allowances for loan losses) 1,273 1,406
- ----------------------------------------------------------------------------------------------------------
Bank's total risk-based capital $ 18,517 $ 17,528
- ----------------------------------------------------------------------------------------------------------
Bank's capital ratios:
Total risk-based 12.78% 12.57%
Tier 1 risk-based 11.90 11.56
Tier 1 leverage 6.25 6.20
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Shelton Bank is Bancorp's sole source of funds for dividend payments to
its stockholders. Connecticut Banking Laws limit the amount of annual cash
dividends that Shelton Bank may pay to Bancorp to an amount which approximates
Shelton Bank's net income for the then current year, plus its retained net
income for the prior two years. Shelton Bank is also prohibited from paying a
cash dividend that would reduce its capital to asset ratios below minimum
regulatory requirements.
During the year ended June 30, 1994, Bancorp paid dividends totaling
$631,000, or $0.49 per share, up 17% from $540,000 or $0.43 per share in the
prior year. The dividend payout ratio was 28% during both years. Bancorp reviews
its dividend policy based on current earnings and by assessing the need to
retain earnings to support long-term growth.
Net interest income
In 1994 net interest income totaled $8.3 million, up $166,000 or 2%,
from $8.1 million in 1993. In 1993 net interest income rose by $872,000 or 12%.
As the result of its interest rate risk management programs, Shelton's net
interest margin remained steady during the periods, despite significant changes
in asset yields and in the cost of funds.
B-36
<PAGE>
As shown in the tables on the following two pages, growth in net
interest income was primarily attributable to increases in the balance of
average interest-bearing assets, specifically in the loan portfolio. Average
loans outstanding rose $10.7 million, or 6%, in 1994, and $18.4 million, or 12%,
in 1993.
A higher rate of average outstanding non-interest-bearing sources of
funds also contributed to the increases in net interest income during the past
two years. As a direct result of Shelton's marketing efforts, average
outstanding demand deposits increased by $1.8 million, or 16%, in 1994, pacing
the $2.0 million, or 22%, increase achieved in 1993.
B-37
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
($ In thousands) Year ended June 30, 1994 1993 1992
Average Interest Average Average Interest Average Average Interest Average
Balance Rate Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------------
Assets:
Loans $181,530 $13,122 7.23% $170,864 $14,214 8.32% $152,487 $14,891 9.77%
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
Securities 59,769 3,413 5.71 45,906 2,905 6.33 38,263 3,048 7.97
Money market and other 6,565 204 3.11 17,016 497 2.92 24,067 1,093 4.54
- ---------------------------------------------------------------------------------------------------------------------
Total securities 66,334 3,617 5.45 62,922 3,402 5.41 62,330 4,141 6.64
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
assets 247,864 16,739 6.75 233,786 17,616 7.54 214,817 19,032 8.86
Cash and due from banks 6,073 5,075 4,983
Other assets 11,728 13,725 12,338
- ---------------------------------------------------------------------------------------------------------------------
Total assets $265,665 $252,586 $232,138
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Interest-bearing deposits:
Time certificates $117,123 $ 5,424 4.63% $115,032 $ 5,819 5.06% $113,287 $ 7,212 6.37%
Savings and NOW 83,617 1,687 2.02 76,902 2,225 2.89 58,086 2,507 4.32
Money market 30,593 1,059 3.46 29,701 1,148 3.87 31,091 1,598 5.14
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 231,333 8,170 3.53 221,635 9,192 4.15 202,464 11,317 5.59
Borrowings 3,803 306 8.05 3,553 327 9.20 5,716 490 8.57
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 235,136 8,476 3.60 225,188 9,519 4.23 208,180 11,807 5.67
Demand deposits 13,105 11,263 9,243
Accrued taxes and
other liabilities 36 314 102
Stockholders' equity 17,388 15,821 14,613
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $265,665 $252,586 $232,138
- ---------------------------------------------------------------------------------------------------------------------
Net interest
income/rate spread $ 8,263 3.15% $ 8,097 3.31% $7,225 3.19%
- ---------------------------------------------------------------------------------------------------------------------
Net interest margin 3.33% 3.46% 3.36%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the changes in interest income and expense
for each major category of interest-bearing assets and liabilities, and the
amount of the change attributable to changes in average outstanding balances
("volume") and rates. Changes attributable to both volume and rate changes have
been allocated in proportion to the relationship of the absolute dollar amount
of the changes in volume and rate.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
($ In thousands) Change from 1993 to 1994 Change from 1992 to 1993 Change from 1991 to 1992
Attributable to: Attributable to: Attributable to:
Volume Rate Total Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 850 $(1,942) $(1,092) $1,676 $(2,353) $ (677) $ 690 $(1,408) $ (718)
Securities 813 (305) 508 547 (691) (144) 2,226 (33) 2,193
Money market and other (323) 30 (293) (269) (326) (595) 768 (210) 558
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 1,340 (2,217) (877) 1,954 (3,370) (1,416) 3,684 (1,651) 2,033
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Time certificates 104 (499) (395) 109 (1,502) (1,393) 1,172 (1,583) (411)
Savings and NOW 181 (719) (538) 679 (961) (282) 1,350 (307) 1,043
Money market 33 (122) (89) (68) (382) (450) 499 (282) 217
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense
on deposits 318 (1,340) (1,022) 720 (2,845) (2,125) 3,021 (2,172) 849
Borrowings 22 (43) (21) (197) 34 (163) (536) (20) (556)
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 340 (1,383) (1,043) 523 (2,811) (2,288) 2,485 (2,192) 293
- ---------------------------------------------------------------------------------------------------------------------
Net interest income $1,000 $ (834) $ 166 $1,431 $ (559) $ 872 $1,199 $ 541 $1,740
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
B-38
<PAGE>
Composition of non-interest income
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1994 1993 1992
($ In thousands) Amount %Change Amount %Change Amount %Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core non-interest income:
Banking service charges $ 892 4% $ 858 10% $ 783 63%
Loan servicing fees 197 n.m. 6 (92) 74 (1)
Other 191 77 108 32 82 (12)
- ---------------------------------------------------------------------------------------------------------------------
Total core non-interest income 1,280 32 972 4 939 45
- ---------------------------------------------------------------------------------------------------------------------
Gains (losses) on asset sales:
Securities 235 (57) 541 n.m. (56) n.m.
Loans 84 (89) 763 18 648 n.m.
Real estate investments 56 (63) 151 n.m. (76) n.m.
Trading account securities (22) (155) 40 n.m. (18) n.m.
- ---------------------------------------------------------------------------------------------------------------------
Total gains on asset sales 353 (76) 1,495 200 498 n.m.
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 1,633 (34)% $2,467 72% $ 1,437 269%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Total non-interest income decreased 34% in 1994, following a 72%
increase in 1993. As the table above shows, the changes were primarily
attributable to varying levels of gains from asset sales.
Core non-interest income showed improvement in both years, increasing
by 32% in 1994 and 4% in 1993.
Banking service charges, Shelton's largest source of core non-interest
income, increased by 4% in 1994 and 10% in 1993. The increases were primarily
attributable to growth in the number of outstanding checking and NOW accounts,
and a correspondingly higher level of utilization of fee-based services by
customers.
Loan servicing fees increased by $191,000 in 1994, compared to a
$68,000 decline in 1993. The variances were primarily attributable to changes in
the rate of amortization expense on Shelton's purchase mortgage servicing rights
("PMSRs"). A falling interest rate environment precipitated a wave of
refinancing activity that caused an unexpected level of prepayments on the
mortgage loans underlying Shelton's PMSRs during 1993. As the net present value
of future loan servicing income was substantially reduced by these prepayments,
in 1993 Shelton sharply increased the rate of amortization expense on PMSRs to
recognize the decline in their value. No similar adjustment was required in
1994.
Other non-interest income increased 77% in 1994 and 32% in 1993. The
1994 increase was primarily the result of fee income generated by Shelton's new
trust department. The increase in 1993 was primarily attributable to higher fees
from the sale of insurance products.
Security gains decreased by $306,000 in 1994, following a $597,000
increase in 1993. During 1994, Shelton sold securities in response to unforeseen
changes in market conditions. The 1993 gain was primarily the result of the sale
of Shelton's $7.9 million mortgage-backed securities portfolio. As part of the
HBT acquisition, Shelton acquired a portfolio of fixed rate 25 year,
mortgage-backed securities. In 1993 management concluded that these long-term
securities presented an undue level of interest rate risk for Shelton, and the
entire portfolio was sold.
Shelton sells most fixed rate mortgage loan originations in the
secondary market. In 1994 loan sales totaled $16.5 million, down 25% from $22.1
million in 1993. The drop in loan sales was attributable to a decline in demand
for fixed rate mortgage loans, a change in consumer preference that occurred
when the Federal Reserve began to raise interest rates during the last half of
Shelton's fiscal year. Although loan sales dropped by only 25%, gains from the
sale of loans fell by almost 90% in 1994. This disparity was attributable to
volatility in the financial markets, which caused a dramatic drop in the market
value of Shelton's portfolio of loans held for sale. The 18% rise in gains from
loan sales during 1993 resulted from an increase in sales volume. Loan sales
totaled $22.1 million in 1993, up 19% from $18.6 million in 1992.
B-39
<PAGE>
Income from real estate investments totaled $56,000 in 1994, down 63%
from $151,000 in 1993. The decline was attributable to a $58,000 drop in sales
gains, and a $37,000 increase in the provision for losses on real estate
investments. The $227,000 increase in income from real estate investments during
1993 was attributable to a $297,000 increase in sales gains, which was partially
offset by a $70,000 increase in the loss provision.
During 1994, Shelton recognized a $22,000 loss from its trading account
activities versus a gain of $40,000 in 1993, and a loss of $18,000 in 1992.
Trading account gains and losses are subject to relatively wide fluctuations as
the result of changes in the financial markets.
Non-interest expense
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1994 1993 1992
($ In thousands) Amount %Change Amount %Change Amount %Change
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 2,995 15% $ 2,610 17% $ 2,223 30%
Equipment 909 6 859 10 783 21
Professional services 735 2 724 46 496 32
Insurance premiums 701 9 642 21 529 71
Other real estate owned 257 (56) 579 40 413 (13)
Occupancy 228 (3) 236 (30) 335 21
Other 646 6 610 22 500 31
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 6,471 3% $ 6,260 19% $ 5,279 27%
=====================================================================================================================
</TABLE>
The rate of increase in non-interest expense slowed to 3% in 1994, well below
the 19% increase in the prior year. On a net basis, all of the increase was
attributable to direct expenses of Shelton's new trust department.
In 1994, salaries and benefits increased by $385,000, or 15%. Part of
the increase was attributable to $104,000 in pension expense during 1994, an
expense item that Shelton did not have in the prior year given that the pension
plan was at its full-funding limitation in 1993. Another contributing factor was
Shelton's new trust department, whose staffing needs added $132,000 to salaries
and benefits in 1994. Other new hires and salary increases were responsible for
the remaining $149,000 increase during 1994. The $387,000, or 17%, increase
during 1993 was partially attributable to a $43,000 increase in medical
insurance premiums and to a $31,000 increase in contributions to Shelton's
employee stock ownership plan. The balance of the 1993 increase was attributable
to new hires and salary increases.
Equipment expense was up 6% in 1994 and 10% in 1993. Higher data
processing costs, additional depreciation expense on new equipment, and
increased telecommunication expense were responsible for most of the increases.
Professional services increased by $11,000 in 1994 and $228,000 in
1993. In both years, professional services accounted for approximately 11% of
total non-interest expense. The 1994 increase resulted from the continuing
utilization of consultants for technical guidance related to items such as
Shelton's trust department, revision of Shelton's policies and procedures,
strategic planning, and compensation issues. The increase in professional
services during 1993 was primarily attributable to legal and consulting fees
incurred in connection with meeting the requirements of the Memorandum of
Understanding ("the MOU") that Shelton Bank entered into with the FDIC and the
Connecticut Banking Commissioner. Shelton entered into the MOU in January, 1993
and met all of its requirements by September, 1993, at which time the MOU was
lifted.
Higher FDIC deposit insurance assessments were responsible for the
majority of the increases in insurance premiums during the past two years.
B-40
<PAGE>
Expenses related to the disposition of OREO properties include the
provision for OREO losses, carrying expenses net of any rental income, and gains
and losses on the sale of the properties. OREO expenses fell by 56% in 1994,
following a 40% increase in 1993. The changes in total OREO expense during the
years were primarily attributable to changes in the amount of the provision for
OREO losses.
Occupancy expenses declined in both 1994 and 1993. The decreases are
attributable to additional rental income generated by Shelton's practice of
leasing out unused space at its branch offices.
The increases in other expenses are chiefly attributable to an increase
in advertising expenditures.
Recent accounting pronouncements
In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("FAS 114"). Among other things, FAS 114 requires that
certain impaired loans be valued based on the present value of expected future
cash flows. Shelton will adopt FAS 114 in the first quarter of fiscal 1996.
Although the initial effect of adopting FAS 114 is dependent on the level of
actual outstanding impaired loans at the time of adoption, current estimates
indicate that the adoption of FAS 114 will not have a material impact on
Shelton's financial position or results of operations.
Impact of inflation and changing prices
Shelton's financial statements and related data have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of Shelton are monetary in nature. As a result, the
course of interest rate movements has a more significant impact on Shelton's
performance than do the effects of general inflation.
Management believes that effective asset/liability management has
reduced interest rate risk. Notwithstanding the above, deflation can directly
affect the value of loan collateral, in particular real estate. In recent years
sharp decreases in real estate prices resulted in significant losses on loans
and OREO.
B-41
<PAGE>
<TABLE>
<CAPTION>
Five Year Growth Rates
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Income and expense:
Net interest income 13.62%
Provision for loan losses (5.31)
Gains on sale of loans 45.23
Securities gains 18.80
Income from real estate investments (44.29)
Other non-interest income 24.04
OREO expense 53.66
Other non-interest expense 14.29
Net income 8.56
Assets, liabilities and equity:
Net loans 6.59
Securities 44.81
Total assets 12.17
Deposits 16.10
Equity 5.45
Financial Ratios:
Yield on interest-bearing assets (8.02)
Cost of funds (14.04)
Net interest margin 1.71
Return on average assets (3.20)
Return on average equity 3.17
Non-performing assets ratio (0.25)
Non-performing loans to total loans (11.05)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
B-42
<PAGE>
APPENDIX C
SHELTON CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31 UNAUDITED
<TABLE>
<S> <C>
Consolidated Statement of Condition as of March 31, 1995 (unaudited) ..................................... C-2
Consolidated Statements of Income for the three and nine month periods
ended March 31, 1995 and 1994 (unaudited) ............................................................. C-3
Consolidated Statement of Changes in Stockholders' Equity for the nine month period
ended March 31, 1995 (unaudited) ...................................................................... C-4
Consolidated Statements of Cash Flows for the nine month period ended March 31, 1995
(unaudited) ........................................................................................... C-5
Notes to Consolidated Financial Statements (unaudited) ................................................... C-6
Management Discussion and Analysis of Unaudited March 31 Consolidated
Financial Statements................................................................................... C-8
</TABLE>
C-1
<PAGE>
UNAUDITEDCONSOLIDATED STATEMENT OF CONDITION OF
SHELTON BANCORP, INC.
($ In thousands)
<TABLE>
<CAPTION>
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Assets
Loans:
Real estate $ 215,950 $ 180,763
Consumer installment 5,839 5,942
Held for sale -- 1,857
-- -----
Total loans 221,789 188,562
Less allowance for loan losses 1,411 1,433
----- -----
Net loans 220,378 187,129
------- -------
Securities:
Held to maturity (fair value $38,120) 39,371 51,037
Available for sale, at fair value 16,531 --
Securities held for sale (fair value $10,297) -- 10,232
Money market investments 36 2,169
Trading account, at fair value 90 118
-- ---
Total securities 56,028 63,556
------ ------
Total interest-bearing assets 276,406 250,685
Cash and due from banks 7,809 8,363
Premises and equipment 5,524 5,652
Accrued interest receivable 1,842 1,847
Investments in real estate 1,174 2,122
Other real estate owned 766 1,252
Other assets 1,477 2,089
----- -----
Total assets $ 294,998 $ 272,011
= ======= = =======
Liabilities and stockholders' equity
Liabilities:
Deposits:
Time certificates $ 140,083 $ 116,970
Savings and NOW 76,679 85,017
Money market 36,017 33,670
Demand 17,362 13,759
------ ------
Total deposits 270,141 249,416
Borrowings 3,700 3,200
Advance payments by borrowers for
taxes and insurance 1,279 1,135
Accrued taxes and other liabilities 344 420
--- ---
Total liabilities 275,464 254,171
------- -------
Stockholders' equity:
Preferred stock, $1.00 par value; authorized-1,000,000
shares; none issued --
Common stock, $1.00 par value; authorized-5,000,000
shares; issued 1,438,747 1,439 1,339
Additional paid-in capital 7,942 7,634
Retained earnings 11,003 9,565
Net unrealized loss on securities available for sale (100) --
Net unrealized loss on marketable equity securities -- (6)
Treasury stock at cost-103,458 shares (750) (693)
---- ----
Total stockholders' equity 19,534 17,839
------ ------
Total liabilities and stockholders' equity $ 294,998 $ 272,011
= ======= = =======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
C-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME OF SHELTON BANCORP, INC.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 3,866 $ 3,323 $ 11,151 $ 9,841
Securities 851 781 2,640 2,494
Money market and other 52 37 135 132
-- -- --- ---
Total interest income 4,769 4,141 13,926 12,467
----- ----- ------ ------
Interest expense:
Deposits 2,492 1,982 7,054 6,108
Borrowings 70 69 250 210
-- -- --- ---
Total interest expense 2,562 2,051 7,304 6,318
----- ----- ----- -----
Net interest income 2,207 2,090 6,622 6,149
Provision for loan losses 105 35 270 95
--- -- --- --
Net interest income after provision
for loan losses 2,102 2,055 6,352 6,054
----- ----- ----- -----
Non-interest income:
Banking service charges 249 221 743 652
Loan servicing fees 43 63 127 142
Trust fees 26 14 73 27
Trading account gains (losses) 14 (6) 31 (11)
Income (loss) from real estate investments 20 (50) 26 34
Gain (loss) on sale of securities (8) (4) (20) 189
Gain (loss) on sale of loans -- (79) -- 144
Other 48 20 116 77
-- -- --- --
Total non-interest income 392 179 1,096 1,254
--- --- ----- -----
Non-interest expense:
Salaries and benefits 738 784 2,126 2,219
Premises and equipment 234 263 729 853
Professional services 248 168 701 585
Insurance premiums 182 169 531 532
Other real estate owned 13 41 52 240
Other 174 151 542 477
--- --- --- ---
Total non-interest expense 1,589 1,576 4,681 4,906
----- ----- ----- -----
Earnings:
Income before income taxes and accounting change 905 658 2,767 2,402
Provision for income taxes 335 165 1,077 1,014
--- --- ----- -----
Income before accounting change 570 493 1,690 1,388
Cumulative effect of change in method of
accounting for income taxes -- -- -- 275
-- -- -- ---
Net income $ 570 $ 493 $ 1,690 $ 1,663
= === = === = ===== = =====
Primary income per share:
Income before accounting change $ 0.43 $ 0.36 $ 1.25 $ 1.04
Net income 0.43 0.36 1.25 1.25
Fully diluted income per share:
Income before accounting change 0.43 0.36 1.25 1.04
Net income 0.43 0.36 1.25 1.24
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
C-3
<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY OF SHELTON BANCORP, INC.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Additional Securities Treasury Total
Common Paid-in Retained Available Stock Stockholders'
Stock Capital Earnings for Sale at Cost Equity
-------- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 1,404 $ 7,730 $ 9,914 ($93) ($693) $ 18,262
Net income -- -- 1,690 -- -- 1,690
Options exercised 35 212 -- -- (57) 190
Cash dividends ($0.46 per share) -- -- (601) -- -- (601)
Increase in net unrealized loss
on securities available for sale -- -- -- (7) -- (7)
-- -- -- --- -- ---
Balance at March 31, 1995 $ 1,439 $ 7,942 $ 11,003 ($100) ($750) $ 19,534
= ===== = ===== = ====== ====== ====== = ======
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
C-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS OF SHELTON BANCORP, INC.
(In thousands)
<TABLE>
<CAPTION>
Nine months ended March 31, 1995
--------------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,690 $ 1,663
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
(Gain) loss on sale of:
Securities available for sale 20 (63)
Other real estate owned (4) (34)
Real estate investments (26) (34)
Trading account (31) 11
Securities held to maturity -- (125)
Loans held for sale -- (144)
Loss provisions 376 491
DeprecIation and amortization 313 358
Deferred income taxes expense (benefit) 88 (65)
Amortization of premium on other securities 70 139
Amortization of premium on mortgage-backed securities 47 169
Amortization of deferred loan origination fees (197) (215)
Cumulative effect of change in income taxes -- (275)
Changes in operating assets and liabilities:
Trading account assets 48 147
Other assets 156 (1,158)
Accrued interest receivable (181) 35
Accrued taxes and other liabilities (151) (319)
----- -----
Net cash provided by (used in) operating activities 2,218 581
----- ---
Cash flows from investing activities:
Loans for portfolio
Net increase (23,600) (10,605)
Purchases (7,623) (5,468)
Loans held for sale
Proceeds from sales 591 13,465
Net decrease (591) (12,365)
Mortgage-backed securities held to maturity
Repayments 1,589 7,303
Purchases -- (10,073)
Securities held to maturity
Proceeds from sales -- 5,492
Proceeds from maturities 200 4,147
Purchases (302) (4,092)
Securities available for sale
Proceeds from sales 5,557 1,157
Proceeds from maturities 1,010 --
Purchases (2,405) 4,221
Net change in securities held for sale -- (10,232)
Net decrease in money market investments 4,756 6,147
Proceeds from sale of real estate investments 1,113 1,543
Proceeds from sale of other real estate owned 408 1,955
Purchase of premises and equipment (203) (276)
Additions to investments in real estate (831) (916)
----- ----
Net cash provided by (used in) investing activities (20,331) (8,597)
-------- -------
Cash flows from financing activities:
Borrowings
Proceeds from short-term borrowings 4,000 --
Repayment of short-term borrowing (6,000) --
Proceeds from long-term borrowings 2,000 --
Repayment of long-term borrowings (1,500) --
Net increase in time certificates of deposit 19,505 1,003
Options exercised 247 225
Increase in Treasury stock (57) --
Net increase (decrease) in other deposit accounts (131) 10,044
Dividends paid (601) (468)
----- -----
Net cash provided by financing activities 17,463 10,804
------ ------
Net (decrease) increase in cash and due from banks (650) 2,788
Cash and due from banks at beginning of period 8,459 5,575
----- -----
Cash and due from banks at end of period $ 7,809 $ 8,363
= ===== = =====
Supplemental information:
Cash paid during the period for:
Interest $ 7,325 $ 6,318
Income taxes 1,089 1,001
Noncash investing activities:
Loans transferred to other real estate owned 170 935
Net unrealized loss on securities available for sale 7 --
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
C-5
<PAGE>
Notes to Unaudited Consolidated Financial Statements of Shelton Bancorp, Inc.
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements include
the accounts of Shelton Bancorp, Inc. and its subsidiary Shelton Savings Bank
("Shelton Bank"), collectively referred to as "Shelton", unless the context
otherwise implies. In the opinion of management, the unaudited consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include all material adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of Shelton's
financial condition and results of operations for the periods presented. All
significant intercompany accounts and transactions have been eliminated from the
unaudited consolidated financial statements.
The consolidated financial statements necessarily include some amounts
that are based on estimates, the most significant of which relate to the
adequacy of the allowance for loan losses, and the valuation of other real
estate owned ("OREO") and investments in real estate. As these estimates are
highly susceptible to changes in the state of the general economic environment,
actual results could differ significantly from such estimates.
Shelton specializes in residential real estate lending and also engages
in the development and sale of residential real estate. Loans collateralized by
real estate located in Connecticut and direct investments in local real estate
development projects comprise most of Shelton's total assets. This concentration
is the result of Shelton targeting its lending activities to the geographic area
where management is familiar with housing and economic trends, combined with
Shelton's long standing commitment to meeting the credit needs of the
communities from which it obtains deposit funds. As essentially all of Shelton's
business is conducted in Connecticut, the overall profitability of Shelton is
heavily dependent on the state of the general economic environment within
Connecticut.
The accompanying unaudited consolidated financial statements of Shelton
should be read in conjunction with the Notes to the Audited Consolidated
Financial Statements of Shelton also included in Appendix B to this Joint Proxy
Statement/Prospectus and to the Shelton Management Discussion and Analysis of
Consolidated Financial Statements which are included elsewhere in the Joint
Proxy Statement/Prospectus.
Reclassifications have been made to the prior year's consolidated
financial statements to conform to the current reporting format.
The results of operations for the three and nine months ended March 31,
1995, are not necessarily indicative of the results of operations that may be
expected for the year ending June 30, 1995.
Note 2 - Net income per share
Net income per share has been calculated by dividing net income by the
weighted average number of common shares outstanding during the period, plus
common share equivalents when dilutive. The latter consists of shares issuable
upon the exercise of stock options. The dilutive effect of stock options on
primary income per share is computed utilizing the average market price of
Shelton's stock during the period. When calculating fully diluted income per
share, the dilutive effect of stock options is computed utilizing the greater of
the closing market price or the average market price during the period.
C-6
<PAGE>
The number of shares used in the calculation of income per share were as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
----------------------------- -----------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary income per share 1,318,728 1,356,368 1,356,869 1,334,465
Fully diluted income per share 1,318,728 1,356,368 1,356,869 1,337,859
</TABLE>
Note 3 - Contingencies, commitments and financial instruments with off-balance
sheet credit risk
Shelton is a party to various legal proceedings incident to its business. In the
opinion of management, the resolution of these proceedings will not have a
material effect on Shelton.
In the normal course of business, Shelton enters into agreements to extend
credit which are not reflected in the accompanying unaudited consolidated
financial statements.
Commitments to extend consisted of the following:
<TABLE>
<CAPTION>
March 31, 1995 June 30, 1994
-------------- -------------
Fixed Variable or Fixed Variable or
Interest Adjustable Interest Adjustable
(In thousands) Rate Interest Rate Total Rate Interest Rate Total
---- ------------- ----- ---- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Home equity credit lines $ -- $ 8,834 $ 8,834 $ -- $ 8,365 $ 8,365
Mortgage loans 185 6,277 6,462 393 9,913 10,306
Letters of credit -- 2,671 2,671 -- 1,337 1,337
Personal credit lines 754 -- 754 753 -- 753
--- -- --- --- -- ---
Total $ 939 $ 17,782 $ 18,721 $ 1,146 $ 19,615 $20,761
= === = ====== = ====== = ===== = ====== =======
Commitments to purchase loans $ -- $ -- $ -- $ -- $ 5,500 $ 5,500
= == = == = == = == = ===== = =====
</TABLE>
Since Shelton can terminate a loan commitment if the buyer does not
comply with the terms of the contract, and some of the agreements may expire
without being drawn upon, they do not necessarily represent a future cash
requirement of Shelton. Prior to entering into any agreement to extend credit,
Shelton evaluates the customer's credit-worthiness in accordance with Shelton's
loan underwriting standards. In most cases the agreements are collateralized
with real estate and the customer is required to pay a non-refundable fee.
Shelton's maximum exposure to credit loss is the total contract amount of the
agreements. In addition, the possibility of future increases in market interest
rates may result in a decline in the market value of fixed-rate loans.
Management does not, however, anticipate any material losses as a result of
these agreements and does not consider them to represent an undue level of
credit, interest or liquidity risk for Shelton.
To reduce the risk of potential decline in the market value of fixed rate loans
being originated for sale, Shelton enters into contracts to sell such loans at a
pre-agreed upon price and date. The primary risk from these contracts is the
potential inability of Shelton to deliver such loans in accordance with the
terms of the contract, in which case Shelton would be obligated to compensate
the buyer for any decline in the market value of the contractual amount of loans
that were not delivered.
C-7
<PAGE>
SHELTON'S MANAGEMENT DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL STATEMENTS - - MARCH 31 UNAUDITED
($ In thousands, except per share data)
<TABLE>
<CAPTION>
Financial Highlights
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
For the Period:
Interest income $ 4,769 $ 4,141 $ 13,926 $ 12,467
Interest expense 2,562 2,051 7,304 6,318
Net interest income 2,207 2,090 6,622 6,149
Net income 570 493 1,690 1,663
Per Share Data: $ 14.63 $ 13.71 $ 14.63 $ 13.71
Book value Primary income per share:
Before accounting change 0.43 0.36 1.25 1.04
Net income 0.43 0.36 1.24 1.25
Fuly diluted income pe share:
Before accounting change 0.43 0.36 1.25 1.04
Net income 0.43 0.36 1.25 1.24
Cash dividends declared 0.16 0.12 0.46 0.37
Selected Financial Ratios:
Yield on interest-bearing assets 6.89% 6.70% 6.82% 6.80%
Cost of funds 4.02 3.53 3.84 3.62
Interest rate spread 2.87 3.17 2.98 3.18
Net interest margin 3.15 3.35 3.25 3.36
Return on average assets 0.79 0.75 0.78 0.84
Return on average equity 12.03 11.31 11.98 12.89
Average equity to average assets 6.54 6.64 6.52 6.54
Dividend payout ratio 36.84 32.66 35.56 27.78
At End of Period:
Tier 1 leverage ratio of bank subsidiary 6.08 6.32
Tier 1 risk-based ratio of bank subsidiary 11.40 11.91
Total risk-based ratio of bank subsidiary 12.34 12.91
Non-performing assets to total loans and OREO 1.15 1.30
Non-performing for loans to total loans 0.81 0.65
Allowance for loan losses to total loans 0.64 0.76
Allowance for loan losses to non-performing loans 78.74 117.27
At End of Period: March 31, March 31,
1995 1994
------- -------
Net loans $ 220,378 $ 187,129
Securities 56,028 63,556
Total assets 294,998 272,010
Deposits 270,141 248,455
Borrowings 3,700 3,200
Stockholders' equity 19,534 17,839
Outstanding shares 1,335,289 1,300,770
--------- ---------
</TABLE>
C-8
<PAGE>
Overview
The major components of the change in total assets, liabilities and equity
of Shelton were as follows:
<TABLE>
<CAPTION>
March 31 June 30, Annualized
1995 1994 Change Growth Rate
---------- ---------- ---------- ------------
($ In thousands)
<S> <C> <C> <C> <C>
Assets:
Net loans $ 220,378 $ 189,228 $ 31,150 22%
Securities held to maturity 39,371 40,949 (1,578) (5)
Other securities 16,657 25,650 (8,993) (47)
------ ------- -------- ----
Total interest-bearing assets 276,406 255,827 20,579 11
Investments in real estate 1,174 1,517 (343) (30)
Other real estate owned 766 1,030 (264) (34)
Other assets 16,652 17,629 (977) (7)
------- ------- ------ ----
Total assets $ 294,998 $ 276,003 $ 18,995 9%
= ======= = ======= = ====== ===
Liabilities and stockholders' equity:
Time certificates of deposit $ 140,083 $ 120,578 $ 19,505 22%
Savings and NOW accounts 77,958 86,673 (8,715) (13)
Money market deposits 36,017 28,576 7,441 35
Borrowings 3,700 5,200 (1,500) (38)
------ ------ ------- --
Total interest-bearing liabilities 257,758 241,027 16,731 9
Demand deposits 17,362 16,219 1,143 9
Other liabilities 344 495 (151) (41)
Stockholders' equity 19,534 18,262 1,272 9
------- ------- ------ --
Total liabilities and stockholders' equity $ 294,998 $ 276,003 $ 18,995 9%
= ======= = ======= = ====== ===
</TABLE>
The major components of the change in year-to-date net income of Shelton
were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended March 31, Change
------------------------ ----------------------
1995 1994 Amount Percent
----- ------ ------ -----
($ In thousands)
<S> <C> <C> <C> <C>
Net interest income $ 6,622 $ 6,149 $ 473 8%
Provision for loan losses 270 95 175 184
Core non-interest income 1,059 898 161 18
Core non-interest expense 4,629 4,666 (37) (1)
----- ----- ---- ---
Core pre-tax earnings 2,782 2,286 496 22
Gains from asset sales 37 356 (319) (90)
Other real estate owned expense 52 240 (188) (78)
--- ---- ----- ----
Income before income taxes and
accounting change 2,767 2,402 365 15
Provision for income taxes 1,077 1,014 63 6
----- ----- -- -
Income before accounting change 1,690 1,388 302 22
Change in accounting for income taxes -- 275 (275) --
--- ---- ----- --
Net income $ 1,690 $ 1,663 $ 27 2%
===== ===== = === ==
</TABLE>
C-9
<PAGE>
Loans
<TABLE>
<CAPTION>
($ In thousands) March 31, June 30, Annualized
1995 1994 Change Growth Rate
---- ---- ------ -----------
<S> <C> <C> <C> <C>
Real estate loans:
First mortgages $ 191,121 $ 159,401 $ 31,720 27%
Home equity credit lines 18,125 18,796 (671) (5)
Construction and land development 5,632 5,139 493 13
Second mortgage 1,072 1,097 (25) (3)
----- ----- --- ---
Total real estate loans 215,950 184,433 31,517 23
Consumer installment 5,839 6,068 (229) (5)
----- ----- ---- ---
Total loans $ 221,789 $ 190,501 $ 31,288 22%
= ======= = ======= = ====== ===
</TABLE>
As part of its interest rate risk management program, Shelton's lending
for portfolio centers on adjustable rate mortgage loans ("ARMs") collateralized
by 1-4 family residential properties. The interest rate that Shelton charges on
ARMs generally adjusts annually based on the National Monthly Median Cost of
Funds Index, an index that approximates Shelton's own cost of funds. Shelton has
also placed strong emphasis on the origination of floating rate home equity
credit lines. The rate on these credit lines is subject to monthly adjustment,
based on changes in the prime interest rate. Shelton currently sells the
majority of its fixed rate mortgage loan originations in the secondary market.
Since ARMs are Shelton's primary lending product for portfolio, demand
for such loans generally drives Shelton's overall growth and is one of the
primary determinants of core profitability. Demand for ARMs generally increases
when their opening first year rate is significantly lower than the rate
available on a comparable fixed rate mortgage. As this was the case during the
past nine months, total loans grew by $31.3 million during the period, an amount
which exceeds the $17.2 million increase that was achieved in total loans during
the year ended June 30, 1994.
C-10
<PAGE>
Non-performing assets
<TABLE>
<CAPTION>
($ In thousands) March 31, June 30, Change Change
1995 1994 Amount Percent
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Loans past due 90 days or more (nonaccrual):
$ 1,792 $ 1,094 $ 698 64%
- ----- - ----- - --- ----
OREO:
Property type:
Single-family homes 553 655 (102) (16)
Multi-family homes 196 228 (32) (14)
Residential land -- 170 (170) (100)
Condominiums 46 31 15 48
Allowance for OREO losses (29) (54) 25 (46)
Total OREO 766 1,030 (264) (26)
--- ----- ----- -----
Non-performing assets $ 2,558 $ 2,124 $ 434 20%
= ===== = ===== = === ------
Restructured loans $ 100 $ 102 $ (2) (2)%
= === = === = === =====
Non-performing assets to total loans
and OREO 1.15% 1.11% 0.04% 4%
Allowance for loan losses to total loans
past due 90 days or more 78.74 116.36 (37.62) (32)
As a percentage of total loans:
Loans past due 90 days or more 0.81 0.57 0.24 42
Allowance for loan losses 0.64 0.67 (0.03) (4)
</TABLE>
Loans past due 90 days or more consisted of the following:
<TABLE>
<CAPTION>
($ In thousands) March 31, June 30, Change Change
1995 1994 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
1-4 family residential properties $ 1,787 $ 935 $ 852 91 %
Commercial real estate -- 156 (156) (100)
Consumer installment 5 3 -- --
- - -- --
Total loans past due 90 days or more $ 1,792 $ 1,094 $ 696 64%
= ===== = ===== = === ===
</TABLE>
Not included in the tables above are loans that, in the opinion of
Shelton's management, warrant monitoring due to varying degrees of documentation
deficiencies supporting the borrowers' current financial position. These
deficiencies have created some uncertainty, but not serious doubts, as to the
borrowers' ability to comply with the loan repayment terms in the future. Such
loans of Shelton totaled $649,000 at March 31, 1995.
The accrual of interest income is generally discontinued by Shelton
when a loan becomes past due 90 days or more, or earlier if reasonable doubt
exists as to its ultimate collectibility. When the accrual of interest income is
discontinued, all previously accrued and uncollected interest income is
generally reversed against the current period's interest income. The accrual of
interest on loans past due 90 days or more may be continued when the net
realizable value of the property collateralizing the loan is sufficient to
discharge all principal and accrued interest income due on the loan. A
C-11
<PAGE>
nonaccrual loan is restored to an accrual status when it is no longer delinquent
and the collectibility of interest and principal is no longer in doubt.
The amount of interest income recognized on nonaccrual and restructured
loans by Shelton, versus the amount that would have been recognized under the
original contract terms was:
<TABLE>
<CAPTION>
(In thousands) Three Months Nine Months
Ended March 31, Ended March 31,
------------------- ------------------
1995 1994 1995 1994
---- ----- ----- ----
<S> <C> <C> <C> <C>
Interest income recorded:
Nonaccrual loans $ 4 $ 4 $ 10 $ 15
Restructured loans 2 -- 5 --
Interest income under original contract terms:
Nonaccrual loans 26 34 89 96
Restructured loans 2 -- 7 --
</TABLE>
Loss Allowances
<TABLE>
<CAPTION>
(In thousands) Loans OREO
----- ----
Nine months ended March 31, 1995 1994 1995 1994
- --------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 1,273 $ 1,406 $ 54 $ 164
Provision charged to expense 270 95 19 219
Net charge-offs (132) (68) (44) (296)
----- ---- ---- -----
Ending balance $ 1,411 $ 1,433 $ 29 $ 87
= ===== = ===== = == = ==
</TABLE>
The allowance for loan losses is established through charges against
income and is maintained at a level that Shelton's management considers adequate
to absorb potential losses in the loan portfolio. Management's estimate of the
adequacy of the allowance for loan losses is based on evaluations of individual
loans, estimates of current collateral values and the results of regulatory
examinations. Management also evaluates the general risk characteristics
inherent in the loan portfolio, concentrations of credit risk, prevailing and
anticipated economic conditions, and historical loan loss experience. Loans are
charged against the allowance for loan losses when management believes that
collection is unlikely. Any subsequent recoveries are credited to the allowance
for loan losses when received.
Loans are originally transferred by Shelton to OREO at the lower of the
loan balance or the fair value of the property. If, on the date of transfer, the
loan balance exceeds the fair value of the property, the excess is charged-off
against the allowance for loan losses. An allowance for OREO losses is
established whenever the carrying value of an individual property exceeds its
current fair value, net of estimated selling costs.
C-12
<PAGE>
Securities
Book and market values of securities, and unrealized gains and losses, of
Shelton were as follows:
<TABLE>
<CAPTION>
(In thousands) March 31, 1995 Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Securities held to maturity $ 39,371 $ 45 $ 1,296 $ 38,120
Securities available for sale 16,702 42 213 16,531
Money market investments 36 -- -- 36
Trading account 113 -- 23 90
---------- ------------- -------------- --------
Total 56,222 $ 87 $ 1,532 $ 54,777
========== ============= ============== ========
Net unrealized loss on trading account and
available for sale securities (194)
-----
Total securities $ 56,028
= ======
</TABLE>
<TABLE>
<CAPTION>
(In thousands) June 30, 1994 Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------- -------------- --------
<S> <C> <C> <C> <C>
Securities held to maturity $ 40,949 $ 69 $ 1,291 $ 39,727
Securities available for sale 20,910 79 238 20,751
Money market investments 4,792 -- -- 4,792
Trading account 212 -- 105 107
---------- ------------- -------------- --------
Total 66,863 $ 148 $ 1,634 $ 65,377
========== ============= ============== ========
Net unrealized loss on trading account and
available for sale securities (264)
-----
Total securities $ 66,599
==========
</TABLE>
On March 31, 1995, the securities portfolio of Shelton totaled $56.0
million or 19% of total assets, down by 16% from $66.6 million, or 24% of total
assets at June 30, 1994. The $10.6 million decrease was primarily attributable
to $5.9 million in sales and a $4.8 million drop in money market investments.
Scheduled repayments and prepayments also contributed to the decline in
outstanding securities during the past nine months. The majority of the cash
provided by the decline in the securities portfolio was used to fund loan
growth.
Debt securities that Shelton has the intent and ability to hold until
maturity are classified as held to maturity and carried at amortized cost.
Securities purchased for resale, in anticipation of short-term gains, are
classified as trading accounts and carried at fair value. All other debt and
equity securities are classified as available for sale. Securities in this
classification may be sold in response to changes in a number of factors,
including Shelton's liquidity needs and market interest rate movements.
Available for sale securities are carried at fair value and unrealized holding
gains and losses, net of income taxes, are reported as a separate component of
stockholders' equity.
The cost basis of a security that has experienced other than a
temporary decline in fair value is written down by Shelton to fair value by a
charge to security gains and losses.
C-13
<PAGE>
Investments in real estate
Investments in real estate consisted of the following:
<TABLE>
<CAPTION>
($ In thousands) March 31, June 30, Change Change
1995 1994 Amount Percent
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Direct:
Stonebridge (30 lot
residential subdivision) $ 1,076 $ 877 $ 199 23 %
Owl Hill (25 unit residential housing) -- 390 (390) (100)
Joint venture:
Walnut Estates (19 lot
residential subdivision) 148 284 (136) (48)
Allowance for losses (50) (34) (16) 47
---- ---- ---- --
Investments in real estate $ 1,174 $ 1,517 $ (343) (23)%
= ===== = ===== = ===== =====
</TABLE>
Income (loss) from investments in real estate consisted of the following:
<TABLE>
<CAPTION>
(In thousands) Three Months Nine Months
Ended March 31, Enced March 31,
---------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Joint ventures $ -- $ 57 $ 78 $ 229
Direct 20 (7) 35 (18)
Provision for losses -- (100) (87) (177)
-- ----- ---- -----
Income from real estate
investments $ 20 $ (50) $ 26 $ 34
= == = ==== = == = ==
</TABLE>
Investments in real estate are carried by Shelton at the lower of cost
or estimated fair value. An allowance for losses on real estate investments is
established whenever the cost basis of an individual property exceeds the net
present value of its estimated future cash flows.
The majority of the development phase of the Stonebridge project,
located in Oxford, Connecticut, was completed by June 30, 1995. Lot sales began
during December, 1994 and are expected to average approximately one sale per
month during the project's sales phase.
As an equity partner in joint ventures with local developers, Shelton
typically receives 50% of the venture's net profits. Both Shelton and its
partner are generally required to make capital contributions, in equal amounts,
to the venture. The Walnut Estates joint venture project, located in Shelton,
Connecticut, entered its sales phase during the latter part of fiscal 1993.
Current projections indicate that the remaining 4 lots will be sold within the
next 6 months.
A change in federal regulations has made it necessary for Shelton to
divest itself of all real estate investments by December 19, 1996. Given the
length of time remaining to complete such divestiture, Shelton has not found it
necessary to make significant changes in the timing of expenditures, sales
prices or any other material aspects of its real estate investments.
C-14
<PAGE>
Deposits
<TABLE>
<CAPTION>
March 31, June 30, Annualized
($ In thousands) 1995 1994 Change Growth Rate
---- ---- ------ -----------
<S> <C> <C> <C> <C>
Time certificates $ 140,083 $ 120,578 $ 19,505 22%
Savings 62,153 70,532 (8,379) (16)
NOW 15,805 16,141 (336) (3)
Money market 36,017 28,576 7,441 35
Demand deposits 17,362 16,219 1,143 9
------ ------ ----- --
Total deposits $ 271,420 $ 252,046 $ 19,374 10%
= ======= = ======= = ====== ===
</TABLE>
To help fund the $31.3 million increase in outstanding loans during the
past nine months, Shelton stepped-up its deposit acquisition activities.
Primarily as the result of expanding Shelton's marketing activities, while
maintaining a competitive deposit rate structure, total deposits increased by
$19.4 million during the nine months ended March 31, 1995.
Borrowings
<TABLE>
<CAPTION>
March 31, June 30, Annualized
($ In thousands) 1995 1994 Change Growth Rate
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Long-term borrowings $ 3,700 $ 3,200 $ 500 21%
Short-term borrowings -- 2,000 (2,000) (133)
-- ----- ------- -----
Total borrowings $ 3,700 $ 5,200 $ (1,500) (38)%
= ===== = ===== = ======= =======
</TABLE>
Borrowings are primarily utilized by Shelton to fund any shortfall
between loan growth and the cash flow provided by deposit growth and the sale or
maturity of securities. As the funds provided by deposit growth and the sale of
securities were sufficient to fund loan growth, total borrowings declined during
the nine months ended March 31, 1995.
Asset/Liability Management
The following table presents the expected maturities, or period to
repricing, of Shelton's assets and liabilities at March 31, 1995:
C-15
<PAGE>
<TABLE>
<CAPTION>
Rate Sensitive or Due in:
(In thousands) March 31, 1995 Three Over Over Six Total
Months or Three to Months to Within Over
less Six Months One Year One Year One Year Total
------ ---------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing assets:
Loans $ 59,559 $ 34,334 $ 83,519 $ 177,412 $ 44,377 $ 221,789
Securities 7,525 1,578 2,910 12,013 43,889 55,902
Money market and
other securities 126 -- -- 126 -- 126
--- -- -- --- -- ---
Total interest-bearing assets 67,210 35,912 86,429 189,551 88,266 277,817
Other assets, net -- -- -- -- 17,181 17,181
-- -- -- -- ------ ------
Total assets 67,210 35,912 86,429 189,551 105,447 294,998
------ ------ ------ ------- ------- -------
Liabilities and
stockholders' equity:
Interest-bearing liabilities:
Time certificates 26,253 31,380 26,955 84,588 55,495 140,083
Regular savings 62,153 -- -- 62,153 -- 62,153
NOW accounts 15,805 -- -- 15,805 -- 15,805
Money market accounts 36,017 -- -- 36,017 -- 36,017
Borrowings -- -- -- -- 3,700 3,700
-- -- -- -- ----- -----
Total interest-bearing liabilities 140,228 31,380 26,955 198,563 59,195 257,758
Demand deposits -- -- -- -- 17,362 17,362
Other liabilities -- -- -- -- 344 344
Stockholders' equity -- -- -- -- 19,534 19,534
-- -- -- -- ------ ------
Total liabilities and
stockholders' equity: 140,228 31,380 26,955 198,563 96,435 294,998
------- ------ ------ ------- ------ -------
Rate sensitivity GAP $ (73,018) $ 4,532 $ 59,474 $ (9,012) $ 9,012 $ --
======= = ===== = ====== = ====== = ===== = =======
</TABLE>
The preceding table presents Shelton's rate sensitivity GAP at March
31, 1995. GAP analysis is a basic interest rate risk measurement tool that
provides management with an indication of the effect that future interest rate
movements could have on Shelton. When liabilities reprice or mature at a faster
pace than assets, a negative GAP position exists. A negative rate sensitivity
GAP indicates that net interest income would tend to decrease as interest rates
rise, and increase as rates fall. Conversely, if a positive GAP position exists,
net interest income would tend to rise with increases in interest rates, and
fall as rates drop.
Shelton's asset/liability management program focuses on minimizing
interest rate risk by maintaining what management considers an appropriate
balance between the volume of assets and liabilities maturing or subject to
repricing within the same time interval.
In an effort to maximize the net interest margin at all levels of the
interest rate cycle, Shelton's lending centers on adjustable rate loans, the
average rates on which float at a positive spread over the average cost of the
liabilities funding the loans.
This focus on adjustable rate lending has served to minimize
fluctuations in Shelton's net interest margin in the past, evidenced by its
ability to maintain the net interest margin at over 3.00% during each of the
past five fiscal years. By comparison, the cost of funds varied between a high
of 7.93% and a low of 3.60% during the same time period. During the past four
quarters the net interest margin has varied between a high of 3.32% and a low of
3.15%. The variation in the cost of funds was much wider during the same period,
ranging from a high of 4.02% to a low of 3.56%.
C-16
<PAGE>
As GAP analysis is only a static view of potential interest rate risk,
management also utilizes multiple simulation analysis techniques in an attempt
to estimate how the repricing and maturity mix of assets and liabilities could
change in response to interest rate changes, and the effect of such changes on
Shelton's net interest income and liquidity position. If these analyses indicate
a high degree of significant adverse change in net interest income or liquidity,
current funding strategies and asset mix would be changed to minimize the
Shelton's potential risk exposure.
Liquidity
Shelton regularly monitors its ability to profitably fund both short
and long-term growth in its lending and other investment activities. Shelton
also monitors its capacity to fund any rapid unforeseen large cash outflows in
an orderly and cost effective manner.
As lending is Shelton's single largest investment activity, its cash
requirements are primarily determined by the level of loan demand. Loan demand
varies in response to changes in market interest rates, the state of the economy
and competition. Shelton's second largest investment activity is the holding of
securities. The majority of Shelton's securities can either be sold or used as
collateral for short-term borrowings, providing a source of cash to fund
unforeseen rapid outflows of funds.
Deposits, specifically time certificates of deposit, are Shelton's
primary financing source. As Shelton does not accept brokered deposits or offer
premium rates to attract large denomination certificates of deposit, essentially
all of its deposit base is comprised of local retail deposit accounts. A local
retail deposit base tends to be somewhat insensitive to moderate interest rate
fluctuations, and provides a reasonably stable and cost effective source of
funds.
Shelton also has the ability to borrow from the FHLB on both a short
and long-term basis, and does so whenever the cash requirements of its investing
activities exceed deposit growth. Shelton's borrowings from the FHLB are limited
to the amount of qualified collateral that Shelton holds. Based on available
collateral, at March 31, 1995 Shelton had potential access to over $100 million
in additional financing, an amount well in excess of its normal annual financing
requirements.
Federal regulations require that Shelton maintain reserves, in the form
of cash on hand or deposit balances at the Federal Reserve Bank, against certain
deposit liabilities. At March 31, 1995 Shelton's reserve requirement was $1.4
million.
Management is not aware of any known trends, events, uncertainties, or
proposed regulatory changes that are reasonably likely to have a material effect
on Shelton's liquidity, capital resources or operations.
Capital resources
Shelton Bank must maintain certain regulatory capital ratios. Depending
on the FDIC's overall quality rating of an institution, all but the highest
rated banks must maintain a minimum Tier 1 leverage ratio of between 4.00% to
5.00%. The FDIC also requires banks to meet supplemental capital adequacy
standards which measure qualifying capital against risk-weighted assets plus
off-balance sheet items such as outstanding loan commitments and letters of
credit. The FDIC's minimum risk-based capital ratio requirement is 8.00%.
Under current FDIC standards Shelton Bank is "well capitalized". A
"well capitalized" institution, as defined by the FDIC, is one which maintains a
total risk-based capital ratio equal to, or greater than 10%, a tier 1
risk-based capital ratio equal to, or greater than 6%, and a tier 1 average
ratio equal to, or greater than 5%.
C-17
<PAGE>
Shelton Bank's regulatory capital ratios were as follows:
<TABLE>
<CAPTION>
March 31, June 30,
($ In thousands) 1995 1994
---- ----
<S> <C> <C>
Shelton Bank's capital components:
Tier 1 capital (Shareholders' equity) $ 17,962 $ 16,122
Tier 2 capital (Allowance for loan losses) 1,411 1,273
----- -----
Shelton Bank's total risk-based capital $ 19,373 $ 17,395
= ====== = ======
Shelton Bank's capital ratios:
Total risk-based 12.34% 12.78%
Tier 1 risk-based 11.44 11.90
Tier 1 leverage 6.09 6.25
</TABLE>
Shelton Bank is Shelton's sole source of funds for dividend payments to
its shareholders. Connecticut Banking Laws limit the amount of annual cash
dividends that Shelton Bank may pay to Shelton to an amount which approximates
Shelton Bank's net income for the then current year, plus its retained net
income for the prior two years. Shelton Bank is also prohibited from paying a
cash dividend that would reduce its capital to asset ratios below minimum
regulatory requirements.
During nine months ended March 31, 1995, Shelton paid dividends
totaling $601,000, or $0.46 per share, up 28% from $468,000, or $0.37 per share
during the same period in 1993. Shelton reviews its dividend policy based on
current and projected earnings, and by assessing the need to retain earnings to
support long-term growth.
C-18
<PAGE>
Average Balances, Interest, Yields and Rates
The following tables present condensed daily average statements of
condition of Shelton, which include nonaccrual loans, the components of net
interest income and selected statistical data.
<TABLE>
<CAPTION>
Three months ended March 31,
1995 1994
-------------------------------- ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- --------- ------- ---------- -------- ------
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Total loans $ 216,963 $ 3,866 7.14% $ 186,365 $ 3,323 7.14%
- ------- - ----- - ------- - -----
Securities:
Debt and equity 42,908 657 6.21 43,295 640 6.00
Money market and other 3,716 52 5.68 5,269 37 2.85
Mortgage-backed 14,529 194 5.42 13,148 141 4.35
------ --- ---- ------ --- ----
Total securities 61,153 903 5.99 61,712 818 5.38
------ --- ---- ------ --- ----
Total interest-bearing assets 278,116 4,769 6.89 248,077 4,141 6.70
Cash and due from banks 6,370 6,164
Other assets 9,109 11,856
----- ------
Total assets $ 293,595 $ 266,097
= ======= = =======
Liabilities and stockholders' equity:
Interest bearing deposits:
Time certificates $ 139,107 $ 1,696 4.94% $ 116,738 $ 1,322 4.59%
Savings and NOW 79,527 370 1.89 83,862 394 1.91
Money market 36,012 426 4.80 31,967 266 3.37
------ --- ---- ------ --- ----
Total interest-bearing deposits 254,646 2,492 3.97 232,567 1,982 3.46
Borrowings 3,700 70 7.67 3,200 69 8.74
----- -- ---- ----- -- ----
Total interest-bearing liabilities 258,346 2,562 4.02 235,767 2,051 3.53
Demand deposits 15,927 12,657
Accrued taxes and other liabilities 112 2
Stockholders' equity 19,210 17,671
------ ------
Total liabilities and
stockholders' equity $ 293,595 $ 266,097
= ======= = =======
Net interest income/rate spread $ 2,207 2.87% $ 2,090 3.17%
= ===== = =====
Net interest margin 3.15 3.35
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
1995 1994
--------------------------------- ----------------------------
Average Average Average Average
Nine months ended March 31, Balance Interest Rate Balance Interest Rate
- --------------------------- ------- -------- ---- ------- -------- ----
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Total loans $ 209,344 $ 11,151 7.10% $ 179,234 $ 9,841 7.32%
- ------- - ------ - ------- - -----
Securities:
Debt and equity 43,873 2,011 6.11 46,424 2,088 5.99
Money market and other 3,772 135 4.77 6,225 132 2.82
Mortgage-backed 15,044 629 5.57 12,360 406 4.38
------ --- ---- ------ --- ----
Total securities 62,689 2,775 5.90 65,009 2,626 5.38
------ ----- ---- ------ ----- ----
Total interest-bearing assets 272,033 13,926 6.82 244,243 12,467 6.80
Cash and due from banks 6,879 6,247
Other assets 9,413 12,158
----- ------
Total assets $ 288,325 $ 262,648
= ======= = =======
Liabilities and stockholders' equity:
Interest-bearing deposits:
Time certificates $ 133,377 $ 4,774 4.77% $ 116,520 $ 4,074 4.66%
Savings and NOW 82,128 1,165 1.89 82,670 1,278 2.06
Money market 33,395 1,115 4.45 30,146 756 3.34
------ ----- ---- ------ --- ----
Total interest-bearing liabilities 248,900 7,054 3.78 229,336 6,108 3.55
Borrowings 4,704 250 7.08 3,200 210 8.74
----- --- ---- ----- --- ----
Total interest-bearing liabilities 253,604 7,304 3.84 232,536 6,318 3.62
Demand deposits 15,735 12,809
Accrued taxes and other liabilities 197 122
Stockholders' equity 18,789 17,181
------ ------
Total liabilities and
stockholders' equity $ 288,325 $ 262,648
= ======= = =======
Net interest income/rate spread $ 6,622 2.98% $ 6,149 3.18%
= ===== = =====
Net interest margin 3.25 3.36
</TABLE>
C-20
<PAGE>
Analysis of Changes in Interest Income and Expense
The following table presents the changes in interest income and expense
for each major category of interest-bearing assets and liabilities of Shelton,
and the amount of the change attributable to changes in average outstanding
balances ("volume") and rates. Changes attributable to both volume and rate
changes have been allocated in proportion to the relationship of the absolute
dollar amount of the changes in volume and rate.
<TABLE>
<CAPTION>
Change from the quarter ended Change from the nine months
March 31, 1994, to quarter March 31, 1994, to nine months
ended March 31, 1995, ended March 31, 1995,
(In thousands) Attributable to: Attributable to:
Rate Volume Total Rate Volume Total
---- -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ (2) $ 545 $ 543 $ (302) $ 1,612 $ 1,310
Securities 85 -- 85 211 (62) 149
-- -- -- --- --- ---
Total interest income 83 545 628 (91) 1,550 1,459
-- --- --- ---- ----- -----
Interest expense:
Deposits 226 284 510 265 681 946
Borrowings (9) 10 1 (45) 85 40
--- -- - ---- -- --
Total interest expense 217 294 511 220 766 986
--- --- --- --- --- ---
Net interest income $ (134) $ 251 $ 117 $ (311) $ 784 $ 473
= ===== = === = === = ===== = === = ===
</TABLE>
Net Interest Income
As shown in the preceding tables, Shelton's growth in net interest
income was primarily attributable to increases in the balance of average
interest-bearing assets, specifically in the loan portfolio. When compared to
the same periods in 1994, average loans outstanding rose $30.6 million, or 18%,
during the three months ended March 31, 1995 and $30.1 million, or 17%, during
the nine months ended March 31, 1995.
Non-Interest Income
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
--------------- ---------------
1995 1994 % Change 1995 1994 % Change
---- ---- -------- ---- ---- --------
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Banking services charges $ 249 $ 221 13% $ 743 $ 652 14%
Loan servicing fees 43 63 (32) 127 142 (11)
Trust fees 26 14 86 73 27 170
Other 48 20 140 116 77 51
-- -- ---- --- -- ---
Core non-interest income 366 318 15 1,059 898 18
Gain (loss) on sale of securities (8) (4) 100 (20) 189 (111)
Gain (loss) on sale of loans -- (79) (100) -- 144 (100)
Income from real estate in investment 20 (50) (140) 26 34 (24)
Trading account gains (losses) 14 (6) (333) 31 (11) (382)
-- -- ---- -- --- ----
Total non-interest income $ 392 $ 179 119% $1,096 $ 1,254 (13)%
= === = === ==== ====== = ===== =====
</TABLE>
The increase in Shelton's banking service charges was primarily
attributable to an increase in the number of outstanding checking accounts, and
a correspondingly higher utilization of fee-based services by customers.
Shelton sells most fixed rate loan originations in the secondary
market, and retains the right to service the loans. As the result of an increase
in market interest rates, fixed rate mortgage loan
C-21
<PAGE>
origination volume has been minimal in recent months causing a decrease in the
loan servicing portfolio. This decrease is responsible for the decline in loan
servicing fees.
The increases in trust fees are attributable to growth in assets under
management by Shelton. Assets under management averaged $12.5 million during the
quarter ended March 31, 1995, up 84%, from $6.8 million during the quarter ended
March 31, 1994. On a year to date basis, assets under management averaged $11.0
million in 1995, up 168%, from $4.1 million during 1994.
Shelton's growth in other non-interest income is partially attributable
to an increase in letter of credit fees.
Shelton's ability to realize gains from the sale of securities varies
with existing conditions in the financial markets.
The decrease in Shelton's gains from the sale of loans can be
attributed to a sharp drop in fixed rate mortgage originations, which was caused
by an increase in market interest rates on fixed rate mortgages. During the
quarter ended March 31, 1995, no fixed rate loans were sold versus $2.6 million
in sales during 1994. During the nine months ended March 31, 1995, a total of
$591,000 in fixed rate loans were sold, versus $13.3 million during the same
period in 1994.
<TABLE>
<CAPTION>
Non-Interest Expense
Three Months Nine Months
Ended March 31, Ended March 31,
----------------------------- --------------------------
1995 1994 % Change 1995 1994 % Change
----- ------ ----- ------ ------- -----
($ In thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 738 $ 784 -6% $2,126 $ 2,219 (4)%
Premises and equipment 234 263 (11) 729 853 (15)
Insurance premiums 182 169 8 531 532 (0)
Professional services 248 168 48 701 585 20
Other 174 151 15 542 477 14
--- --- --- --- --- ----
Core non-interest income 1,576 1,535 3 4,629 4,666 (1)
Other real estate owned 13 41 (68) 52 240 (78)
-- -- ----- -- --- ------
Total non-interest expenses $ 1,589 $1,576 1% $4,681 $ 4,906 (5)%
= ===== ====== == ====== = ===== =======
</TABLE>
Salaries and benefits expense declined as a result of savings in the
employee benefits area. As a member bank, Shelton received approximately $40,000
upon the disbanding of The New England League of Savings Institutions. Shelton
was required to use these funds for payment of employee medical plan premiums.
Additionally, Shelton received a $68,000 refund of unemployment taxes upon the
settlement of Shelton's claim that it had been overcharged.
An increase in rental income, which is derived from leasing out unused
space at Shelton's office locations, is responsible for the decline in premises
and equipment expense.
Improvement in Shelton Bank's FDIC insurance risk classification offset
by the expense of insuring Shelton Bank's increase in deposits resulted in
minimal changes in insurance expense.
Shelton's utilization of outside consultants, for technical advice
related to strategic planning issues, caused the increase in professional
service expense during the 1995 period.
The increase in other expenses was primarily attributable to an
increase in marketing expenses.
C-22
<PAGE>
The decline in OREO properties is reflected in the decrease in OREO
expenses during the 1995 period.
Impact of recently issued accounting standards
In May 1993, Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment
of a Loan" ("FAS 114"). Shelton will adopt FAS 114 during the first quarter of
fiscal 1996. FAS 114 requires, among other things, that certain impaired loans
be valued based on the present value of expected future cash flows, or the
market value of the collateral if the loan is collateral dependent. Although the
initial effect of adopting this new accounting standard is dependent on the
level of outstanding loans at the time of the adoption, current estimates
indicate that the adoption of FAS 114 will not have a material impact on
Shelton's financial position or results of operations.
C-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law sets forth certain
circumstances under which directors, officers, employees and agents may be
indemnified against liability that they may incur in their capacity as such.
Section 145 of the Delaware General Corporation Law, which is filed as Exhibit
99.1 to this Registration Statement, is incorporated herein by reference.
Article Nine of the Registrant's By-laws, entitled "Indemnification,"
provides for indemnification of the Registrant's directors, officers, employees
and agents under certain circumstances. Article Nine of the Registrant's
By-laws, which are filed as Exhibit 4.2 to this Registration Statement, is
incorporated herein by reference.
The Registrant also has the power to purchase and maintain insurance on
behalf of its directors and officers. The Registrant has in effect a policy of
liability insurance covering its directors and officers, the effect of which is
to reimburse the directors and officers of the Registrant against certain
damages and expenses resulting from certain claims made against them caused by
their negligent act, error or omission.
The foregoing indemnity and insurance provisions have the effect of
reducing directors' and officers' exposure to personal liability for actions
taken in connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indenmnification by it is
against public policy as express in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
Item 21. Exhibits and Financial Statement Schedules.
2.1 Agreement and Plan of Merger dated June 20, 1995 among the
Registrant, Webster Acquisition Corp. and Shelton Bancorp,
Inc., including exhibits A through G thereto (incorporated
herein by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K/A filed on July 27, 1995).
II-1
<PAGE>
4.2 By-laws of the Registrant, as amended to date (incorporated
herein by reference to Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.
12 Statement re: computation of ratios.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5).
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Alex. Brown & Sons, Incorporated
99.1 Section 145 of the Delaware General Corporation Law
(incorporated herein by reference to Exhibit 28.1 to the
Registrant's Registration Statement on Form S-2 (No. 33-54980)
filed on November 25, 1992).
99.2 Form of Webster Proxy Card
99.3 Form of Shelton Proxy Card
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
II-2
<PAGE>
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed
to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(d) The Registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (c) immediately preceding, or (ii)
that purports to meet the requirements of section 10(a)(3) of
the Securities Act and is used in connection with an offering
of securities subject to Rule 415 under the Securities Act
will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) The undertaking concerning indemnification is included as part
of the response to Item 20.
(f) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of
this form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or
other equally prompt means. This includes information
contained in documents filed subsequent to the effective date
of the registration statement through the date of responding
to the request.
(g) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved
therein, that was not the subject of and included in the
registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Waterbury, State of Connecticut, on the 27th day of July 1995.
WEBSTER FINANCIAL CORPORATION
By: /s/ James C. Smith
------------------------------
James C. Smith
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the undersigned in the capacities
indicated on the 27th day of July 1995.
Signature Title
- ---------- -----
/s/ James C. Smith Chairman and Chief Executive Officer
- ------------------- (Principal Executive Officer)
James C. Smith
/s/ John V. Brennan Executive Vice President, Chief
- ------------------- Financial Officer and Treasurer
John V. Brennan (Principal Financial Officer)
/s/ Peter J. Swiatek Controller
- -------------------- (Principal Accounting Officer)
Peter J. Swiatek
/s/ Joel S. Becker Director
- ------------------
Joel S. Becker
/s/ O. Joseph Bizzozero, Jr. Director
- ----------------------------
O. Joseph Bizzozero, Jr.
<PAGE>
/s/ Robert A. Finkenzeller Director
- ----------------------------
Robert A. Finkenzeller
/s/ Walter R. Griffin Director
- ----------------------------
Walter R. Griffin
/s/ J. Gregory Hickey Director
- ---------------------------
J. Gregory Hickey
/s/ C. Michael Jacobi Director
- ---------------------------
C. Michael Jacobi
/s/ Harold W. Smith Director
- ---------------------------
Harold W. Smith
/s/ Sr. Marguerite Waite, C.S.J. Director
- --------------------------------
Sr. Marguerite Waite, C.S.J.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
-------
No. Exhibit
--- -------
<S> <C>
2.1 Agreement and Plan of Merger dated June 20, 1995 among the
Registrant, Webster Acquisition Corp. and Shelton Bancorp, Inc.,
including exhibits A through G thereto (incorporated herein by
reference to Exhibit 2 to the Registrant's Current Report on
Form 8-K/A filed on July 27, 1995).
4.2 By-laws of the Registrant, as amended to date (incorporated
herein by reference to Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.
12 Statement re: computation of ratios.
23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit
5)
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Alex. Brown & Sons, Incorporated
99.1 Section 145 of the Delaware General Corporation Law
(incorporated herein by reference to Exhibit 28.1 to the
Registrant's Registration Statement on Form S-2 (No. 33-54980)
filed on November 25, 1992).
99.2 Form of Webster Proxy Card
99.3 Form of Shelton Proxy Card
</TABLE>
<PAGE>
Exhibit 5 Opinion of Hogan & Hartson L.L.P. as to the validity of the
securities registered hereunder, including the consent of that
firm.
<PAGE>
July 28, 1995
Board of Directors
Webster Financial Corporation
First Federal Bank Building
145 Bank Street
Waterbury, Connecticut 06720
Ladies and Gentlemen:
We are acting as counsel to Webster Financial Corporation (the
"Corporation"), a Delaware corporation, in connection with its registration on
Form S-4, as amended (the "Registration Statement") filed with the Securities
and Exchange Commission relating to the proposed public offering of up to
1,337,618 shares of Common Stock, par value $.01 per share, all of which shares
(the "Shares") are to be issued by the Corporation of Shelton Bancorp, Inc.
("Shelton") in accordance with the terms of the Agreement and Plan of Merger
dated June 20, 1995, as amended (the "Agreement"), between the Corporation,
Webster Acquisition Corp. and Shelton. This opinion letter is furnished to you
at your request to enable you to fulfill the requirements of Item 601(b)(5) of
Regulation S-K, 17 C.F.R. ss. 229.601(b)(5), in connection with the Registration
Statement.
For purposes of this opinion letter, we have examined copies of
the following documents:
1. An executed copy of the Registration Statement;
2. An executed copy of the Agreement;
3. The Restated Certificate of Incorporation of the
Corporation, with amendments thereto, as certified by
the Secretary of the Corporation on the date hereof as
then being complete, accurate and in effect;
<PAGE>
4. The Bylaws of the Corporation, as amended, as certified
by the Secretary of the Corporation on the date hereof
as then being complete, accurate and in effect; and
5. Resolutions of the Board of Directors of the
Corporation adopted at meetings held on June 19, 1995
and July 24, 1995, as certified by the Secretary of the
Corporation on the date hereof as then being complete,
accurate and in effect, relating to, among other
things, the issuance of the Shares and arrangements in
connection therewith.
We have not, except as specifically identified above, made any
independent review or investigation of factual or other matters, including the
organization, existence, good standing, assets, business or affairs of the
Corporation. In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter is
given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on
the General Corporation Law of the State of Delaware. We express no opinion
herein as to any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of
the opinion that following (i) effectiveness of the Registration Statement, (ii)
issuance of the Shares pursuant to the terms of the Agreement, and (iii) receipt
by the Corporation of the consideration for the Shares specified in the
Agreement and resolutions of the Board of Directors, the Shares will be validly
issued, fully paid and nonassessable under the General Corporation Law of the
State of Delaware.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion letter
has been prepared solely for your use in connection with the filing of the
Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as
Exhibit 5 to the Registration Statement and to the references to this firm under
the captions "The Merger - Certain Federal Income Tax Consequences" and "Legal
Matters" in the joint proxy statement/prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 12 Statement re: computation of ratios.
<PAGE>
<TABLE>
<CAPTION>
WEBSTER RATIO OF EARNINGS TO FIXED CHARGES
DECEMBER
MARCH 1994 MARCH 1995 1994 1993 1992 1991 1990
3 Mo. Ended 3 Mo. Ended WEBSTER WEBSTER WEBSTER WEBSTER WEBSTER
WEBSTER WEBSTER
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes 6,186 6,824 20,142 21,697 10,233 4,212 (975)
Plus: Fixed Charges 4,367 7,001 23,040 14,529 6,518 6,103 8,554
Less: Interest captialized 0 0 0 0 0 0 0
Less: Pref. Stock Div Requirement (469) (324) (1,716) (2,653) (581) 0 0
--------- --------- --------- --------- --------- --------- ---------
Total Earnings 10,084 13,501 41,466 33,573 16,170 10,315 7,579
Fixed Charges
- -------------
Interest on Borrowings 3,878 6,657 21,284 11,836 5,897 6,063 8,514
Plus: ESOP Int. Exp 20 20 40 40 40 40 40
Plus: Amort. of Debt Expense 0 0 0 0 0 0 0
Plus: Rental Expense 0 0 0 0 0 0 0
Plus: Preferred Stock Div Req's 469 324 1,716 2,653 581 0 0
--------- --------- --------- --------- --------- --------- ---------
Total Fixed Charges 4,367 7,001 23,040 14,529 6,518 6,103 8,554
Earnings in Excess (Deficit) of
Fixed Charges 5,717 6,500 18,426 19,044 9,652 4,212 (975)
Ratio of Earnings/Fixed Charges 2.31X 1.93X 1.80X 2.31X 2.48X 1.69X .89X
231% 193% 180% 231% 248% 169% 89%
</TABLE>
<PAGE>
SHELTON RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
-------------------------------------------------------
1994 1993 1992 1991 1990 Nine Months Nine Months
SHELTON SHELTON SHELTON SHELTON SHELTON Ended 3/95 Ended 3/94
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes 3,275 3,511 2,508 1,324 1,863 2,767 2,402
Plus: Fixed Charges 314 338 539 1,109 1,952 250 210
Less: Interest captialized 0 0 0 0 0 0 0
Less: Pref. Stock Div Requirement 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- -------- ---------
Total Earnings 3,589 3,849 3,047 2,433 3,815 3,017 2,612
Fixed Charges
- -------------
Interest on Borrowings 306 327 490 1,046 1,883 250 210
Plus: ESOP Int. Exp 0 1 3 9 15 0 0
Plus: Amort. of Debt Expense 0 0 0 0 0 0 0
Plus: Rental Expense 8 10 46 54 54 0 0
Plus: Preferred Stock Div Req's 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- -------- ---------
Total Fixed Charges 314 338 539 1,109 1,952 250 210
Earnings in Excess (Deficit) of
Fixed Charges 3,275 3,511 2,508 1,324 1,863 2,767 2,402
Ratio of Earnings/Fixed Charges 11.43X 11.39X 5.65X 2.19X 1.95X 12.07x 12.44x
1143% 1139% 565% 219% 195% 1207% 1244%
</TABLE>
<PAGE>
WEBSTER/SHELTON COMBINED RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1994 1994 1994 1995 1995 1995 1994
3 Mo. Ended 3 Mo. Ended 3 Mo. Ended 3 Mo. Ended 3 Mo. Ended 3 Mo. Ended WEBSTER
WEBSTER SHELTON COMBINED WEBSTER SHELTON COMBINED
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes 6,186 658 6,844 6,824 905 7,729 20,142
Plus: Fixed Charges 4,367 71 4,438 7,001 72 7,073 23,040
Less: Interest captialized 0 0 0 0 0 0 0
Less: Pref. Stock Div Requirement (469) 0 (469) (324) 0 (324) (1,716)
------- ------- ------- ------- ------- ------- -------
Total Earnings 10,084 729 10,813 13,501 977 14,478 41,466
Fixed Charges
- -------------
Interest on Borrowings 3,878 69 3,947 6,657 70 6,727 21,284
Plus: ESOP Int. Exp 20 0 20 20 0 20 40
Plus: Amort. of Debt Expense 0 0 0 0 0 0 0
Plus: Rental Expense 0 2 2 0 2 2 0
Plus: Preferred Stock Div Req's 469 0 469 324 0 324 1,716
------- ------- ------- ------- ------- ------- -------
Total Fixed Charges 4,367 71 4,438 7,001 72 7,073 23,040
Earnings in Excess (Deficit) of
Fixed Charges 5,717 658 6,375 6,500 905 7,405 18,426
Ratio of Earnings/Fixed Charges 2.31X 10.27X 2.44X 1.93X 13.57X 2.05X 1.80X
231% 1027% 244% 193% 1357% 205% 180%
[TABLE CONTINUES...]
1994 1994 1993 1993 1993 1992 1992
SHELTON COMBINED WEBSTER SHELTON COMBINED WEBSTER SHELTON
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes 3,393 23,535 21,697 3,198 24,895 10,233 3,263
Plus: Fixed Charges 353 23,393 14,529 290 14,819 6,518 453
Less: Interest captialized 0 0 0 0 0 0 0
Less: Pref. Stock Div Requirement 0 (1,716) (2,653) 0 (2,653) (581) 0
------- ------- ------- ------- ------- ------- -------
Total Earnings 3,746 45,212 33,573 3,488 37,061 16,170 3,716
Fixed Charges
- -------------
Interest on Borrowings 345 21,629 11,836 280 12,116 5,897 430
Plus: ESOP Int. Exp 0 40 40 0 40 40 0
Plus: Amort. of Debt Expense 0 0 0 0 0 0 0
Plus: Rental Expense 0 0 0 10 10 0 23
Plus: Preferred Stock Div Req's 8 1,724 2,653 0 2,653 581 0
------- ------- ------- ------- ------- ------- -------
Total Fixed Charges 353 23,393 14,529 290 14,819 6,518 453
Earnings in Excess (Deficit) of
Fixed Charges 3,393 21,819 19,044 3,198 22,242 9,652 3,263
Ratio of Earnings/Fixed Charges 10.61X 1.93X 2.31X 12.03X 2.50X 2.48X 8.20X
1061% 193% 231% 1203% 250% 248% 820%
</TABLE>
[TABLE CONTINUES...]
<PAGE>
<TABLE>
<CAPTION>
1992 1991 1991 1991 1990 1990 1990
COMBINED WEBSTER SHELTON COMBINED WEBSTER SHELTON COMBINED
Earnings
- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes 13,496 4,212 1,900 6,112 (975) 1,604 629
Plus: Fixed Charges 6,971 6,103 655 6,758 8,554 1,638 10,192
Less: Interest captialized 0 0 0 0 0 0 0
Less: Pref. Stock Div Requirement (581) 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total Earnings 19,886 10,315 2,555 12,870 7,579 3,242 10,821
Fixed Charges
- -------------
Interest on Borrowings 6,327 6,063 601 6,664 8,514 1,584 10,098
Plus: ESOP Int. Exp 40 40 0 40 40 0 40
Plus: Amort. of Debt Expense 0 0 0 0 0 0 0
Plus: Rental Expense 23 0 54 54 0 0 0
Plus: Preferred Stock Div Req's 581 0 0 0 0 54 54
------- ------- ------- ------- ------- ------- -------
Total Fixed Charges 6,971 6,103 655 6,758 8,554 1,638 10,192
Earnings in Excess (Deficit) of
Fixed Charges 12,915 4,212 1,900 6,112 (975) 1,604 629
Ratio of Earnings/Fixed Charges 2.85X 1.69X 3.90X 1.90X .89X 1.98X 1.06X
285% 169% 390% 190% 89% 198% 106%
</TABLE>
<PAGE>
Exhibit 23.2 Consent of KPMG Peat Marwick LLP.
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Webster Financial Corporation:
We consent to the use of our reports incorporated herein by reference and to the
reference to our Firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
July 26, 1995
<PAGE>
Exhibit 23.3 Consent of Coopers & Lybrand L.L.P.
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of
Webster Financial Corporation of our report dated July 21, 1994 on our audit of
the consolidated financial statements of Shelton Bancorp, Inc. We also consent
to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Hartford, Connecticut
July 27, 1995
<PAGE>
Exhibit 23.4 Consent of Alex. Brown & Sons, Incorporated
<PAGE>
Exhibit 23.4
CONSENT OF ALEX. BROWN & SONS, INCORPORATED
We hereby consent to the use of our firm's name in the Form
S-4 of Webster Financial Corporation ("Webster") and amendments thereto relating
to the registration of shares of Webster's common stock to be issued in
connection with the proposed acquisition of Shelton Bancorp, Inc. ("Shelton") by
Webster. We also consent to the filing as Appendix A to the Joint Proxy
Statement/Prospectus included as part of the Form S-4 of our opinion, dated June
20, 1995, to the effect that, as of the date of our opinion, the terms of the
Agreement and Plan of Merger, dated as of June 20, 1995, among Webster, Shelton
and Webster Acquisition Corp. are fair, from a financial point of view, to
Shelton and its shareholders and to the references to our opinion included in
the Joint Proxy Statement/Prospectus. The changes made in such Agreement
subsequent to June 20, 1995 do not affect our opinion.
Alex. Brown & Sons, Incorporated
By /s/ Howard J. Loewenberg
--------------------------------
Howard J. Loewenberg
Vice President
Date: July 27, 1995
<PAGE>
Exhibit 99.2 Form of Webster Proxy Card
<PAGE>
WEBSTER FINANCIAL CORPORATION
This Proxy is Solicited on Behalf of The Board of Directors
The undersigned shareholder of Webster Financial Corporation
("Webster") hereby appoints Walter R. Griffin and Harold W. Smith, or any of
them, with full power of substitution in each, as proxies to cast all votes
which the undersigned shareholder is entitled to cast at the special meeting of
shareholders (the "Webster Meeting") to be held at 4:00 p.m. on September __,
1995 at the Elton Ballroom, 30 West Main Street, Waterbury, Connecticut 06702,
and at any adjournments thereof, upon the following matters. The undersigned
shareholder hereby revokes any proxy or proxies heretofore given.
This proxy will be voted as directed by the undersigned shareholder.
UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR APPROVAL OF THE
ISSUANCE OF ADDITIONAL SHARES OF WEBSTER STOCK TO SHAREHOLDERS OF SHELTON
BANCORP, INC. AS PART OF THE MERGER, AND IN ACCORDANCE WITH THE DETERMINATION OF
A MAJORITY OF THE BOARD OF DIRECTORS OF WEBSTER AS TO OTHER MATTERS. The
undersigned shareholder may revoke this proxy at any time before it is voted by
delivering to the Secretary of Webster either a written revocation of the proxy
or a duly executed proxy bearing a later date, or by appearing at the Webster
Meeting and voting in person. The undersigned shareholder hereby acknowledges
receipt of Webster's Notice of Special Meeting and Joint Proxy
Statement/Prospectus.
If you receive more than one proxy card, please sign and return all
cards in the accompanying envelope.
(continued and to be signed and dated on reverse side)
See
Reverse Side
<PAGE>
[X]
Please mark your
votes as this.
------------
COMMON
Proposal 1 : To approve the issuance of additional shares of Webster Stock to
shareholders of Shelton Bancorp, Inc. as part of the Merger.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Other Matters: The proxies are authorized to vote upon such other
business as may properly come before the Webster Meeting, or
any adjournments thereof, in accordance with the determination
of a majority of Webster's Board of Directors.
Date: -------------------------------
-------------------------------
-------------------------------
Signature of Shareholder or
Authorized Representative
Pleas date and sign exactly as name appears hereon. Each executor,
administrator, trustee, guardian, attorney-in-fact and other fiduciary should
sign and indicate his or her full title. When stock has been issued in the name
of two or more person, all should sign.
<PAGE>
Exhibit 99.3 Form of Shelton Proxy Card
<PAGE>
SHELTON BANCORP, INC.
This Proxy is Solicited on Behalf of The Board of Directors
The undersigned shareholder of Shelton Bancorp, Inc. ("Shelton") hereby
appoints ________________________ and _____________________, or any of them,
with full power of substitution in each, as proxies to cast all votes which the
undersigned shareholder is entitled to cast at the special meeting of
shareholders (the "Shelton Meeting") to be held at 10:00 a.m. on September __,
1995 at Rapp's Paradise Inn, 557 Wakelee, Ansonia, Connecticut, and at any
adjournments thereof, upon the following matters. The undersigned shareholder
hereby revokes any proxy or proxies heretofore given.
This proxy will be voted as directed by the undersigned shareholder.
UNLESS CONTRARY DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED TO APPROVE AND
ADOPT AN AGREEMENT AND PLAN OF MERGER, DATED JUNE 20, 1995, AS AMENDED, AMONG
WEBSTER FINANCIAL CORPORATION ("WEBSTER"), WEBSTER ACQUISITION CORP. AND
SHELTON, PURSUANT TO WHICH SHELTON AND SHELTON SAVINGS BANK WILL BE ACQUIRED BY
WEBSTER FINANCIAL CORPORATION, AND IN ACCORDANCE WITH THE DETERMINATION OF THE
PROXIES. The undersigned shareholder may revoke this proxy at any time before it
is voted by delivering to the Secretary of Shelton either a written revocation
of the proxy or a duly executed proxy bearing a later date, or by appearing at
the Shelton Meeting and voting in person. The undersigned shareholder hereby
acknowledges receipt of Shelton's Notice of Special Meeting and Joint Proxy
Statement/Prospectus.
If you receive more than one proxy card, please sign and return all
cards in the accompanying envelope.
(continued and to be signed and dated on reverse side)
See
Reverse Side
<PAGE>
[X]
Please mark your
votes as this.
-------------
COMMON
Proposal 1: To approve and adopt an Agreement and Plan of Merger, dated June
20, 1995, as amended, among Webster, Webster Acquisition Corp. and
Shelton, pursuant to which Shelton and Shelton Savings Bank will be
acquired by Webster.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Other Matters: The proxies are authorized to vote upon such other
business as may properly come before the meeting, or any
adjournments thereof, in accordance with the determination of
the proxies.
Date: -------------------------------
-------------------------------
-------------------------------
Signature of Shareholder or
Authorized Representative
Pleas date and sign exactly as name appears hereon. Each executor,
administrator, trustee, guardian, attorney-in-fact and other fiduciary should
sign and indicate his or her full title. When stock has been issued in the name
of two or more person, all should sign.
<PAGE>
