UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 20, 1997
WEBSTER FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-15213 06-1187536
- --------------------------------------------------------------------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
Webster Plaza, Waterbury, Connecticut 06720
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 753-2921
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
------------
Filed as Exhibit 99.1 are consolidated financial statements of Webster
Financial Corporation restated to reflect the acquisition by merger of DS
Bancor, Inc., which was accounted for as a pooling of interests. The
consolidated financial statements of Webster Financial Corporation are restated
for periods prior to the date of the acquisition. Also included herein as
Exhibit 99.2 are consolidated financial statements of DS Bancor Inc.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
Exhibit No. 23.1 Consent of KPMG Peat Marwick LLP.
Exhibit No. 23.2 Consent of Friedberg, Smith & Co., P.C.
Exhibit No. 99.1 Webster Financial Corporation restated consolidated
financial statements.
Exhibit No. 99.2 DS Bancor, Inc. consolidated financial
statements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
(Registrant)
/s/ John V. Brennan
-------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
Date: May 15, 1997
<PAGE>
Exhibit Index
Pages in
Sequentially Numbered
Exhibit No. Exhibit Copy
----------- ------- ----
Exhibit 23.1 Consent of KPMG Peat Marwick L.L.P. 1
Exhibit 23.2 Consent of Friedberg, Smith & Co., P.C. 1
Exhibit 99.1 Webster Financial Corporation 52
restated consolidated financial
statements
Exhibit 99.2 DS Bancor, Inc. consolidated financial
statements 54
EXHIBIT NO. 23.1
- ----------------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Webster Financial Corporation
We consent to the incorporation by reference in the registration statements
(Nos. 33-13244 and 33-38286) of Form S-8 of Webster Financial Corporation of our
report dated May 16, 1997, relating to the consolidated statements of condition
of Webster Financial Corporation and subsidiares as of December 31, 1996 and
1995 and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the May 20, 1997 current report on Form 8-K of
Webster Financial Corporation.
KPMG Peat Marwick LLP
Hartford, Connecticut
May 20, 1997
EXHIBIT NO. 23.2
- ----------------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Webster Financial Corporation
We consent to the inclusion, in the Form 8-K filed by Webster Financial
Corporation (Webster) on May 20, 1997, of our opinion dated January 29, 1997 on
the separate consolidated financial statements of DS Bancor, Inc. and Subsidiary
(DS Bancor) as of December 31, 1996 and 1995 and for each of the years in the
three year period ended December 31, 1996.
We did not perform any procedures on the pooling of interests combination of the
financial statements of DS Bancor with Webster as of any date or for any period
presented in the Form 8-K referred to above, and therefore we express no opinion
thereon. Such combined financial data has been audited and reported upon by
other auditors.
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
May 20, 1997
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
STATEMENT OF CONDITION DATA (Dollars in Thousands Except Share Data)*
---------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31,
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $5,126,278 $4,474,153 $4,276,341 $3,677,524 $3,558,429
Loans receivable, net 3,384,465 2,767,295 2,708,643 2,247,222 2,230,190
Securities 1,376,479 1,374,621 1,159,803 1,013,007 712,501
Core deposit intangible 46,442 7,565 9,061 16,083 20,426
Deposits 4,099,501 3,458,347 3,459,691 2,972,795 2,990,010
Shareholders' equity 292,093 290,782 223,944 192,713 187,780
OPERATING DATA Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
Net interest income $ 154,944 $ 122,292 $ 126,820 $ 104,305 $ 72,075
Provision for loan losses 8,850 5,625 5,480 7,072 6,949
Noninterest income 29,524 25,659 16,730 18,046 11,478
Noninterest expenses:
Non-recurring expenses (a) 5,230 6,371 5,700 - -
Other noninterest expenses 115,511 96,756 99,205 82,110 55,050
-------- ------ ------ ------- -------
Total noninterest expenses 120,741 103,127 104,905 82,110 55,050
-------- ------- ------- ------- -------
Income before taxes 54,877 39,199 33,165 33,169 21,554
Income taxes 20,390 13,266 8,770 13,943 10,300
------- -------- ------ -------- --------
Net income before cumulative change 34,487 25,933 24,395 19,226 11,254
Cumulative effect of change in method of
accounting for income taxes - - - 6,123 -
------- ------- ------- ------- -------
Net income 34,487 25,933 24,395 25,349 11,254
Preferred stock dividends 1,149 1,296 1,716 2,653 581
------- ------- ------- ------- -------
Net income available to
common shareholders $ 33,338 $ 24,637 $ 22,679 $ 22,696 $ 10,673
======= ======= ======= ======= ========
</TABLE>
1
<PAGE>
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
SIGNIFICANT STATISTICAL DATA
- ----------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------
For the Period 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate spread 3.13% 2.79% 3.16% 2.97% 3.26%
Net yield on average earning assets 3.22% 2.92% 3.22% 3.05% 3.42%
Return on average shareholders' equity (b) 11.54% 10.47% 11.23% 10.04% 7.47%
Net Income per common share (c)(d)
Primary $ 2.82 $ 2.35 $ 2.31 $ 1.93 $ 1.29
Fully Diluted $ 2.70 $ 2.25 $ 2.19 $ 1.83
$ 1.28
Dividends declared per common share (e) $ 0.68 $ 0.64 $ 0.52 $ 0.50 $ 0.48
Dividend payout ratio 24.37% 27.83% 18.44% 16.85% 37.07%
Noninterest expenses to average assets 2.39% 2.37% 2.62% 2.29% 2.48%
Noninterest expenses(excluding foreclosed
property expenses and provisions, net
to average assets 2.22% 2.23% 2.38% 2.02%
2.04%
At End of Period:
Fully diluted weighted average shares 12,781 11,514 11,158 10,068 8,362
Book value per common share $ 24.72 $ 23.72 $ 20.20 $ 19.88 $ 19.75
Tangible book value per common share $ 20.66 $ 23.06 $ 19.32 $ 17.98 $ 17.27
Shareholders' equity to total assets 5.70% 6.50% 5.24% 5.24% 5.28%
</TABLE>
* Information for all periods presented has been restated to reflect the
inclusion of the results of DS Bancor Inc., Shelton Bancorp, Inc. and Shoreline
Bank and Trust Company which were acquired on January 31, 1997, November 1, 1995
and December 16, 1994, respectively and were accounted for using the pooling of
interests method.
(a) See Management's Discussion and Analysis Comparison of 1996 and 1995 years
and 1995 and 1994 years and Note 17 to the Consolidated Financial Statements.
(b) Return on average shareholder's equity, excluding non-recurring items was
12.56%, 11.95% and 12.75% for the years ended December 31, 1996, 1995 and 1994,
respectively.
(c) Before cumulative change in the method of accounting for Income Taxes in
1993. After such cumulative change net income per common share for 1993 was
$2.65 on a primary basis and $2.52 on a fully diluted basis.
(d) Net income per common share calculated on a primary and fully diluted basis,
excluding non-recurring expenses was $3.08 and $2.94, respectively, for the year
ended December 31, 1996, $2.70 and $2.57, respectively for the year ended
December 31, 1995 and $2.65 and $2.48 respectively for the year ended December
31, 1994.
(e) Webster has continuously declared dividends since the third quarter of 1987.
All per share data and the number of outstanding shares of common stock have
been adjusted retroactively to give effect to the payment of stock dividends in
1993.
2
<PAGE>
GLOSSARY OF TERMS
Allowance for Loan Losses: A reserve for estimated loan losses at a particular
balance sheet date.
Capital Components and Ratios:
Leverage Ratio: Tier 1 capital as a percentage of adjusted total assets for
the Bank.
Risk-Weighted Assets: The sum of risk-weighted assets plus the risk-weighted
credit equivalent amounts of off- balance sheet items, less core deposit
intangibles and certain other non-qualifying intangible assets and the
non-qualifying portion of the allowance for loan losses.
Tier 1 Capital: The sum of common shareholders' equity at the Bank (excluding
net unrealized gains or losses on securities, except for net unrealized
gains/losses on marketable equity securities) less other non-qualifying
intangible assets.
Tier 1 Risk-Weighted Capital Ratio: The ratio of Tier 1 capital to net
risk-adjusted assets.
Total Capital: The sum of Tier 1 capital plus the qualifying portion of the
allowance for loan losses.
Total Risk-Weighted Capital Ratio: The ratio of total capital to net
risk-adjusted assets.
Core Deposit Intangible: The excess of the purchase price over the fair value of
the tangible net assets acquired in a purchase transaction that represents the
estimated value of the deposit base.
Derivatives: Interest rate or currency swaps, futures, forwards, option
contracts, or other off-balance sheet financial instruments used for
asset/liability management or trading purposes. These instruments derive their
values or contractually determined cash flows from the price of an underlying
asset or liability, reference rate, index or other security.
Earning Assets: The sum of loans, segregated assets, mortgage loans held for
sale, securities and short-term investments.
Interest Bearing Liabilities: The sum of interest-bearing deposits, securities
sold under agreements to repurchase and other borrowings.
Interest Rate Spread: The difference between the average yields on earning
assets and interest bearing liabilities.
Net Interest Margin: Net interest income as a percentage of average earning
assets.
Nonaccrual Assets: The sum of nonaccrual loans plus other real estate owned.
Nonaccrual Loans: The sum of loans on nonaccrual status (for purposes of
interest recognition) plus restructured loans (loans whose repayment criteria
have been renegotiated to less-than-market terms due to the inability of the
borrowers to repay the loans in accordance with their original terms).
Other Real Estate Owned: Real estate acquired in foreclosure or comparable
proceedings under which possession of the collateral has been taken.
Reserve Coverage: Allowance for loan losses divided by nonaccrual loans.
Return on Average Equity: Net income as a percentage of average shareholders'
equity.
3
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS ("MD&A")
INTRODUCTION
- --------------------------------------------------------------------------------
Webster Financial Corporation, ("Webster"), through its subsidiary, Webster
Bank, (the "Bank") delivers financial services to individuals, families and
businesses throughout Connecticut. Webster Bank is organized along three
business lines - consumer, business and mortgage banking, supported by
centralized administration and operations. The Corporation has grown
significantly in recent years, primarily through a series of acquisitions which
have expanded and strengthened its franchise.
Assets at December 31, 1996 were $5.1 billion compared to $4.5 billion a year
earlier. Net loans receivable amounted to $3.4 billion at December 31, 1996
compared to $2.8 billion a year ago. Deposits were $4.1 billion at December 31,
1996 compared to $3.5 billion at December 31, 1995.
BUSINESS COMBINATIONS SUBSEQUENT TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
The Derby Acquisition
On January 31, 1997, Webster acquired DS Bancor, Inc. ("Derby") and its
subsidiary, Derby Savings Bank, a $1.2 billion savings bank in Derby,
Connecticut. In connection with the merger with Derby, Webster issued 3,501,370
shares of its common stock for all the outstanding shares of Derby common stock.
Under the terms of the merger agreement each outstanding share of Derby common
stock was converted into 1.14158 shares of Webster common stock. This
acquisition was accounted for as a pooling of interests and as such,
Consolidated Financial Statements include Derby's financial data as if Derby had
been combined at the beginning of the earliest period presented.
BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
The Shawmut Transaction
On February 16, 1996, Webster Bank acquired 20 branches in the Greater Hartford
market from Shawmut Bank Connecticut National Association (the "Shawmut
Transaction"), as part of a divestiture in connection with the merger of Shawmut
and Fleet Bank. In the branch purchase, Webster Bank acquired approximately $845
million in deposits, and $586 million in loans. As a result of this transaction,
Webster recorded $44.2 million as a core deposit intangible asset. In connection
with the Shawmut Transaction, Webster raised net proceeds of $32.1 million
through the sale of 1,249,600 shares of its common stock in an underwritten
public offering in December 1995. The Shawmut Transaction was accounted for as a
purchase, therefore transaction results are reported only for the periods
subsequent to the consummation of the Shawmut Transaction.
Prior to the Shawmut Transaction Webster completed five acquisitions as follows:
- --------------------------------------------------------------------------------
Date Assets Acquired Accounting Treatment
- --------------------------------------------------------------------------------
1995 Shelton Bancorp $ 295 million Pooling of Interests
1994 Shoreline Bank & Trust $ 51 million Pooling of Interests
1994 Bristol Savings Bank $ 486 million Purchase
1992 First Constitution Bank $ 1.1 billion Purchase
1991 Suffield Bank $ 264 million Purchase
ASSET QUALITY
- --------------------------------------------------------------------------------
General
Webster devotes significant attention to maintaining high asset quality through
conservative underwriting standards, active servicing of loans, aggressively
managing nonaccrual assets and maintaining adequate reserve coverage on
nonaccrual assets. At year end 1996, residential and consumer loans comprised
over 86% of the total loan portfolio. All investments
4
<PAGE>
are either U.S. Government or Agency securities or have an investment rating in
the top two rating categories by a major rating service at time of purchase.
Nonaccrual Assets
The aggregate amount of nonaccrual assets decreased to $53.0 million at December
31, 1996 from $72.5 million at December 31, 1995 and declined as a percentage of
total assets to 1.03% at December 31, 1996 from 1.62% at December 31, 1995.
Nonaccrual loans decreased $11.6 million in 1996 and foreclosed properties
decreased $7.9 million due to write-downs, sale of foreclosed properties and a
bulk sale of $18 million of nonaccrual assets. The allowance for loan losses at
December 31, 1996 was $41.6 million and represented 103.87% of nonaccrual loans.
Total allowances for nonaccrual assets of $42.3 million represented 78.73% of
nonaccrual assets. The following table details Webster's nonaccrual assets for
the last five years.
<TABLE>
<CAPTION>
At December 31,
(IN THOUSANDS) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
Nonaccrual Assets:
Loans accounted for on a nonaccrual basis:
<S> <C> <C> <C> <C> <C>
Residential real estate $ 24,067 $ 27,811 $ 26,485 $ 33,660 $ 51,343
Commercial real estate 12,874 20,355 20,935 8,840 3,191
Consumer 3,116 3,445 2,517 2,832 5,509
Foreclosed Properties:
Residential and Consumer 5,082 7,752 10,895 28,600 32,641
Commercial 7,909 13,136 21,449 13,007 9,918
- ---------------------------------------------------------------------------------------------------
Total $ 53,048 $ 72,499 $ 82,281 $ 86,939 $102,602
===================================================================================================
A summary of the activity in the allowance for loan losses for the last five
years follows:
For the Years Ended December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Balance at beginning of period $ 48,703 $ 53,575 $ 52,147 $ 63,717 $ 14,729
Charge-offs:
Residential real estate (13,951) (8,458) (13,988) (10,011) (1,891)
Consumer (3,411) (817) (1,333) (2,096) (917)
Commercial (6,505) (4,368) (4,394) (3,391) (2,161)
- ---------------------------------------------------------------------------------------------------
(23,867) (13,643) (19,715) (15,498) (4,969)
Recoveries:
Residential real estate 634 833 430 413 80
Consumer 311 1,027 1,747 770 599
Commercial 1,977 1,286 1,042 246 244
- ---------------------------------------------------------------------------------------------------
Net charge-offs (20,945) (10,497) (16,496) (14,069) (4,046)
Acquired allowance for purchased loans 5,000 -- 12,819 -- 46,085
Acquired allowance adjustment -- -- -- (5,963) --
Transfer from allowance for losses for
loans held for sale -- -- -- 2,390 --
Provisions charged to operations 8,850 5,625 5,105 6,072 6,949
- ---------------------------------------------------------------------------------------------------
Balance at end of period $ 41,608 $ 48,703 $ 53,575 $ 52,147 $ 63,717
Ratio of net charge-offs to average loans
outstanding 0.7% 0.4% 0.6% 0.6% 0.3%
- ---------------------------------------------------------------------------------------------------
</TABLE>
During 1996, 1995, 1994 and 1993, increased loan charge-offs were due primarily
to loans acquired as a result of the acquisitions. Such charge-offs were in line
with expectations and adequate loan loss allowances were established at the time
of each acquisition. Included in the 1996 loan charge-offs were write-downs of
$6.3 million related to a bulk sale of $18.0 million of nonaccrual residential
loans and foreclosed properties. See Note 13 to the Consolidated Financial
Statements for a summary of activity in the allowance for losses on foreclosed
properties. Management believes that the allowance for loan losses is adequate
to cover expected losses in the portfolio.
5
<PAGE>
The following table presents an allocation of Webster's allowance for loan
losses at the dates indicated and the related percentage of loans in each
category to Webster's gross loan portfolio:
<TABLE>
<CAPTION>
At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
Balance at End of Period
Applicable to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans $13,175 74.72% $22,937 80.14% $29,641 81.48% $39,762 84.62 $50,099 83.00%
Commercial mortgage loans 10,199 7.99 12,045 6.81 11,106 6.56 3,320 3.83 5,451 4.31
Commercial non-mortgage
loans 10,890 5.90 4,105 2.42 4,250 2.35 1,917 1.65 1,554 1.26
Consumer loans 7,344 11.39 9,616 10.63 8,578 9.61 7,148 9.90 6,613 11.43
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $41,608 100.00% $48,703 100.00 $53,575 100.00% $52,147 100.00% $63,717 100.00%
====================================================================================================================================
</TABLE>
6
<PAGE>
SEGREGATED ASSETS
- --------------------------------------------------------------------------------
Segregated Assets consist of all commercial real estate, commercial, and
multi-family loans acquired from the FDIC in the First Constitution acquisition.
Segregated Assets, before the allowance for losses of $2.9 million, totaled
$78.5 million at December 31, 1996 down from $256.6 million at acquisition
(1992). Segregated Assets are subject to a loss-sharing arrangement with the
FDIC. The FDIC is required to reimburse Webster Bank quarterly for 80% of the
total net charge-offs and certain related expenses on Segregated Assets through
December 1997, with such reimbursement increasing to 95% (less recoveries in
years six and seven) as to such charge-offs and expenses in excess of $49.2
million (with payment at the end of the seventh year as to such excess). At
December 31, 1996, cumulative net charge-offs and expenses aggregated $54.0
million. During the first quarter of 1996, Webster began recording the
additional 15% reimbursement (the difference between the 80% and 95%
reimbursement levels) as a receivable from the FDIC. The impact of purchasing
the Segregated Assets has been reflected primarily in increased noninterest
expenses for the Bank's share of certain reimbursable expenses and all
non-reimbursable expenses. The Bank's share of charge-offs reduces the allowance
for losses on the Segregated Assets which was established in conjunction with
the First Constitution acquisition. Management believes that the allowance for
losses on Segregated Assets is adequate to cover expected losses on this
portfolio. See Note 5 to the Consolidated Financial Statements.
Reimbursable net charge-offs and eligible expenses of Segregated Assets
aggregated $4.9 million for 1996. During 1996, the Bank received $4.2 million as
reimbursement for eligible charge-offs and related net expenses in accordance
with the loss-sharing arrangement described above. Payments due from the FDIC
upon charge-off and related expenses are recorded as receivables. Such
reimbursements are made on a quarterly basis to the Bank by the FDIC and when
received are invested in earning assets. Such reimbursements have no immediate
impact on the consolidated statements of income.
A detail of changes in the allowance for Webster's share of losses for
Segregated Assets follows:
Years Ended December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of period $ 3,235 $4,420
Charge-offs (621) (1,772)
Recoveries 245 587
- ------------------------------------------------------------------------------
Balance at end of period $ 2,859 $3,235
- ------------------------------------------------------------------------------
At December 31, 1996 and 1995, nonaccrual Segregated Assets were classified as
follows:
At December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Segregated Assets accounted for on a nonaccrual basis:
Commercial real estate loans $ 3,337 $2,604
Commercial loans 192 1,203
Multi-family real estate loans 495 1,432
Foreclosed Properties:
Commercial real estate 269 648
Multi-family real estate 138 651
- -------------------------------------------------------------------------------
Total $ 4,431 $6,538
===============================================================================
7
<PAGE>
- --------------------------------------------------------------------------------
The following table sets forth the contractual maturity and interest rate
sensitivity of commercial loans contained in the Segregated Assets portfolio at
December 31, 1996.
Contractual Maturity
One Year One to Over
(In thousands) or Less Five Years Five Years Total
- --------------------------------------------------------------------------------
Contractual Maturity:
Commercial loans $ 735 $3,694 $2,177 $6,606
- --------------------------------------------------------------------------------
Total $ 735 $3,694 $2,177 $6,606
================================================================================
Interest Rate Sensitivity:
Fixed Rates $ 208 $ 213 $ -- $ 421
Variable Rates 527 3,481 2,177 6,185
- --------------------------------------------------------------------------------
Total $ 735 $3,694 $2,177 $6,606
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Webster Bank is required to maintain minimum levels of liquid assets as defined
by regulations adopted by the Office of Thrift Supervision ("OTS"). This
requirement, which may be varied by the OTS, is based upon a percentage of
withdrawable deposits and short term borrowings. The required liquidity ratio is
currently 5.00% and the Bank's liquidity ratio was 6.05% at December 31, 1996.
The primary sources of liquidity for Webster are net cash flows from operating
activities, investing activities and financing activities. Net cash flows from
operating activities include net income, loans originated for sale, the sale of
loans originated for sale, net changes in other asset and liabilities and
adjustments for noncash items such as depreciation, the provision for loan
losses and changes in accruals. Net cash flows from investing activities
primarily includes the purchase, maturity, and sale of securities and
mortgage-backed securities that are classified as trading, available for sale or
held to maturity, and the net change in loans and Segregated Assets. While
scheduled loan amortization, maturing securities, short term investments and
securities repayments generally are predictable sources of funds, loan and
mortgage-backed securities prepayments are greatly influenced by general
interest rates, economic conditions and competition. One of the inherent risks
of investing in loans and mortgage-backed securities is the ability of such
instruments to incur prepayments of principal prior to maturity at prepayment
rates different than those estimated at the time of purchase. This generally
occurs because of changes in market interest rates. The market values of
fixed-rate loans and mortgage-backed securities are sensitive to fluctuations in
market interest rates, declining in value as interest rates rise. If interest
rates decrease, the market value of loans and mortgage-backed securities
generally will tend to increase with the level of prepayments also normally
increasing. The lower yields on such loans and mortgage-backed securities may be
offset by a lower cost of funds. Changes in the volume of nonaccrual assets due
to additions or sales of such assets also affect liquidity.
Financing activity net cash flows primarily include proceeds and repayments from
FHL Bank advances and other borrowings, the net change in deposits and changes
in the capital structure generally related to stock issuances and repurchases.
The utilization of particular sources of funds depends on comparative costs and
availability. Webster Bank has from time to time, chosen not to pay rates on
deposits as high as certain competitors, and when necessary, supplements
deposits with various borrowings. The Bank manages the prices of its deposits to
maintain a stable, cost-effective deposit base as a source of liquidity.
The Bank had additional borrowing capacity from the FHL Bank of $1.9 billion at
December 31, 1996. At that date, the Bank had FHL Bank advances outstanding of
$510.1 million compared to $480.0 million at December 31, 1995. See Note 9 to
the Consolidated Financial Statements.
8
<PAGE>
Webster's main sources of liquidity at the holding company level are dividends
from the Bank and net proceeds from capital offerings and borrowings, while the
main outflows are the payment of dividends to preferred and common stockholders,
the payment of interest to holders of Webster's 8 3/4% Senior Notes and
repurchases of Webster's common stock. There are certain restrictions on payment
of dividends by Webster Bank to Webster. See Note 15 to the Consolidated
Financial Statements. Webster also has a $20 million line of credit with a
correspondent bank. On January 31, 1997, Webster completed the sale of
$100,000,000 of Webster Capital Trust/Capital Securities further increasing its
Capital Resources. The Capital Securities are further discussed in Note 18 to
the Consolidated Financial Statements.
On November 19, 1996, Webster completed a previously announced stock repurchase
program, which resulted in total repurchases of 549,800 shares and also
announced its intention to repurchase up to 300,000 additional shares. At
December 31, 1996, 255,100 shares had been repurchased under the new repurchase
plan, to offset future dilution from shares of common stock that were issued in
January 1997, in connection with conversions of preferred stock or issued upon
exercise of options under Webster's stock option plans. The remaining shares
under the plan were repurchased in January 1997. Webster previously repurchased
548,500 shares in two stock repurchase plans announced in 1988 and 1990.
Applicable OTS regulations require federal savings banks such as the Bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement (expressed as a ratio of core or Tier 1 capital to adjusted total
assets) and risk-based capital requirements (expressed as a ratio of core or
Tier 1 capital and total capital to total risked-weighted assets). As an OTS
regulated savings institution, the Bank also is subject to a minimum tangible
capital requirement (expressed as a ratio of tangible capital to adjusted total
assets). At December 31, 1996, the Bank was in full compliance with all
applicable capital requirements as detailed below:
<TABLE>
<CAPTION>
At December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 Tier 1
Tangible Capital Core Capital Risk-Based Capital Total Risk-Based Capital
Requirement Requirement Requirement Requirement
(DOLLARS IN THOUSANDS) Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital for regulatory purposes $ 283,665 5.59% $ 288,066 5.68% $ 288,066 10.62% $ 321,134 11.84%
Minimum regulatory requirement 76,088 1.50 152,175 3.00 108,503 4.00 217,005 8.00
- ------------------------------------------------------------------------------------------------------------------------------------
Excess over requirement $ 207,577 4.09% $ 135,891 2.68% $ 179,563 6.62% $ 104,129 3.84%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
The goal of Webster's asset/liability policy is to manage interest-rate risk so
as to maximize net interest income over time in changing interest-rate
environments while maintaining acceptable levels of risk. Webster must provide
for sufficient liquidity for daily operations while maintaining mandated
regulatory liquidity levels. To this end, Webster's strategies for managing
interest-rate risk are responsive to changes in the interest-rate environment
and market demands for particular types of deposit and loan products. Management
measures interest-rate risk using GAP, duration and simulation analyses with
particular emphasis on measuring changes in the market value of portfolio equity
and changes in net interest income in different interest-rate environments. The
simulation analyses incorporate assumptions about balance sheet changes such as
asset and liability growth, loan and deposit pricing and changes due to the mix
and maturity of such assets and liabilities. From such simulations, interest
rate risk is quantified and appropriate strategies are formulated. The overall
interest rate risk position is reviewed on an ongoing basis by the Asset
Liability Committee, which includes Executive Management and has representation
by members of each line of business. Strategies employed in 1996 to improve the
interest-rate sensitive position included (i) the selling of certain fixed-rate
mortgage loans, (ii) promotion of adjustable-rate mortgage loans, (iii) emphasis
on the origination of variable-rate home equity credit lines and commercial
loans, (iv) emphasis on the purchase of short-term or adjustable-rate securities
or mortgage-backed securities, (v) emphasis on deposits and borrowed funds that
meet asset/liability management objectives and (vi) the employment of hedging
techniques to reduce the interest-rate risk of certain assets or liabilities.
Based on Webster's asset/liability mix at December 31, 1996, management's
simulation analysis of the effects of changing interest rates projects that an
instantaneous 200 basis point increase in interest rates would decrease the
market value of equity by approximately 12% at December 31, 1996. At December
31, 1996, Webster had a 6.2% positive GAP position in the one year time horizon
which means that cumulative interest-rate
9
<PAGE>
sensitive assets exceed cumulative interest-rate sensitive liabilities for that
period. Management believes that its interest-rate risk position represents a
reasonable amount of interest-rate risk at this point in time. Webster also
utilizes as part of its asset/liability management strategy various interest
rate instruments including short futures positions, interest rate swaps,
interest rate caps and interest rate floors. The notional amounts of these
instruments are not reflected in Webster's statement of condition but are
included in the repricing table for purposes of analyzing interest rate risk.
Interest rate contracts are entered into as hedges against future rate
fluctuations and not for speculative purposes.
Webster is unable to predict future fluctuations in interest rates and as such
the market values of certain of Webster's financial assets and liabilities are
sensitive to fluctuations in market interest rates. Changes in interest rates
can affect the amount of loans originated by the Bank, as well as the value of
its loans and other interest-earning assets. Increases in interest rates may
cause depositors to shift funds from accounts that have a comparatively lower
cost such as regular savings accounts to accounts with a higher cost such as
certificates of deposit. If the cost of interest-bearing liabilities increase at
a rate that is greater than the increase in yields on interest-earning assets,
the interest rate spread is negatively affected. Changes in the asset and
liability mix also affects the interest rate spread.
The following table sets forth the estimated maturity/repricing structure of
Webster's interest-earning assets and interest-bearing liabilities at December
31, 1996. Repricing for mortgage loans is based on contractual repricing and
projected prepayments and repayments of principal. Deposit liabilities without
fixed maturities are assumed to decay over the periods presented based on
industry standards and internal projections.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
More than More than More than More than More than
6 Months 6 Months 1 Year 3 Years 5 Years 10 Years
(DOLLARS IN THOUSANDS) or less to 1 Year to 3 Years to 5 Years to 10 Years to 20 Years
- ---------------------------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 1,402,571 $ 821,148 $ 363,501 $ 264,625 $ 268,286 $ 232,160
Securities 651,382 346,135 144,452 45,524 86,991 69,893
- ---------------------------------------------------------------------------------------------------------------------------
Total Rate-Sensitive
Assets $ 2,053,953 $ 1,167,283 $ 507,953 $ 310,149 $ 355,277 $ 302,053
===========================================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Deposits $ 1,603,773 $ 771,977 $ 1,050,627 $ 293,485 $ 75,010 $ 584
Borrowings 505,275 78,125 69,500 50,920 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Rate-Sensitive
Liabilities $ 2,109,048 $ 850,102 $ 1,120,127 $ 344,405 $ 75,010 $ 584
===========================================================================================================================
Consolidated GAP $ (55,095) $ 317,181 $ (612,174) $ (34,256) $ 280,267 $ 301,469
GAP to Total Assets Percent (1.07%) 6.19% (11.94%) (0.67%) 5.47% 5.88%
Cumulative GAP $ (55,095) $ 262,086 $ (350,088) $ (384,344) $ (104,077) $ 197,392
Cumulative GAP to Total
Assets Percent (1.07%) 5.11% (6.83%) (7.50%) (2.03%) 3.85%
Total Assets $ 5,126,278 $ 5,126,278 $ 5,126,278 $ 5,126,278 $ 5,126,278 $ 5,126,278
===========================================================================================================================
</TABLE>
- ---------------------------------------------------------
More than
(DOLLARS IN THOUSANDS) 20 Years Total
- ---------------------------------------------------------
Assets
Loans $ 108,124 $ 3,460,415
Securities 32,129 1,376,506
- ----------------------------------------------------------
Total Rate-Sensitive
Assets $ 140,253 $ 4,836,921
- ----------------------------------------------------------
Liabilities
- ----------------------------------------------------------
Deposits $ 304,045 $ 4,099,501
Borrowings -- 703,820
- ----------------------------------------------------------
Total Rate-Sensitive
Liabilities $ 304,045 $ 4,803,321
- ----------------------------------------------------------
Consolidated GAP $ (163,792) N/A
GAP to Total Assets Percent (3.20%) N/A
Cumulative GAP $ 33,600 N/A
Cumulative GAP to Total
Assets Percent 0.66% N/A
Total Assets $ 5,126,278
- ----------------------------------------------------------
10
<PAGE>
The following table sets forth the contractual maturity and interest-rate
sensitivity of residential and commercial real estate construction loans and
commercial loans at December 31, 1996.
<TABLE>
<CAPTION>
Contractual Maturity .
- ------------------------------------------------------------------------------------------------
One Year One to Over
(In thousands) or Less Five Years Five Years Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contractual Maturity:
Construction loans:
Residential mortgage $ 6,062 $ 220 $ 83,597 $ 89,879
Commercial mortgage 9,809 9,232 1,560 20,601
Commercial non-mortgage loans 73,487 81,491 39,777 194,755
- ------------------------------------------------------------------------------------------------
Total $ 89,358 $ 90,943 $ 124,934 $ 305,235
================================================================================================
Interest-Rate Sensitivity:
Fixed rate $ 4,399 $ 23,850 $ 31,820 $ 60,069
Variable 84,959 67,093 93,114 245,166
- ------------------------------------------------------------------------------------------------
Total $ 89,358 $ 90,943 $ 124,934 $ 305,235
================================================================================================
</TABLE>
COMPARISON OF 1996 AND 1995 YEARS
- --------------------------------------------------------------------------------
General. For 1996, Webster reported net income of $34.5 million, or $2.69 per
share on a fully diluted basis. Included in the 1996 results are non-recurring
expenses totaling $5.2 million which include: $4.7 million of expenses related
to a special assessment associated with the recapitalization of the Savings
Association Insurance Fund ("SAIF") and $500,000 of acquisition related charges
for the Shawmut Transaction. Excluding the effect of these non-recurring
expenses, net income for the 1996 year would have been $37.5 million or $2.94
per fully diluted share. Net income for 1995 amounted to $25.9 million, or $2.25
per share on a fully diluted basis. Included in the 1995 results are
non-recurring expenses totaling $6.4 million which include: $3.3 million of
expenses related to the Shelton acquisition, $2.1 million of expenses related to
changing the name and of merging together Webster's banking subsidiaries, and
$1.0 million of expenses related to the Shawmut Transaction. Excluding the
effects of these non-recurring expenses, net income for the 1995 year would have
been $29.6 million or $2.57 per fully diluted share. Results for the Shawmut
Transaction are included in the accompanying Consolidated Financial Statements
only from the date of acquisition on February 16, 1996.
Net Interest Income. Net interest income before provision for loan losses
increased $32.7 million in 1996 to $154.9 million from $122.2 million in 1995.
The increase is primarily attributable to an increased volume of average earning
assets and interest bearing liabilities related to the Shawmut Transaction.
Interest rate spread for the 1996 year increased to 3.13% compared to 2.79% in
1995 also due primarily to lower costing liabilities acquired in the Shawmut
Transaction.
Interest Income. Total interest income for 1996 amounted to $355.9 million, an
increase of $50.5 million, or 16.5% compared to $305.4 million in 1995. The
increase in interest income was due primarily to an increase in the average
volume of loans and securities and to an increase in the average yield on all
interest-earning assets which increased to 7.40% in 1996 from 7.23% in 1995.
Interest Expense. Interest expense for 1996 amounted to $201.0 million, an
increase of $17.9 million compared to $183.1 million in 1995. The increase in
interest expense was due primarily to an increase in the average volume of
deposits and borrowings and to a decrease in the average yield on all interest
bearing liabilities to 4.27% in 1996 from 4.45% in 1995. The decrease in the
average yield on interest bearing liabilities is due primarily to the increase
in noninterest bearing and other deposits acquired in the Shawmut Transaction.
11
<PAGE>
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned and paid by Webster.
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Average Average Average Average Average Average
(DOLLARS IN THOUSANDS) Balance Interest Yield Balance Interest Yield Balance Interest Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net (a) $ 3,317,119 $259,586(b) 7.83% $2,781,031 $210,044(b) 7.55% $2,628,081 $186,661(b) 7.10%
Segregated Assets, net (a) 93,034 6,470 6.95 123,293 9,592 7.78 126,207 9,789 7.76
Securities 1,367,159 88,089 6.44(c) 1,285,079 84,308 6.56(c) 1,147,961 70,491 6.14(c)
Interest-Bearing Deposits 30,563 1,792 5.77 33,600 1,456 4.27 33,012 1,161 3.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 4,807,875 355,937 7.40 4,223,003 305,400 7.23 3,935,261 268,102 6.81
Other Assets 244,279 134,390 263,057
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,052,154 $4,357,393 $4,198,318
- ------------------------------------------------------------------------------------------------------------------------------------
Savings and Escrow $ 855,445 19,544 2.28% $ 688,749 15,413 2.24% $ 687,031 16,801 2.45%
Money Market Savings,
NOW and DDA 881,688 15,845 1.80 733,701 20,198 2.75 705,002 17,762 2.52
Time Deposits 2,292,931 124,109 5.41 2,095,082 108,791 5.19 1,959,662 78,280 3.99
FHL Bank Advances 501,385 30,253 6.03 500,804 32,080 6.41 474,360 24,736 5.21
Repurchase Agreements
and Other Borrowings 137,192 7,582 5.53 49,945 2,966 5.94 523 43 8.22
Senior Notes 40,000 3,660 9.15 40,000 3,660 9.15 40,000 3,660 9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 4,708,641 200,993 4.27 4,108,281 183,108 4.45 3,866,578 141,282 3.65
Other Liabilities 44,766 1,381 114,446
Shareholders' Equity 298,747 247,731 217,294
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and
Interest Rate Spread $154,944 3.13 $122,292 2.79 $126,820 3.16
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 5,052,154 $ 4,357,393 $4,198,318
- ------------------------------------------------------------------------------------------------------------------------------------
Net Yield on Average
Earning Assets 3.22% 2.92% 3.22%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Interest on nonaccrual loans has been included only to the extent reflected
in the Consolidated Statements of Income. Nonaccrual loans, however, are
included in the average balances outstanding.
(b) Includes discount and fee income, net of $1.3 million, $1.1 million and
$506,000 in 1996, 1995 and 1994, respectively.
(c) Yields are adjusted to a fully taxable equivalent basis.
Net interest income also can be analyzed in terms of the impact of changing
rates and changing volumes. The following table describes the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected Webster's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate), (ii) changes attributable to changes in
rates (changes in rates multiplied by prior volume), and (iii) the net change.
The change attributable to the combined impact of volume and rate has been
allocated proportionately to the change due to volume and the change due to
rate.
12
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, Years Ended December 31,
1996 v. 1995 1995 v. 1994
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
(IN THOUSANDS) Rate Volume Total Rate Volume Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning assets:
Loans and Segregated Assets $ 7,142 $ 39,278 $ 46,420 $ 12,178 $ 11,008 $ 23,186
Securities (952) 5,069 4,117 5,385 8,727 14,112
- ---------------------------------------------------------------------------------------------------------------------------
Total 6,190 44,347 50,537 17,563 19,735 37,298
- ---------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (4,941) 20,037 15,096 25,750 5,809 31,559
FHL Bank advances and other
borrowings (2,269) 5,058 2,789 5,732 4,535 10,267
- ---------------------------------------------------------------------------------------------------------------------------
Total (7,210) 25,095 17,885 31,482 10,344 41,826
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 13,400 $ 19,252 $ 32,652 $(13,919) $ 9,391 $(4,528)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Provision for Loan Losses. The provision for loan losses for 1996 was $8.9
million compared to $5.6 million in 1995. The increased provision for the 1996
year is attributable to an increase in the balance of outstanding loans and the
change in portfolio mix. The allowance for losses on loans amounted to $41.6
million and represented 103.9% of nonaccrual loans at December 31, 1996 versus
$48.7 million or 94.4% of nonaccrual loans at December 31, 1995.
Noninterest Income. Noninterest income for 1996 amounted to $29.5 million,
compared to $25.7 million in 1995. Fees and service charges totaled $19.8
million in 1996, an increase of $4.1 million, or 26.5% from 1995 due primarily
to a larger customer base. Gains on the sale of loans and mortgage loan
servicing rights amounted to $783,000 in 1996 compared to $4.6 million in 1995.
The 1995 results included gains on the sale of mortgage loan servicing rights of
$2.1 million. Gains on the sale of securities amounted to $4.2 million in 1996
compared to $653,000 in 1995. Other noninterest income was $4.8 million for 1996
and $4.7 million for 1995.
Noninterest Expenses. Noninterest expenses for 1996 amounted to $120.7 million
compared to $103.1 million in 1995. The increase of $17.6 million is due
primarily to increased salaries and employee benefits, occupancy, furniture and
equipment, core deposit intangible amortization, marketing, and other operating
expenses with all such increases related primarily to the Shawmut Transaction.
Offsetting such increases were decreased foreclosed property expenses and
provisions due to a decrease in the outstanding balance of foreclosed
properties. Included in the 1996 results are non-recurring expenses totaling
$5.2 million which include: $4.7 million of expenses related to a special
assessment associated with the recapitalization of the SAIF and $500,000 related
to the Shawmut Transaction. Also, included in the 1996 results were benefits
from the Bank Insurance Fund ("BIF") and SAIF related to deposit premium
reductions. At December 31, 1996, approximately 79% of the Bank's deposits are
assessed premiums at the BIF rate and 21% at the SAIF rate. Included in the 1995
results are non-recurring expenses totaling $6.4 million which include: $3.3
million of expenses related to the Shelton acquisition, $2.1 million of expenses
related to changing the name and merging together Webster's banking
subsidiaries, and $1.0 million of expenses related to the Shawmut Transaction.
Income Taxes. Income tax expense for 1996 increased to $20.4 million from $13.3
million in 1995. The increase in income tax expense is due primarily to an
increase in income before taxes. Included in the 1996 and 1995 results are $2.0
million and $2.3 million of benefits from the reduction of the deferred tax
asset valuation allowance. The decrease in the valuation allowance was due to
favorable reassessments of known risks during 1996 and 1995.
13
<PAGE>
COMPARISON OF 1995 AND 1994 YEARS
- --------------------------------------------------------------------------------
General. For 1995, Webster reported net income of $25.9 million, or $2.25 per
share on a fully diluted basis. Included in the 1995 results are a total of $6.4
million of non-recurring expenses which include: $3.3 million of expenses
related to the Shelton acquisition, $2.1 million of expenses related to changing
the name of and merging together Webster's banking subsidiaries, and $1.0
million of expenses related to charges incurred in preparation for the Shawmut
Transaction. Also included in the 1995 results are a $2.2 million gain on the
sale of mortgage servicing rights and $500,000 of losses on the sale of
securities as part of a portfolio restructuring plan. Net income for 1994
amounted to $24.4 million, or $2.19 per share on a fully diluted basis. Included
in the 1994 results are $700,000 of expenses related to the Shoreline
acquisition, a $5.0 million write-down of the First Constitution core deposit
intangible asset and income tax benefits of $3.5 million related to a reduction
of the deferred tax asset valuation allowance. Results for Bristol Savings Bank
are included in the accompanying Consolidated Financial Statements only from the
date of acquisition on March 3, 1994.
Net Interest Income. Net interest income before the provision for loan losses
decreased $4.5 million in 1995 to $122.3 million from $126.8 million for 1994.
The decrease was due primarily to the fact that the cost of interest-bearing
liabilities increased faster than the yield on interest-earning assets, in part
due to a shift of low cost deposits to longer term certificates of deposit.
Interest Income. Total interest income for 1995 amounted to $305.4 million, an
increase of $37.3 million, or 13.9%, compared to $268.1 million in 1994. This
increase in interest income was due primarily to an increase in the average
volume of loans and mortgage-backed securities and to an increase in the average
yield on all interest-earning assets which increased to 7.23% in 1995 from 6.81%
in 1994.
Interest Expense. Interest expense for 1995 amounted to $183.1 million, an
increase of $41.8 million, or 29.6%, compared to $141.3 million in 1994. The
increase in interest expense of $41.8 million was due primarily to an increase
in interest rates of $31.5 million and to an increase in the average volume of
deposits and borrowings of $10.3 million.
Provision for Loan Losses. The provision for loan losses for 1995 was $5.6
million versus $5.5 million for 1994. The allowance for loan losses at December
31, 1995 amounted to $48.7 million and represented 94.37% of nonaccrual loans
versus $53.6 million or 107.29% of nonaccrual loans at December 31, 1994.
Noninterest Income. Noninterest income for 1995 amounted to $25.7 million,
compared to $16.7 million in 1994. Fees and service charges totaled $15.6
million in 1995, an increase of $2.1 million, or 15.4% from 1994 due primarily
to a larger customer base. Gains on the sale of loans, mortgage loan servicing
rights, securities and mortgage-backed securities amounted to $5.3 million in
1995 compared to losses of $534,000 in 1994. The 1995 results include
non-recurring income of $2.2 million, which represent gains on the sale of
mortgage loan servicing rights and non-recurring losses on the sale of
securities as part of a portfolio restructuring plan. Other noninterest income
for 1995 amounted to $4.7 million, an increase of $1.0 million from 1994.
Noninterest Expenses. Noninterest expenses for 1995 amounted to $103.1 million
compared to $104.9 million in 1994. The decrease of $1.8 million was due
primarily to increased salaries and employee benefits, offset by decreases in
federal deposit insurance premiums and foreclosed properties expenses. Included
in the 1995 results were a total of $6.4 million of non-recurring expenses which
include: $3.3 million of expenses related to the Shelton acquisition, $2.1
million of expenses related to changing the name of and merging together
Webster's banking subsidiaries, and $1.0 million of expenses related to charges
incurred in preparation for the Shawmut Transaction. Also included in the 1995
results were benefits from the reduction of the BIF deposit insurance premiums.
The Federal Deposit Insurance Corporation determined that the BIF had met its
required reserve ratio as of June 1, 1995 and lowered the BIF insurance premiums
retroactively to that date. There was no reduction by the FDIC in the premium
rates of the SAIF which had not met its required reserve level. At December 31,
1995, approximately 72% of the Bank's deposits were assessed premiums at the BIF
rate and 28% at the SAIF rate. Deposits acquired in the Shawmut Transaction on
February 16, 1996 were assessed at the lower BIF rates. The decrease in
foreclosed property expenses was due to lower provisions for foreclosed property
losses and lower foreclosed property expenses due to a decrease in the
outstanding balance of foreclosed properties. Included in the 1994 results were
$700,000 of expenses related to the Shoreline acquisition and a $5.0 million
write-down of the First Constitution core deposit intangible asset. An
evaluation of the core deposit intangible asset at December 31, 1995 was
14
<PAGE>
performed using a discounted cash flow analysis. This analysis revealed that
there had not been any further impairment of this asset.
Income Taxes. Income tax expense for 1995 increased to $13.3 million from $8.8
million in 1994. Included in the 1995 and 1994 results were $2.3 million and
$3.8 million, respectively, of benefits from the reduction of the deferred tax
asset valuation allowance primarily related to Bristol Savings Bank.
IMPACT OF INFLATION AND CHANGING PRICES
- --------------------------------------------------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a banking institution are monetary in nature. As a result, interest rates have a
more significant impact on a banking institution's performance than the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services. In
the current interest-rate environment, the maturity structure of Webster's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
RECENT FINANCIAL ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In September 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
which was amended by SFAS No. 127 in December 1996 to defer the effective date
of certain provisions of SFAS No. 125 for one year. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control of the underlying assets
or liabilities transferred. It distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. It is expected that the
provisions of this statement will not have a material impact on the financial
results of the corporation. This statement generally is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996, except as amended by SFAS No. 127, and is to be applied
prospectively.
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123 "Accounting for Stock-Based Compensation." This statement encourages all
companies to adopt a new fair value based method of accounting for stock
compensation plans in place of the intrinsic value method prescribed by
Accounting Principal Board Opinion No. 25 ("APB 25"). In adopting the fair value
based method, companies record compensation cost related to activity within
their stock-based compensation plans. Companies that choose to continue to
account for stock-based compensation under the provisions of APB 25 are required
to disclose the impact on net income and earnings per share as if they had
adopted the fair value method (See Note 16). Webster has elected not to adopt
the fair value method and will continue to account for stock options as
prescribed under APB 25. This standard applies to financial statements for
fiscal years beginning after December 31, 1994.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
("SFAS No. 122") "Accounting for Mortgage Servicing Rights," which amends SFAS
No. 65 "Accounting for Certain Mortgage Banking Activities." Under SFAS No. 65,
mortgage servicing rights were required to be capitalized only if servicing was
purchased but prohibited separate capitalization of mortgage servicing rights
when acquired through loan portfolio sales with servicing rights retained. SFAS
No. 122 requires that a mortgage banking entity recognize as a separate asset
the value of the right to service mortgage loans for others, regardless of how
those servicing rights are acquired. Additionally, SFAS No. 122 requires that a
mortgage banking entity assess its capitalized mortgage servicing rights for
impairment and establish valuation allowances based on the fair value of those
servicing rights, which include those servicing rights acquired prior to the
adoption of SFAS No. 122. As allowed under the provisions of this statement,
Webster elected early adoption of SFAS No. 122 on July 1, 1995. In September
1996 the FASB superseded SFAS No. 122 with the issuance of SFAS No. 125.
See Note 7.
15
<PAGE>
In October 1994, the FASB issued SFAS No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments." This statement
requires institutions to disclose the average fair value of derivative
instruments as well as net gains and losses arising from trading revenues.
Webster currently holds short futures positions to minimize the price volatility
of certain adjustable-rate assets held as Trading Securities. Changes in the
market value of short futures positions are recognized in the statements of
income as a gain or loss in the period for which the change occurred. Webster
also holds various interest-rate financial instruments in the form of interest
rate swaps, caps and floors as hedges against changes in interest rates. This
statement applies to fiscal years ending after December 15, 1994. See Notes 3
and 11.
In November 1993, the Accounting Standards Executive Committee issued Statement
of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
This statement requires institutions with employee stock ownership plans to
record compensation expense equivalent to the fair value of shares committed to
be released to employees. Shares not committed to be released are excluded from
outstanding shares for the calculation of net income per share. Such provisions
are not required for employee stock ownership plan shares issued prior to
December 31, 1992. On March 3, 1994, in conjunction with the subscription and
public offerings of 1,150,000 shares of common stock of Webster, the Webster
Bank Employee Stock Ownership Plan purchased 100,000 additional shares. The
implementation of Statement of Position 93-6 did not have a significant effect
on Webster's earnings.
RECENT TAX LEGISLATION
- --------------------------------------------------------------------------------
Tax law changes were enacted in August 1996 to eliminate the "thrift bad debt"
method of calculating bad debt deductions for tax years after 1995 and to impose
a requirement to recapture into taxable income (over a six-year period) all bad
debt reserves accumulated after 1987. Since Webster previously recorded a
deferred tax liability with respect to these post 1987 reserves, its total
income tax expense for financial reporting purposes will not be affected by the
recapture requirement. The tax law changes also provide that taxes associated
with the recapture of pre-1988 bad debt reserves would become payable under more
limited circumstances than under prior law. Under the tax laws, as amended,
events that would result in recapture of the pre-1988 bad debt reserves include
stock and cash distributions to the holding company from the Bank in excess of
specified amounts. Webster does not expect such reserves to be recaptured into
taxable income.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
Assets 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Depository Institutions $ 100,113 $ 62,653
Interest-bearing Deposits 27 28,322
Securities: (Note 3)
Trading at Fair Value 59,331 45,775
Available for Sale, at Fair Value 810,989 749,017
Held to Maturity, (Market Value: $500,458 in 1996; $583,169 in 1995) 506,159 579,829
Loans Receivable, Net (Note 4) 3,384,465 2,767,295
Segregated Assets, Net (Note 5) 75,670 104,839
Accrued Interest Receivable 31,400 29,331
Premises and Equipment, Net (Note 6) 56,575 47,158
Foreclosed Properties, Net (Note 13) 12,991 20,888
Core Deposit Intangible (Note 2) 46,442 7,565
Prepaid Expenses and Other Assets (Note 7) 42,116 31,481
- -------------------------------------------------------------------------------------------------------------------
Total Assets $5,126,278 $4,474,153
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Deposits (Note 8) $4,099,501 $3,458,347
Federal Home Loan Bank Advances (Note 9) 510,130 479,976
Other Borrowings (Note 10) 144,627 170,014
Advance Payments by Borrowers for Taxes and Insurance 28,447 25,628
Accrued Expenses and Other Liabilities 51,480 49,406
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 4,834,185 4,183,371
- -------------------------------------------------------------------------------------------------------------------
Shareholders' Equity: (Notes 15 and 16)
- -------------------------------------------------------------------------------------------------------------------
Cumulative Convertible Preferred Stock, Series B, 98,084 shares issued and
outstanding at December 31, 1996 and
172,869 shares issued and outstanding at December 31, 1995 1 2
Common Stock, $.01 par value:
Authorized - 14,000,000 shares;
Issued - 11,993,407 shares at December 31, 1996 and 11,959,623 shares in 1995 120 119
Paid in Capital 171,766 181,598
Retained Earnings 139,936 112,872
Less Treasury Stock at cost, 575,274 shares at December 31, 1996 and
424,024 shares at December 31, 1995 (18,801) (3,290)
Less Employee Stock Ownership Plan Shares Purchased with Debt (2,574) (3,207)
Unrealized Gains on Securities, Net 1,645 2,688
- -------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 292,093 290,782
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6, and 19)
Total Liabilities and Shareholders' Equity $ 5,126,278 $4,474,153
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans and Segregated Assets $ 266,056 $ 219,636 $ 196,450
Securities and Interest-bearing Deposits 89,881 85,764 71,652
- ------------------------------------------------------------------------------------------------------------------
Total Interest Income 355,937 305,400 268,102
- ------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on Deposits (Note 8) 159,498 144,402 112,843
Interest on Borrowings 41,495 38,706 28,439
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 200,993 183,108 141,282
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 154,944 122,292 126,820
Provision for Loan Losses (Note 4) 8,850 5,625 5,480
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 146,094 116,667 121,340
- ------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Fees and Service Charges 19,790 15,644 13,554
Gain on Sale of Loans and Loan Servicing, Net (Note 4) 783 4,615 360
Gain (Loss) on Sale of Securities, Net (Note 3) 4,153 653 (894)
Other Noninterest Income 4,798 4,747 3,710
- ------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 29,524 25,659 16,730
- ------------------------------------------------------------------------------------------------------------------
Noninterest Expenses:
Salaries and Employee Benefits 55,778 48,167 45,075
Occupancy Expense of Premises 11,285 8,204 7,790
Furniture and Equipment Expenses 10,216 7,362 7,015
Federal Deposit Insurance Premiums 1,575 5,508 8,512
Foreclosed Property Expenses
and Provisions, Net (Note 13) 3,389 5,801 9,853
Core Deposit Intangible Amortization 5,338 1,444 2,082
Marketing Expenses 5,634 4,603 3,392
Non-recurring Expenses (Note 17) 5,230 6,371 5,700
Other Operating Expenses 22,296 15,667 15,486
- ------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 120,741 103,127 104,905
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 54,877 39,199 33,165
Income Taxes (Note 14) 20,390 13,266 8,770
- ------------------------------------------------------------------------------------------------------------------
Net Income 34,487 25,933 24,395
Preferred Stock Dividends 1,149 1,296 1,716
- ------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 33,338 $ 24,637 $ 22,679
- ------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Primary $ 2.82 $ 2.35 $ 2.31
Fully Diluted 2.69 2.25 2.19
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) Employee
Stock Unrealized
Ownership Gains
Plan Shares (Losses) On
Preferred Common Paid-In Retained Treasury Purchased Securities,
Stock Stock Capital Earnings Stock With Debt Net Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 3 $ 90 $116,998 $ 79,969 $ (3,816) $(1,952) $ 1,421 $ 192,713
Net Income for 1994 - - - 24,395 - - - 24,395
Dividends Paid:
$.48 Per Common Share - - - (3,053) - - - (3,053)
Dividends Paid or Accrued:
Preferred Series B - - - (1,716) - - - (1,716)
Dividends On:
Unallocated ESOP Shares - - - 52 - - - 52
Reduction of Debt Related
to ESOP Shares - - - - - 352 - 352
Purchase of Additional
ESOP Shares - - - - - (2,075) - (2,075)
Stock Dividends Declared by
Pooled Companies Prior
to Mergers (69) - - - (69)
Exercise of Stock Options - 2 2,372 - 124 - - 2,498
Net Proceeds from Sale of
Common Stock - 11 21,912 - - - - 21,923
Conversion of Preferred
Series B to Common Stock (1) 5 (4) - - - - -
Net Unrealized Loss on
Securities Available for
Sale, Net of Taxes - - - - - - (11,076) (11,076)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 2 $ 108 $141,278 $ 99,578 $ (3,692) $(3,675) $ (9,655) $ 223,944
- ----------------------------------------------------------------------------------------------------------------------------
Net Income for 1995 - - - 25,933 - - - 25,933
Dividends Paid:
$.64 Per Common Share - - - (4,382) - - - (4,382)
Dividends Paid or Accrued:
Preferred Series B - - - (1,296) - - - (1,296)
Allocation of ESOP Shares - - (3) - - 468 - 465
Fractional Shares Paid - - (13) - - - - (13)
Exercise of Stock Options - - 1,285 - 402 - - 1,687
Proceeds from Sale
of Common Stock - 12 32,100 - - - - 32,112
Stock Dividends Declared by
Pooled Companies Prior
to Mergers - - 6,950 (6,961) - - - (11)
Other, net - (1) 1 - - - - -
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes - - - - - - 12,343 12,343
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2 $ 119 $181,598 $ 112,872 $ (3,290) $(3,207) $ 2,688 $ 290,782
- ----------------------------------------------------------------------------------------------------------------------------
Net Income for 1996 - - - 34,487 - - - 34,487
Dividends Paid:
$.68 Per Common Share - - - (5,546) - - - (5,546)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers - - - (728) - - - (728)
Dividends Paid or Accrued:
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Series B - - - (1,149) - - - (1,149)
Allocation of ESOP Shares - - 94 - - 633 - 727
Exercise of Stock Options - 1 277 - 3,351 - - 3,629
Conversion of Preferred
Series B to Common Stock (1) - (8,724) - 8,725 - - -
Common Stock Repurchased - - - - (27,611) - - (27,611)
Other, Net - - (105) - 24 - - (81)
Pooling Adjustments, Net - - (1,374) - - - (1,071) (2,445)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes - - - - - - 28 28
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1 $ 120 171,766 $ 139,936 $ (18,801) $(2,574) $ 1,645 $ 292,093
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(DOLLARS IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 34,487 $ 25,933 $ 24,395
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 8,850 5,625 5,480
Provision for Foreclosed Property Losses 1,846 3,500 5,317
Provision for Depreciation and Amortization 8,083 5,618 5,190
Amortization of Securities Premiums, Net 4,539 1,485 1,598
Amortization and Write-down of Core Deposit Intangible 5,338 1,444 7,083
Amortization of Mortgage Servicing Rights 491 715 712
(Gains) Losses on Sale of Foreclosed Properties (1,360) (1,038) 372
(Gains) Losses on Sale of Loans and Securities (4,085) (4,838) 743
(Gains) Losses on Sale of Trading Securities (851) (430) (209)
Decrease (Increase) in Trading Securities 7,587 (19,721) 24,983
Loans Originated for Sale (66,606) (101,537) (301,125)
Sale of Loans, Originated for Sale 80,704 143,898 221,020
Decrease (Increase) in Interest Receivable 598 (3,690) (233)
(Decrease) Increase in Interest Payable (742) 960 3,888
(Decrease) Increase in Accrued Expenses and Other Liabilities, Net (17,924) 5,985 (44,437)
(Increase) Decrease in Prepaid Expenses and Other Assets (17,572) (282) 4,509
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 43,383 63,627 (40,714)
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of Securities, Available for Sale (483,675) (253,238) (155,287)
Purchases of Securities, Held to Maturity (100,426) (316,521) (174,571)
Maturities of Securities 104,757 84,203 104,392
Proceeds from Sales of Securities, Available for Sale 292,581 193,825 65,787
Net Decrease in Interest-bearing Deposits 28,295 30,496 26,396
Purchase of Loans (77,440) (99,235) (59,119)
Net Increase in Loans 11,004 (4,071) (152,711)
Proceeds from Sale of Foreclosed Properties 20,593 15,040 26,478
Net Decrease in Segregated Assets 29,169 28,941 39,902
Principal Collected on Mortgage-Backed Securities 191,064 118,174 166,503
Purchase of Premises and Equipment, Net (11,173) (9,169) (7,710)
Net Cash and Cash Equivalents Received from Bank Acquisition 113,551 - 15,490
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 118,300 (211,555) (104,450)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net (Decrease) Increase in Deposits (110,095) (1,344) 48,327
Net Proceeds from Sale of Common Stock - 32,112 21,923
Repayment of FHL Bank Advances (1,628,499) (1,108,486) (1,175,888)
Proceeds from FHL Bank Advances 1,658,653 1,106,618 1,282,542
Repayment of Other Borrowings (1,439,207) (61,193) (1,450)
Proceeds from Other Borrowings 1,414,548 188,077 -
Cash Dividends to Common and Preferred Shareholders (7,423) (5,690) (4,717)
Net Increase (Decrease) in Advance Payments for Taxes and Insurance 2,819 368 (7,301)
Exercise of Stock Options 12,592 1,687 2,498
Common Stock Repurchased (27,611) - -
- --------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (124,223) 152,149 165,934
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 37,460 4,221 20,770
Cash and Cash Equivalents at Beginning of Period 62,653 58,432 37,662
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 100,113 $ 62,653 $ 58,432
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures:
Income Taxes Paid $ 22,584 $ 12,580 $ 12,342
Interest Paid 198,849 182,289 145,268
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of Loans to Foreclosed Properties 19,047 15,416 49,514
Transfer of Securities from Held to Maturity to Available for Sale - 321,824 -
Securitization of Residential Real Estate Loans - - 137,458
</TABLE>
Assets acquired and liabilities assumed in 1996 business combinations were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended
December 31, 1996
- --------------------------------------------------------------------------------------------------
<S> <C>
Assets Acquired:
Loans $ 586,235
Premises and Equipment 6,327
Other Assets 3,059
- --------------------------------------------------------------------------------------------------
Total Assets Acquired 595,621
- --------------------------------------------------------------------------------------------------
Liabilities Assumed:
Deposits 846,412
Less Deposits Exchanged (95,163)
- --------------------------------------------------------------------------------------------------
Net Deposits Assumed 751,249
Other Liabilities 922
- --------------------------------------------------------------------------------------------------
Total Liabilities Assumed 752,171
- --------------------------------------------------------------------------------------------------
Net Liabilities Assumed 156,550
Net Premium Paid for Deposits (42,999)
- --------------------------------------------------------------------------------------------------
Net Cash and Cash Equivalents Received from Bank Acquisition $113,551
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
22
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
a) Business
Webster Financial Corporation, ("Webster"), through its subsidiary, Webster
Bank, (the "Bank") delivers financial services to individuals, families and
businesses throughout Connecticut. Webster Bank is organized along three
business lines - consumer, business and mortgage banking, supported by
centralized administration and operations. The Corporation has grown
significantly in recent years, primarily through a series of acquisitions which
have expanded and strengthened its franchise in Connecticut. Webster Bank was
founded in 1935 and converted from a federal mutual to a federal stock
institution in 1986.
b) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Webster and the
Bank. The consolidated financial statements and notes hereto have been
retroactively restated to include the accounts of DS Bancor Inc. ("Derby")
acquired on January 31, 1997, Shelton Bancorp Inc. ("Shelton") acquired on
November 1, 1995 and Shoreline Bank and Trust and Company ("Shoreline") acquired
on December 16, 1994 as if the mergers had occurred at the beginning of the
period of the earliest date presented (See Note 2). The financial statements
have been prepared in conformity with generally accepted accounting principles
and all significant intercompany transactions have been eliminated in
consolidation.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amount of assets and liabilities as of
the date of the balance sheets and revenues and expenses for the periods
presented. The actual results of Webster could differ from those estimates.
Material estimates that are susceptible to near term changes include the
determination of the allowance for loan losses, the valuation allowance of the
deferred tax asset and the valuation of foreclosed property.
c) Allowance for Loan Losses
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses. Effective January 1,
1995, Webster adopted Statement of Financial Accounting Standard ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118. Under this standard, commercial and commercial real estate loans are
considered impaired when it is probable that Webster will not collect all
amounts due in accordance with the contractual terms of the loan. Certain loans
are exempt from the provisions of SFAS No. 114, including large groups of
smaller balance homogenous loans that are collectively evaluated for impairment,
such as consumer and residential mortgage loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review Webster's allowance for loan
losses. Such agencies may require Webster to recognize additions to the
allowance for loan losses based on judgments different from those of management.
d) Foreclosed Properties
Foreclosed properties consists of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Foreclosed
properties are reported at the lower of fair value less estimated selling
expenses or cost with an allowance for losses to provide for declines in value.
Operating expenses are charged to current period earnings and gains and losses
upon disposition are reflected in the statements of income when realized.
e) Loans
Loans are stated at the principal amounts outstanding. Interest on loans is
credited to income as earned based on the rate applied to principal amounts
outstanding. Interest which is more than 90 days past due is not accrued. Such
interest ultimately collected, if any, is credited to income in the period
received. Loan origination fees, net of certain direct origination costs and
premiums and discounts on loans purchased, are recognized in interest income
over the lives of the loans using a method approximating the interest method.
Loans held for sale are carried at the lower of cost or market value in
aggregate. Net unrealized losses on loans held for sale, if any, are recognized
in a valuation allowance by charges to income.
23
<PAGE>
f) Securities
Securities are classified into one of three categories. Securities with fixed
maturities that management has the intent and ability to hold to maturity are
classified as Held to Maturity and are carried at cost, adjusted for
amortization of premiums and accretion of discounts over the estimated terms of
the securities utilizing a method which approximates the level yield method.
Securities that management intends to hold for indefinite periods of time,
including securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, the need to increase regulatory capital or
other similar factors, are classified as Available for Sale. All Equity
Securities are classified as Available for Sale. Securities Available for Sale
are carried at fair value with unrealized gains and losses recorded as
adjustments to shareholders' equity on a tax effected basis. Securities
classified as Trading Securities are carried at fair value with unrealized gains
and losses included in earnings. Gains and losses on the sales of securities are
recorded using the specific identification method.
Mortgage-backed securities include collateralized mortgage obligations ("CMOs")
which are either U.S. government agency securities or are rated in at least the
top two ratings categories by at least one of the major rating agencies at the
time of purchase. One of the risks inherent when investing in CMOs and
mortgage-backed securities is the ability of such instruments to incur
prepayments of principal prior to maturity. Because of prepayments, the
weighted-average yield of these securities may also change, which could effect
earnings.
g) Interest-rate Instruments
Webster utilizes as part of its asset/liability management strategy various
interest rate contracts including short futures positions, interest rate swaps,
interest rate caps and interest rate floors. Webster holds short futures
positions to minimize the price volatility of certain adjustable rate assets
held as Trading Securities. Changes in the market value of short futures
positions are recognized as a gain or loss in the consolidated statement of
income in the period for which the change occurred.
Interest rate caps, interest rate floors and interest rate swaps are entered
into as hedges against future interest rate fluctuations. Webster does not trade
in speculative interest rate contracts. Those agreements meeting the criteria
for hedge accounting treatment are designated as hedges and are accounted for as
such. If a contract is terminated, any unrecognized gain or loss is deferred and
amortized as an adjustment to the yield of the related asset or liability over
the remainder of the period that was being hedged. If the linked asset or
liability is disposed of prior to the end of the period being managed, the
related interest rate contract is marked to fair value, with any resulting gain
or loss recognized in current period income as an adjustment to the gain or loss
on the disposal of the related asset or liability. Interest income or expense
associated with interest rate caps and swaps is recorded as a component of net
interest income. Interest rate instruments that hedge available for sale assets
are marked to fair value monthly with adjustments to shareholders' equity on a
tax effected basis.
h) Interest-bearing Deposits
Interest-bearing Deposits consist primarily of deposits in the Federal Home Loan
Bank of Boston or other short-term overnight investments. These deposits are
carried at cost which approximates market value.
i) Premises and Equipment
Depreciation of premises and equipment is accumulated on a straight-line basis
over the estimated useful lives of the related assets. Estimated lives are 15 to
40 years for buildings and improvements and 3 to 20 years for furniture,
fixtures and equipment. Amortization of leasehold improvements is calculated on
a straight-line basis over the terms of the related leases.
Maintenance and repairs are charged to expense as incurred and improvements are
capitalized. The cost and accumulated depreciation relating to premises and
equipment retired or otherwise disposed of are eliminated from the accounts and
any resulting gains and losses are credited or charged to income.
24
<PAGE>
j) Segregated Assets
Segregated Assets represent commercial, commercial real estate and multi-family
loans acquired in the October 1992 First Constitution acquisition. In addition,
Segregated Assets contain foreclosed properties that have been so classified
subsequent to the acquisition date. These assets are subject to a loss-sharing
arrangement with the FDIC as discussed in Notes 2 and 5.
Interest on Segregated Assets is credited to income earned on loans and
segregated assets based on the rate applied to principal amounts outstanding.
Interest which is more than 90 days contractually past due is not accrued. Such
interest ultimately collected, if any, is credited to income in the period
received.
k) Core Deposit Intangible
The excess of the purchase price over the fair value of the tangible net assets
acquired in acquisitions accounted for using the purchase accounting method has
been allocated to deposits. The deposit intangible is being amortized on a
straight-line basis over a period of ten years from the acquisition date. On a
periodic basis, management assesses the recoverability of the deposit
intangible. Such assessments encompass a projection of future earnings from the
deposit base as compared to original expectations, based upon a discounted cash
flow analysis. If an assessment of the core deposit intangible indicates that it
is impaired, a charge to income for the most recent period is recorded for the
amount of such impairment.
l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
m) Employee Benefit Plans
The Bank has a noncontributory pension plan covering substantially all
employees. Pension costs are accrued in accordance with generally accepted
accounting principles and are funded in accordance with the requirements of the
Employee Retirement Income Security Act (ERISA). The Bank also accrues costs
related to postretirement benefits.
n) Net Income Per Share
Primary net income per share is calculated by dividing net income available to
common shareholders by the weighted-average number of shares of common stock and
common stock equivalents outstanding, when dilutive. The common stock
equivalents consist of common stock options and warrants. Fully diluted net
income per share is calculated by dividing adjusted net income by the
weighted-average fully diluted common shares, including the effect of common
stock equivalents and the hypothetical conversion into common stock of the
Series B cumulative convertible preferred stock. The weighted-average number of
shares used in the computation of primary earnings per share for the years ended
December 31, 1996, 1995 and 1994 were 11,823,778, 10,498,492 and 9,812,206,
respectively, and for fully diluted earnings per share were 12,781,296,
11,513,533, and 11,158,044 for the same periods, respectively.
o) Stock Compensation
Statement of Financial Accounting Standard No. 123 encourages all companies to
adopt a new fair value based method of accounting for stock-based employee
compensation plans. Under the provisions of this statement, Webster has elected
to continue to measure compensation for its stock option plans using the
accounting method prescribed by Accounting Principal Board Opinion No. 25 ("APB
No. 25") "Accounting for Stock Issued to Employees." Entities electing to
maintain accounting standards under APB No. 25 must make pro forma disclosures
for net income and earnings per share as if the fair value based method of
accounting had been applied. See Note 16.
p) Statements of Cash Flows
For purposes of the Statements of Cash Flows, Webster considers cash on hand and
in banks to be cash equivalents.
25
<PAGE>
q) Loan Sales and Servicing Sales
Gains or losses on sales of loans are recognized at the time of the sale. On
July 1, 1995, Webster elected early adoption of Statement of Financial
Accounting Standard No. 122 ("SFAS No. 122") "Accounting for Mortgage Servicing
Rights." SFAS No. 122 requires that a mortgage banking entity recognize as a
separate asset the value of the right to service mortgage loans for others,
regardless of how those servicing rights are acquired. Fair values are estimated
considering loan prepayment predictions, historical prepayment rates, interest
rates, and other economic factors. For purposes of impairment evaluation and
measurement, Webster stratifies mortgage servicing rights based on predominate
risk characteristics of the underlying loans, including loan type and
amortization type (fixed or adjustable). To the extent that the carrying value
of mortgage servicing rights exceeds fair value by individual stratum, a
valuation allowance is established. The allowance may be adjusted for changes in
fair value. The cost basis of mortgage servicing rights is amortized into
noninterest income over the estimated period of servicing revenue. See Note 4.
When loans sold have an average contractual interest rate, adjusted for normal
servicing costs, which differs from the agreed yield to the purchaser, gains or
losses are recognized equal to the present value of such differential over the
estimated remaining life of such loans. Any resulting net premium is amortized
over the same estimated life using a method approximating the interest method.
The aggregate of unamortized excess servicing rights arising from gains on loan
sales is included in the accompanying Consolidated Statements of Condition as a
component of Prepaid Expenses and Other Assets and is periodically reviewed and
adjusted for changed circumstances.
r) Reclassifications
Certain financial statement balances as previously reported have been
reclassified to conform to the 1996 Consolidated Financial Statements
presentation.
NOTE 2: BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
Pooling of Interests Transaction Consummated in 1997
On January 31, 1997, Webster acquired DS Bancor, Inc. ("Derby") and its
subsidiary, Derby Savings Bank, a $1.2 billion savings bank in Derby,
Connecticut. In connection with the merger with Derby, Webster issued 3,501,370
shares of its common stock for all the outstanding shares of Derby common stock.
Under the terms of the agreement each outstanding share of Derby common stock
was converted into 1.14158 shares of Webster common stock. This acquisition was
accounted for as a pooling of interests and as such the Consolidated Financial
Statements include Derby's financial data as if Derby had been combined at the
beginning of the earliest period presented.
POOLING OF INTERESTS TRANSACTIONS
- --------------------------------------------------------------------------------
On November 1, 1995, Webster merged with Shelton, with $295 million in assets,
based in Shelton, Connecticut. In connection with the acquisition, Webster
issued 1,292,549 shares of its common stock for all of the outstanding shares of
Shelton common stock, based on an exchange ratio of .92 shares of Webster common
stock for each of Shelton's outstanding shares of common stock. On December 16,
1994, Webster acquired Shoreline, with $51 million in assets, based in Madison,
Connecticut. In connection with the acquisition of Shoreline, Webster issued
266,500 shares of its common stock for all of the outstanding shares of
Shoreline common stock, based on an exchange ratio of 1 share of Webster's
common stock for 2 shares of Shoreline's common stock. Both acquisitions were
accounted for as a pooling of interests and as such the consolidated financial
statements include financial data as if both Shelton and Shoreline had been
combined as of the beginning of the earliest period presented.
PURCHASE TRANSACTIONS
- --------------------------------------------------------------------------------
The Shawmut Transaction
On February 16, 1996, Webster Bank acquired 20 branches in the Hartford market
from Shawmut Bank Connecticut National Association, as part of a divestiture in
connection with the merger of Shawmut and Fleet Bank (the "Shawmut
Transaction"). In the branch purchase, Webster Bank acquired approximately $845
million in deposits, and $586 million in loans. As a result of this transaction,
Webster recorded $44.2 million as a core deposit intangible asset. In connection
with the Shawmut Transaction, Webster raised net proceeds of $32.1 million
through the sale of 1,249,600 shares of its common stock in an underwritten
public offering in December 1995. The Shawmut Transaction was accounted for as a
26
<PAGE>
purchase, and results of operations related to the transaction from February 16,
1996 to December 31, 1996 are included in the accompanying Consolidated
Financial Statements.
Bristol Savings Bank Acquisition
On March 3, 1994, Bristol Savings Bank ("Bristol") converted from a Connecticut
mutual savings bank to a Connecticut capital stock savings bank and concurrently
became a wholly-owned subsidiary of Webster. Bristol had 5 banking offices in
Hartford County. In connection with the conversion, Webster completed the sale
of 1,150,000 shares of its common stock in related subscription and public
offerings. The Bristol acquisition was accounted for as a purchase, and results
of operations relating to Bristol from March 3, 1994 to December 31, 1996 are
included in the accompanying Consolidated Financial Statements. Negative
goodwill of $2.3 million represented the net effect of all purchase accounting
adjustments and is recorded as a reduction of premises and equipment and is
being amortized over a 10 year period. Bristol was merged with Webster Bank in
1995.
FDIC Assisted Acquisitions
Webster significantly expanded its retail banking operations through assisted
acquisitions of First Constitution Bank ("First Constitution") in October 1992
and Suffield Bank ("Suffield") in September 1991 from the Federal Deposit
Insurance Corporation ("FDIC"). These acquisitions, which were accounted for as
purchases, involved financial assistance from the FDIC and extended Webster's
retail banking operations into new market areas by adding 21 branch offices,
$1.5 billion in retail deposits and approximately 150,000 customer accounts. See
Note 5 to the Consolidated Financial Statements for additional information
concerning the terms of these assisted acquisitions.
27
<PAGE>
<TABLE>
<CAPTION>
NOTE 3: SECURITIES
- --------------------------------------------------------------------------------------------------------------------
A summary of securities follows:
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------------
Recorded Estimated Recorded Estimated
(IN THOUSANDS) Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trading Securities:
Mortgage-Backed Securities:
GNMA $ 31,537 $ 31,537 $ 14,766 $ 14,766
FHLMC 27,794 27,794 29,838 29,838
Equity Securities - - 1,171 1,171
- --------------------------------------------------------------------------------------------------------------------
59,331 59,331 45,775 45,775
- --------------------------------------------------------------------------------------------------------------------
Available for Sale Portfolio:
U.S. Treasury Notes:
Matures within 1 year - - 1,000 1,000
Matures over 1 within 5 years 2,508 2,544 - -
U.S. Government Agency:
Matures over 1 within 5 years 12,883 12,974 12,901 12,522
Matures over 5 within 10 years 9,700 9,638 5,322 5,359
Corporate Bonds and Notes:
Matures within 1 year 2,000 1,999 2,975 3,047
Matures over 1 within 5 years - - 27,180 27,172
Matures over 5 within 10 years 2,659 2,655 2,737 2,730
Mutual Funds* 7,216 7,236 35,147 35,078
Stock in Federal Home Loan Bank of Boston 39,832 39,832 39,832 39,832
Other Equity Securities 32,486 36,644 22,524 25,272
Mortgage-Backed Securities:
FNMA 142,497 141,944 140,705 143,703
FHLMC 17,214 17,425 81,024 81,784
GNMA 236,393 239,142 20,443 20,512
Collateralized Mortgage Obligations 296,180 294,920 349,562 350,190
Unamortized Hedge 5,460 4,036 816 816
Unrealized Securities Gains, Net 3,961 - 6,849 -
- --------------------------------------------------------------------------------------------------------------------
810,989 810,989 749,017 749,017
- --------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes:
Matures within 1 year 944 956 3,577 3,577
Matures over 1 within 5 years - - 8,262 8,445
U.S. Government Agency:
Matures within 1 year 6,867 6,867 1,003 1,006
Matures over 1 within 5 years 28,089 28,712 39,868 41,330
Matures over 5 within 10 years 499 487 999 1,008
Corporate Bonds and Notes:
Matures within 1 year 301 302 - -
Matures over 1 within 5 years 1,176 1,173 2,555 2,579
Matures over 5 within 10 years - - 330 325
Matures over 10 years 100 100 - -
Money Market Preferred Stock 8,000 8,000 5,000 5,000
Mortgage-Backed Securities:
FHLMC 84,862 84,069 113,758 114,108
FNMA 28,859 29,086 31,785 32,457
GNMA 1,309 1,369 1,622 1,698
Collateralized Mortgage Obligations 345,153 339,337 370,762 371,342
Other Mortgage-Backed Securities - - 308 294
- --------------------------------------------------------------------------------------------------------------------
506,159 500,458 579,829 583,169
- --------------------------------------------------------------------------------------------------------------------
Total $1,376,479 $1,370,778 $1,374,621 $1,377,961
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Mutual funds consist primarily of funds that invest in U.S. Government
securities, Mortgage-Backed securities and Money Market instruments.
28
<PAGE>
A summary of realized gains and losses follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(IN THOUSANDS) Gains Losses Net Gains Losses Net Gains Losses Net
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Trading Securities:
Mortgage-Backed Securities $ 2,962 $ (2,712) $ 250 $ 1,901 $ (194) $ 1,707 $ 2,086 $ (3,247) $ (1,161)
Futures and Options Contracts 10,704 (10,434) 270 3,517 (5,333) (1,816) 5,127 (3,826) 1,301
Equity Securities 366 (35) 331 539 - 539 197 (276) (79)
- -------------------------------------------------------------------------------------------------------------------------------
14,032 (13,181) 851 5,957 (5,527) 430 7,410 (7,349) 61
- -------------------------------------------------------------------------------------------------------------------------------
Available for Sale:
Mortgage-Backed Securities 1,211 (590) 621 898 (878) 20 - - -
U.S. Treasury Notes - (7) (7) 363 - 363 - - -
U.S. Government Agencies 10 - 10 - (1,507) (1,507) 20 - 20
Corporate Debt - - - - (555) (555) 455 (3) 452
Mutual Funds 227 (174) 53 - (139) (139) 72 (1,653) (1,581)
Other Equity Securities 2,766 (197) 2,569 2,042 (1) 2,041 236 (82) 154
Other 56 - 56 - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
4,270 (968) 3,302 3,303 (3,080) 223 783 (1,738) (955)
- -------------------------------------------------------------------------------------------------------------------------------
Total $18,302 $(14,149) $ 4,153 $ 9,260 $(8,607) $ 653 $ 8,193 $ (9,087) $ (894)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of securities from the held to maturity portfolio for the
years ended December 31, 1996 and 1995 and 1994. During the 1995 fourth quarter,
the Bank elected, under guidelines issued by the Financial Accounting Standards
Board, to transfer certain securities from the held to maturity to the available
for sale portfolio. These securities had an approximate book value of $321.8
million and fair market value of $320.3 million. Under this one-time provision,
the Bank was able to reassess the appropriateness of the classifications of all
securities held and account for any resulting reclassifications at fair market
value. The Bank reclassified certain securities to allow greater flexibility in
managing interest-rate risk and to enhance its ability to react to changes in
market conditions.
Webster holds short futures positions to minimize the price volatility of
certain adjustable-rate assets held as Trading Securities. At December 31, 1996,
Webster held 298 short positions in Eurodollar futures contracts ($298.0 million
notional amount) and 410 short positions in 5 and 10 year Treasury note futures
($41.0 million notional amount). Changes in the market value of short futures
positions are recognized as a gain or loss in the period for which the change
occurred. All gains and losses resulting from short futures positions are
reflected in gains (losses) on sale of securities, net in the Consolidated
Statements of Income.
29
<PAGE>
Summaries of unrealized gains and losses for the available for sale and held to
maturity portfolios follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(IN THOUSANDS) Gains Losses Net Gains Losses Net
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury Notes $ 40 $ (4) $ 36 $ - $ - $ -
U.S. Government Agency 100 (71) 29 109 (379) (270)
Corporate Bonds and Notes - (5) (5) 3 (18) (15)
Mutual Funds 20 - 20 79 (148) (69)
Equity Securities 4,281 (123) 4,158 3,319 (572) 2,747
Mortgage-Backed Securities 7,774 (8,051) (277) 8,993 (4,537) 4,456
- ---------------------------------------------------------------------------- ---------------------------------
12,215 (8,254) 3,961 12,503 (5,654) 6,849
- --------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes:
Matures within 1 year 12 - 12 1 (1) -
Matures within 5 years - - - 184 (1) 183
U.S. Government Agency
Matures within 1 year - - - 3 - 3
Matures over 1 within 5 years 935 (312) 623 1,465 (2) 1,463
Matures over 5 within 10 years - (12) (12) 8 - 8
Corporate Bonds and Notes
Matures within 1 year 1 - 1 - - -
Matures over 1 within 5 years 5 (8) (3) 26 (2) 24
Matures over 5 within 10 years - - - - (5) (5)
Mortgage-Backed Securities 2,097 (8,419) (6,322) 4,906 (3,242) 1,664
- --------------------------------------------------------------------------------------------------------------
3,050 (8,751) (5,701) 6,593 (3,253) 3,340
- --------------------------------------------------------------------------------------------------------------
Total $15,265 $(17,005) $(1,740) $19,096 $(8,907) $10,189
- --------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
The following table sets forth the contractual maturities of Webster's
securities and mortgage-backed securities at December 31, 1996 and the weighted
average yields of such securities.
<TABLE>
<CAPTION>
Due Due
Due After One, But After Five, But Due
Within One Year Within Five Years Within 10 Years After 10 Years
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing Deposits (a) $ 27 5.15% $ - - % $ - - % $ - - %
Trading Portfolio:
Mortgaged-Backed Securities
and Collateralized Mortgage
Obligations (b) 27,849 7.32 - - - - 31,482 6.45
Available For Sale Portfolio:
U.S. Government Agency - - 14,975 5.91 - - 7,637 7.72
Mutual Funds - - - - - - 7,236 5.92
Equity Securities - - - - - - 36,644 -
Corporate Bonds and Notes 1,999 5.00 166 10.14 2,489 6.08 - -
U.S. Treasury Notes - - 2,544 7.01 - - - -
Mortgaged-Backed Securities
and Collateralized Mortgage
Obligations (b) - - 43,064 5.72 21,071 6.33 633,332 6.76
Held to Maturity Portfolio:
U.S. Treasury Notes 944 3.38 - - - - - -
U.S. Government Agencies 6,867 9.29 28,089 5.64 499 6.40 100 7.98
Corporate Bonds and Notes 301 7.39 1,176 5.87 - - - -
Money Market Preferred Stock 8,000 4.02 - - - - - -
FHL Bank Stock - - - - - - 39,832 6.40
Mortgage-Backed Securities
and Collateralized Mortgage
Obligations (b) 14,061 6.39 61,202 5.80 2,075 7.96 382,845 7.35
- -----------------------------------------------------------------------------------------------------------------------
Totals $60,048 6.75% $151,216 5.79% $26,134 6.11% $1,139,108 6.72%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Adjusted to a fully taxable equivalent basis.
(b) Although the stated final maturity of these obligations are long-term, the
weighted average life generally is much shorter due to prepayments of
principal.
31
<PAGE>
NOTE 4: LOANS RECEIVABLE, NET
- --------------------------------------------------------------------------------
A summary of loans receivable, net follows:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Loans Secured by Mortgages on Real Estate: Amount % Amount %
--------- ---- ---------- ----
<S> <C> <C> <C> <C>
Conventional, VA and FHA 2,484,967 73.4 $2,197,890 79.4
Conventional, VA and FHA Loans Held for Sale 3,933 0.1 4,907 0.2
Residential Participation 14,933 0.4 9,368 0.3
Residential Construction 95,790 2.7 57,928 2.2
Commercial Construction 14,691 0.6 16,241 0.5
Other Commercial 250,427 7.4 178,314 6.4
- ---------------------------------------------------------------------------------------------------------------------
2,864,741 84.6 2,464,648 89.0
Consumer Loans:
Home Equity Credit Lines 253,786 7.5 201,260 7.3
Other Consumer Loans 119,048 3.5 96,103 3.5
Credit Cards 13,675 0.4 - -
- ---------------------------------------------------------------------------------------------------------------------
386,509 11.4 297,363 10.8
Commercial Non-Mortgage Loans 194,755 5.8 68,657 2.5
- ---------------------------------------------------------------------------------------------------------------------
Gross Loans Receivable 3,446,005 101.8 2,830,668 102.3
Less:
Loans in Process 35,924 1.1 24,393 0.9
Allowance for Losses on Loans 41,608 1.2 48,703 1.8
Premiums on Loans Purchased, Deferred Loan
Fees and Unearned Discounts, Net (15,992) (0.5) (9,723) (0.4)
- ---------------------------------------------------------------------------------------------------------------------
Loans Receivable ,Net $3,384,465 100.0% $2,767,295 100.0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Included above at December 31, 1996 and 1995 are $395.7 million and $466.9
million, respectively, of residential and consumer loans acquired from the FDIC
in the First Constitution acquisition ("Reserve Assets"). In 1992, the Bank
established $46.5 million in allowances for loan losses and allowances for loans
held for sale through purchase accounting adjustments to cover its portion of
losses on the Reserve Assets. For four years after the acquisition date, the
FDIC was required to reimburse the Bank quarterly, in an aggregate amount up to
$20 million, for 80% of all net charge-offs on the Reserve Assets and the Bank's
share of net charge-offs and expenses associated with Segregated Assets
("Webster Bank's Shared Losses"), if such charge-offs on the Reserve Assets and
Webster Bank's portion of the Shared Losses collectively exceed $52 million.
Cumulative net charge-offs on Reserve Assets and the Bank's share of net
charge-offs and expenses associated with Segregated Assets from acquisition date
through 1996 totaled $38.0 million. The reporting period for contingent reserve
assets expired at December 31, 1996 and the losses recognized by the Bank on
these assets were less than those required for the FDIC to make additional
payments to the Bank. See Note 4 for a discussion on Segregated Assets.
Webster adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan"
on January 1, 1995 as amended by SFAS No. 118, with no impact on its results of
operations. At December 31, 1996, Webster had $25.7 million of impaired loans,
of which $1.1 million was measured based upon the fair value of the underlying
collateral and $6.4 million was measured based upon the expected future cash
flows of the impaired loans. Of the total impaired loans of $25.7 million, $1.6
million had allowances for losses on impaired loans of $2.5 million. In 1996 and
1995, the average balance of impaired loans was $25.6 million and $27.4 million,
respectively. The allowance for losses on impaired loans was established as a
result of an allocation from the allowance for losses on loans.
Webster's policy with regard to the recognition of interest income on impaired
loans includes an individual assessment of each loan. Interest which is more
than 90 days past due is not accrued. When payments on impaired loans are
received, Webster records interest income on a cash basis or applies the total
payment to principal based on an individual assessment of each loan. Cash basis
interest income recognized on impaired loans for the twelve months ended
December 31, 1996 and 1995 amounted to $74,623 and $50,362, respectively.
32
<PAGE>
A detail of the changes in the allowances for loan losses for the three years
follows:
<TABLE>
<CAPTION>
December 31,
1996
- --------------------------------------------------------------------------------------------------------------
Impaired Total
(IN THOUSANDS) Loans Loans Allowance 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $45,010 $3,693 $48,703 $ 53,575 $ 52,147
Provisions Charged to Operations 8,850 - 8,850 5,625 5,105
Acquired Allowance for Purchased Loans 5,000 - 5,000 12,819
Allocation to General Allowance 4 (4) - - -
Charge-offs (22,635) (1,233) (23,868) (13,643) (19,715)
Recoveries 2,923 - 2,923 3,146 3,219
- --------------------------------------------------------------------------------------------------------------
Balance at End of Period $39,152 $2,456 $41,608 $ 48,703 $ 53,575
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Webster is a party to financial instruments with off-balance sheet risk to meet
the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments included commitments
to extend credit and commitments to sell residential first mortgage loans. These
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized on the balance sheet.
The estimated fair value of commitments to extend credit is considered
insignificant at December 31, 1996 and 1995. Future loan commitments represent
residential mortgage loan commitments, letters of credit, standby letters of
credit, credit card lines and unused home equity credit lines. Rates for these
loans are generally established shortly before closing. The rates on home equity
lines of credit generally vary with the prime rate.
At December 31, 1996 and 1995 residential mortgage commitments outstanding
totaled $51.1 million and $50.0 million, respectively. Residential commitments
outstanding at December 31, 1996 consist of adjustable and fixed-rate mortgages
of $28.9 million and $22.2 million respectively, at rates ranging from 5.9% to
8.3%. Commitments to originate loans generally expire within 60 days. In
addition, at December 31, 1996 and 1995, there were unused portions of home
equity credit lines extended by Webster of $250.9 million and $224.0 million,
respectively. Unused commercial lines of credit, letters of credit, standby
letters of credit and outstanding commercial new loan commitments totaled $103.0
million and $50.3 million at December 31, 1996 and 1995, respectively.
Additionally, unused credit card lines were $33.0 million at December 31, 1996.
There were no credit card lines outstanding at December 31, 1995.
Webster uses forward commitments to sell residential first mortgage loans which
are entered into for the purpose of reducing the market risk associated with
originating loans held for sale. The types of risk that may arise are from the
possible inability of Webster or the other party to fulfill the contracts. At
December 31, 1996 and 1995, Webster had forward commitments to sell loans
totaling $3.7 million and $2.9 million, respectively, at rates between 5.75% and
9.0% and 5.5% and 8.0%, respectively. The estimated fair value of commitments to
sell loans is considered insignificant at December 31, 1996 and 1995.
At December 31, 1996, 1995 and 1994, Webster serviced, for the benefit of
others, mortgage loans aggregating approximately $1,112.0 million, $900.2
million and $1,073.8 million, respectively. During 1996, Webster purchased
mortgage loan servicing assets with a principal balance of $272.5 million and
recorded a mortgage servicing asset of $2.8 million and during 1995, Webster
sold mortgage servicing assets with a principal balance of $290.0 million and
recorded a $2.2 million gain on their sale.
33
<PAGE>
NOTE 5: SEGREGATED ASSETS, NET
- --------------------------------------------------------------------------------
Segregated Assets, Net are certain assets purchased from the FDIC in the First
Constitution acquisition which are subject to a loss-sharing arrangement with
the FDIC:
At December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Commercial Real Estate Loans $ 58,745 $ 79,995
Commercial Loans 6,606 10,439
Multi-Family Real Estate Loans 12,772 16,341
Other Real Estate Owned 406 1,299
- --------------------------------------------------------------------------------
78,529 108,074
Allowance for Segregated Asset Losses (2,859) (3,235)
- --------------------------------------------------------------------------------
Segregated Assets, Net $ 75,670 $104,839
- --------------------------------------------------------------------------------
The FDIC is required to reimburse Webster quarterly through 1997 for 80% of all
net charge-offs (i.e., the excess of charge-offs over recoveries) and certain
permitted expenses related to the Segregated Assets.
During 1998 and 1999, Webster is required to pay quarterly to the FDIC an amount
equal to 80% of the recoveries during such years on Segregated Assets which were
previously charged off after deducting certain permitted expenses related to
those assets. Webster is entitled to retain 20% of such recoveries during the
sixth and seventh years following the First Constitution acquisition and 100%
thereafter.
Upon termination of the seven-year period after the First Constitution
acquisition (December, 1999), if the sum of Webster's 20% share of net
charge-offs on Segregated Assets for the first five years after the acquisition
date plus permitted expenses during the entire seven-year period, less any
recoveries during the sixth and seventh year on Segregated Assets charged off
during the first five years, exceeds $49.2 million, the FDIC is required to pay
Webster an additional 15% of any such excess over $49.2 million at the end of
the seventh year. At December 31, 1996, cumulative net charge-offs and expenses
aggregated $53.9 million. During the first quarter of 1996, Webster began
recording the additional 15% reimbursement as a receivable from the FDIC (See
Note 7). As of December 31, 1996, Webster had received a total of $42.2 million
in reimbursements for net charge-offs and permitted expenses from the FDIC. At
December 31, 1996 and 1995, Webster had allowances for losses of $2.9 million
and $3.2 million, respectively, to cover its portion of Segregated Assets
losses.
A detail of changes in the allowance for Webster's share of losses for
Segregated Assets follows:
At December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,235 $ 4,420
Charge-offs (621) (1,772)
Recoveries 245 587
- --------------------------------------------------------------------------------
Balance at End of Period $ 2,859 $ 3,235
- --------------------------------------------------------------------------------
At December 31, 1996 and 1995, nonperforming Segregated Assets are classified as
follows:
At December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Commercial Real Estate Loans $ 3,337 $ 2,604
Commercial Loans 192 1,203
Multi-Family Real Estate Loans 495 1,432
Foreclosed Property:
Commercial Real Estate 269 648
Multi-Family Real Estate 138 651
- --------------------------------------------------------------------------------
Total $ 4,431 $6,538
- --------------------------------------------------------------------------------
34
<PAGE>
NOTE 6: PREMISES AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
A summary of premises and equipment, net follows:
December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Land $ 7,918 $ 7,111
Buildings and Improvements 43,168 36,241
Leasehold Improvements 3,878 2,642
Furniture, Fixtures and Equipment 38,406 33,097
- --------------------------------------------------------------------------------
Total Premises and Equipment 93,370 79,091
Accumulated Depreciation and Amortization 36,795 31,933
- --------------------------------------------------------------------------------
Premises and Equipment, Net $ 56,575 $47,158
- --------------------------------------------------------------------------------
At December 31, 1996, Webster was obligated under various non-cancelable
operating leases for properties used as branch office facilities. The leases
contain renewal options and escalation clauses which provide for increased
rental expense based primarily upon increases in real estate taxes over a base
year. Rental expense under leases was $2,914,000, $1,532,000 and $1,797,000 in
1996, 1995 and 1994, respectively. Webster is also entitled to rental income
under various non-cancelable operating leases for properties owned. Rental
income under these leases was $1,949,000, $1,716,000 and $1,510,000 in 1996,
1995 and 1994, respectively.
The following is a schedule of future minimum rental payments and receipts
required under these leases as of December 31, 1996:
(IN THOUSANDS) Payments Receipts
- --------------------------------------------------------------------------------
Years ending December 31:
1997 $2,930 $820
1998 2,551 577
1999 2,104 513
2000 1,589 468
2001 1,373 415
Later years 6,770 948
- --------------------------------------------------------------------------------
Total $17,317 $3,741
- --------------------------------------------------------------------------------
NOTE 7: PREPAID EXPENSES AND OTHER ASSETS
- --------------------------------------------------------------------------------
A summary of prepaid expenses and other assets follows:
December 31,
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Due from FDIC $ 1,420 $ 1,174
Income Taxes Receivable 6,913 1,809
Deferred Tax Asset, Net (Note 14) 18,869 18,113
Mortgage Servicing Rights, Net 5,572 2,933
Other Assets 9,342 7,452
- --------------------------------------------------------------------------------
Prepaid Expenses and Other Assets $ 42,116 $ 31,481
- --------------------------------------------------------------------------------
Of the $1.4 million due from FDIC at December 31, 1996, $926,000 represents
Webster's 80% reimbursement for fourth quarter net charge-offs and expenses on
Segregated Assets which will be received in the first quarter of 1997. The
remaining 474,000 represents the additional 15% reimbursement of charge-offs and
expenses which Webster will receive at the end of the seventh year (See Note 5).
The increase in Income Taxes Receivable is due to the timing of the SAIF
recapitalization in the third quarter of 1996. Other Assets are primarily
comprised of prepaid expenses and various miscellaneous assets.
35
<PAGE>
During the 1995 second quarter, Webster adopted Statement of Financial
Accounting Standard No. 122 ("SFAS 122") "Accounting for Mortgage Servicing
Rights." This statement requires that a mortgage banking entity recognize as a
separate asset the value of the right to service mortgage loans for others,
regardless of how those servicing rights are acquired. Amortization of mortgage
servicing rights was $491,000, $715,000, and $712,000 for the years ended
December 31, 1996, 1995 and 1994 respectively. During 1996 and 1995 Webster
capitalized mortgage servicing assets of $508,000 and $184,000, respectively
related to originating loans and selling them servicing retained. Also, during
1996 Webster purchased mortgage loan servicing assets with a principal balance
of $272.5 million and recorded a mortgage loan servicing asset of $2.8 million.
At December 31, 1996 the allowance for decline in value of mortgage loan
servicing rights was $95,000 and was established through a provision in 1996.
There was no allowance for mortgage servicing rights at December 31, 1995.
NOTE 8: DEPOSITS
- --------------------------------------------------------------------------------
Deposits and weighted average rates are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average % of Average % of
(IN THOUSANDS) Rate Balance Total Rate Balance Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regular Savings 2.39% $ 829,932 20.3% 2.06% $ 657,198 19.0%
NOW Accounts 1.67 387,092 9.4 1.85 274,230 7.9
Demand Deposits - 303,858 7.4 - 160,418 4.6
Money Market Deposit Accounts 3.51 204,605 5.0 5.12 296,636 8.6
- -----------------------------------------------------------------------------------------------------------------------
Certificate Accounts:
Up to 12 months 5.13 1,443,612 35.2 5.29 1,092,661 31.6
13 to 24 months 5.65 584,135 14.3 5.95 634,542 18.3
25 to 36 months 5.74 82,925 2.0 5.53 95,373 2.8
Over 36 months 6.15 263,342 6.4 6.15 247,289 7.2
- -----------------------------------------------------------------------------------------------------------------------
Total Certificates 5.39 2,374,014 57.9 5.61 2,069,865 59.9
- -----------------------------------------------------------------------------------------------------------------------
Total Deposits 3.94% $4,099,501 100.0% 4.33% $3,458,347 100.0%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposits is summarized as follows:
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
Regular Savings $ 19,576 $15,413 $ 16,801
NOW Accounts 5,969 3,739 4,837
Money Market Deposit Accounts 9,839 16,459 12,925
Certificate Accounts 124,114 108,791 78,280
- --------------------------------------------------------------------------------
Total $159,498 $144,402 $112,843
- --------------------------------------------------------------------------------
The following table presents the amount of time deposits in amounts of $100,000
or more at December 31, 1996 maturing during the periods indicated:
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Maturing Amount
- --------------------------------------------------------------------------------
January 1, 1997 to March 31, 1997 $ 52,178
April 1, 1997 to June 30, 1997 57,720
July 1, 1997 to December 31, 1997 50,487
January 1, 1998 and beyond 45,724
- --------------------------------------------------------------------------------
Total $ 206,109
- --------------------------------------------------------------------------------
36
<PAGE>
NOTE 9: FEDERAL HOME LOAN BANK ADVANCES
- --------------------------------------------------------------------------------
Advances payable to the Federal Home Loan Bank of Boston are summarized as
follows:
At December 31,
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Fixed Rate:
- --------------------------------------------------------------------------------
4.82% to 8.61% Due 1996 $ - $367,054
4.82% to 9.80% Due 1997 382,190 69,190
4.99% to 6.48% Due 1998 66,600 16,600
8.56% to 8.86% Due 1999 2,900 2,900
6.31% to 9.16% Due 2000 10,920 10,920
- --------------------------------------------------------------------------------
462,610 466,664
- --------------------------------------------------------------------------------
Variable Rate:
- --------------------------------------------------------------------------------
5.94% to 6.41% Due in 1996 - 13,312
7.32% Due in 1997 47,520 -
- --------------------------------------------------------------------------------
47,520 13,312
- --------------------------------------------------------------------------------
Total Federal Home Loan Bank Advances $ 510,130 $479,976
- --------------------------------------------------------------------------------
The following table sets forth certain information as to the Bank's FHL
Bank short-term borrowings at the dates and for the years indicated.
<TABLE>
<CAPTION>
At December 31,
(Dollars in thousands) 1996 1995 1994 .
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding during the period:
FHL Bank short-term advances $357,769 $361,660 $384,323
Amount outstanding at end of period:
FHL Bank short-term advances 324,565 306,277 343,145
Highest month end balance of short-term FHL Bank borrowings 475,693 493,340 530,338
Weighted average interest rate of short-term FHL Bank
borrowings at end of period 5.73% 5.95% 5.79%
Weighted average interest rate of short-term FHL Bank
borrowings during the period 5.62% 6.02% 4.96%
</TABLE>
At December 31, 1996, the Bank had additional borrowing capacity of over $1.9
billion from the Federal Home Loan Bank, including a line of credit of
approximately $61.3 million. Advances are secured by the Bank's investment in
FHLB stock and a blanket security agreement. This agreement requires the Bank to
maintain as collateral certain qualifying assets, principally mortgage loans and
securities. At December 31, 1996 and 1995, the Bank was in compliance with the
Federal Home Loan Bank collateral requirements.
NOTE 10: OTHER BORROWINGS
- --------------------------------------------------------------------------------
The following table summarizes other borrowings at December 31, 1996 and 1995.
At December 31,
(DOLLARS IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------------
Reverse Repurchase Agreements $ 77,585 $ 126,884
Senior Notes 40,000 40,000
Bank Line of Credit 18,000 -
ESOP Borrowings 2,546 3,130
Other Borrowings 6,496 -
- --------------------------------------------------------------------------------
Total $ 144,627 $ 170,014
- --------------------------------------------------------------------------------
37
<PAGE>
The weighted average rates for other borrowed funds for the 1996 and 1995 year
periods were 6.28% and 7.58%, respectively.
During 1996, reverse repurchase agreement transactions were the primary source
of borrowed funds with the exception of FHLB advance borrowings (See Note 9).
The average balance and weighted average rate for repurchase transactions for
the 1996 year period was $129.2 million and 5.52% as compared to $37.8 million
and 5.91% for the 1995 year period. Securities underlying the reverse repurchase
transactions held as collateral are primarily U.S. Agency securities consisting
of GNMA and FNMA securities. Securities for reverse repurchase agreement
transactions related to Webster's funding operations are delivered to
broker-dealers who arrange the transactions. Webster also enters into reverse
repurchase agreements directly with certain customers.
Information concerning borrowings under reverse repurchase agreements is
summarized below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at Weighted Average Book Value Market Value
December 31, 1996 Maturity Date of Collateral of Collateral
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$77,585 1.2 months $78,491 $79,287
</TABLE>
The following table sets forth certain information as to the Bank's
reverse repurchase agreement short-term borrowings at the dates and for the
years indicated.
<TABLE>
<CAPTION>
At December 31,
(Dollars in thousands) 1996 1995 1994 .
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding during the period:
Reverse repurchase short-term agreements $129,166 $ 37,830 N/A
Amount outstanding at end of period:
Reverse repurchase short-term agreements 77,585 126,884 N/A
Highest month end balance of short-term borrowings 180,704 126,884 N/A
Weighted average interest rate of reverse repurchase
agreement short-term borrowings at end of period 5.51% 5.80% N/A
Weighted average interest rate of repurchase
agreement short-term borrowings during the period 5.52% 5.91% N/A
</TABLE>
There were no reverse repurchase agreements transacted in 1994.
In 1996, Webster also utilized a variable rate line of credit through a
correspondent bank with a credit limit of $20 million. Webster has established
multiple sources of funding and uses the most favorable source under the
circumstances in conjunction with asset and liability management strategies. The
ESOP borrowings are from a correspondent bank at a floating rate based on the
correspondent bank's base (prime) rate and such rates at December 31, 1996 and
1995 were 7.90% and 8.36%, respectively. The estimated fair value of the ESOP
borrowings approximates book value at December 31, 1996 and 1995. The terms of
the loan agreements call for the ESOP to make annual scheduled principal
repayments through the year 2001. Interest is paid quarterly and the borrowings
are secured and guaranteed by Webster. See Note 15 for a description of the
increase in the ESOP's outstanding indebtedness in 1994.
On June 29, 1993, Webster completed a registered offering of $40 million of 8
3/4% Senior Notes due 2000 ("the Senior Notes"). Webster used $18.25 million
from the net proceeds of the offering to redeem the remaining shares of Series A
Stock issued by Webster to the FDIC in connection with the First Constitution
acquisition. The Senior Notes may not be redeemed by Webster prior to maturity
and are not exchangeable for any shares of Webster's common stock.
38
<PAGE>
NOTE 11: INTEREST RATE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Webster utilizes as part of its asset/liability management strategy various
interest rate contracts including short futures positions, interest rate swaps,
interest rate caps and interest rate floors. (See Note 3 for disclosures on
futures positions). Webster utilized interest rate financial instruments to
hedge mismatches in interest rate maturities to reduce exposure to movements in
interest rates. These interest rate financial instruments involve, to varying
degrees, credit risk and market risk. Credit risk is the possibility that a loss
may occur if a counterparty to a transaction fails to perform according to the
terms of the contract. Market risk is the effect of a change in interest rates
or currency rates on the value of the financial instrument. The notional amount
of interest rate financial instruments is the amount upon which interest and
other payments under the contract are based. For interest rate financial
instruments, the notional amount is not exchanged and therefore, the notional
amounts should not be taken as a measure of credit or market risk.
The fair value, which approximates the cost to replace the contract at the
current market rates is generally representative of market risk. Credit risk
related to the interest rate swaps at December 31, 1996 is not significant due
to counterparty ratings and to the fact that Webster is currently paying amounts
that are greater than it is receiving. Credit risk related to interest rate caps
and interest rate floors approximates their fair market value at December 31,
1996. In the event of a default by a counterparty, the cost to Webster, if any,
would be the replacement cost of the contract at the current market rate.
Interest rate financial instruments are summarized as follows:
<TABLE>
<CAPTION>
Fair Market
Notional Amount Value Book Value
December 31, December 31, December 31,
(IN THOUSANDS) 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swap agreements $ 50,000 $150,000 $ (15) $ (4,954) $ - $ -
Interest rate floor agreements 100,000 - 1,602 - 1,482 -
Interest rate cap agreements 225,000 125,000 2,449 173 3,978 816
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 375,000 $275,000 $ 4,036 $ (4,781) $ 5,460 $ 816
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest rate swap agreements involve the exchange of fixed and variable
interest payments based upon notional amounts paid to a maturity date. At
December 31, 1996, Webster had one interest rate swap agreement in which the
corporation received a variable rate based on LIBOR and paid a fixed rate of
6.04%. Total net interest expense paid on swap agreements totaled $903,000 for
the year ended December 31, 1996.
Interest rate cap agreements require cash payments to be made or received only
if current interest rates rise above a predetermined interest rate. At December
31, 1996, Webster had two outstanding cap agreements with an interest rate cap
of 7% and one outstanding interest rate cap agreement with an interest rate cap
of 6.50%. The amount paid for entering into the interest rate cap is amortized
over the life of the agreement as an adjustment to mortgage-backed securities
available for sale interest income. At December 31, 1996, Webster had $4.0
million of unamortized interest rate cap balances and during the 1996 period
amortized $496,000. Similarly, interest-rate floor agreements require cash
payments to be made or received if current interest rates fall below a
predetermined interest rate. At December 31, 1996, Webster had one outstanding
interest rate floor agreement with an interest rate floor of 5.75%. The amount
paid for entering into an interest rate floor agreement is amortized over the
life of the agreement as an adjustment to mortgage-backed securities available
for sale interest income. At December 31, 1996, Webster had $1.5 million of
unamortized floor balances and during the 1996 period amortized $235,000.
39
<PAGE>
NOTE 12: SUMMARY OF ESTIMATED FAIR VALUES
- --------------------------------------------------------------------------------
A summary of estimated fair values consisted of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(IN THOUSANDS) Amount Fair Value AmountFair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Securities (Note 3) $1,376,402 $ 1,372,222 $ 1,374,621 $1,377,961
Residential Loans 2,574,576 2,641,465 2,255,951 2,319,007
Consumer Loans 134,933 135,128 97,210 99,545
Home Equity Loans 255,350 262,581 202,247 206,744
Commercial Loans 461,213 457,414 260,590 260,570
Less Allowance for Loan Losses 41,608 - 48,703 -
Segregated Assets, Net (Note 5) 75,670 75,670 104,839 104,839
Interest rate contracts (Note 11) 5,460 4,036 816 (4,781)
Mortgage Servicing Rights, Net 5,572 6,398 2,933 2,933
Other Assets 283,318 283,318 223,649 217,418
Liabilities:
Deposits Other than Certificates $1,725,487 $ 1,725,487 $ 1,388,482 $1,388,482
Certificate Accounts:
Maturing in Less than One Year 1,445,073 1,445,814 1,494,592 1,505,515
Maturing in One Year and Beyond 928,941 929,483 575,273 588,571
Federal Home Loan Bank Advances 510,130 510,637 479,976 483,149
Other Borrowings 144,627 144,565 170,014 170,890
Other Liabilities 79,927 79,927 75,034 75,034
</TABLE>
In December 1991, the Financial Accounting Standards Board issued Statement No.
107, "Disclosures about Fair Value of Financial Instruments," which requires all
entities to disclose the fair value of financial instruments, including both
assets and liabilities recognized and not recognized in the statement of
financial position, for which it is practicable to estimate fair value.
The carrying amounts for interest-bearing deposits approximate fair value since
they mature in 90 days or less and do not present unanticipated credit concerns.
The fair value of securities (Note 3) is estimated based on prices published in
financial newspapers or quotations received from securities dealers or pricing
services. The fair value of interest rate contracts was based on the amount
Webster would receive or pay to terminate the agreements. Federal Home Loan Bank
stock has no active market and is required to be held by member banks. The
estimated fair value of Federal Home Loan Bank stock equals the carrying amount.
In estimating the fair value of loans, portfolios with similar financial
characteristics were classified by type. Loans were segmented into four generic
types: residential, consumer, home equity and commercial. Residential loans were
further segmented into fifteen and thirty year fixed-rate contractual
maturities, with the remaining classified as variable-rate loans. The fair value
of each category is calculated by discounting scheduled cash flows through
estimated maturity using market discount rates. Adjustments were made to reflect
credit and rate risks inherent in the portfolio.
Due to the loss-sharing arrangement with the FDIC, a yield on Segregated Assets
that approximates a market yield and the allowance for Webster's share of losses
on Segregated Assets, Webster believes that the estimated fair value of
Segregated Assets approximates their carrying amount of $75.7 million and $104.8
million at December 31, 1996 and December 31, 1995, respectively.
The estimated fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, regular savings, NOW accounts and money
market accounts, is equal to the amount payable on demand. The estimated fair
values of certificates of deposit, Federal Home Loan Bank Advances, and other
borrowings were calculated using the discounted cash flow method. The discount
rate is estimated using rates currently offered for deposits and Federal Home
Loan Bank
40
<PAGE>
Advances of similar remaining maturities. The discount rate used for the Senior
Notes was calculated using a spread over Treasury Notes consistent with the
spread used to price the Senior Notes at their inception.
The calculation of fair value estimates of financial instruments is dependent
upon certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or settlement
are not reflected in the amounts disclosed. Fair value estimates are not
intended to reflect the liquidation value of the financial instruments.
NOTE 13: FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET AND ALLOWANCE FOR
LOSSES ON FORECLOSED PROPERTIES
- --------------------------------------------------------------------------------
Foreclosed property expenses and provisions, net are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Gain) Loss on Sale of Foreclosed Properties
Acquired in Settlement of Loans, Net $ (1,360) $ (1,038) $ 372
Provision for Losses on Foreclosed
Properties 1,846 3,500 5,317
Rental Income (262) (782) (1,260)
Foreclosed Property Expenses 3,165 4,121 5,424
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 3,389 $ 5,801 $ 9,853
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Webster has an allowance for losses on foreclosed properties. A detail of the
changes in the allowance follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 1,221 $ 2,943 $ 2,076
Provisions 1,846 3,500 5,317
Losses Charged to Allowance (2,471) (5,504) (11,802)
Recoveries Credited to Allowance 144 282 852
Additions to Allowance for Acquired
Foreclosed Properties - - 6,500
- ---------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 740 $ 1,221 $ 2,943
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In connection with the Bristol acquisition in 1994, a purchase accounting
adjustment of $5.9 million for the allowance for losses on foreclosed properties
was recorded at the time of the acquisition and added to Bristol's existing
allowance of $600,000 to reflect an accelerated disposition strategy.
41
<PAGE>
NOTE 14: INCOME TAXES
- --------------------------------------------------------------------------------
Charges for income taxes in the Consolidated Statements of Income are comprised
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 16,857 $ 14,242 $ 11,031
State 3,539 4,589 3,909
- ---------------------------------------------------------------------------------------------------------------------------
20,396 18,831 14,940
Deferred:
Federal (1,779) (4,385) (4,698)
State 1,773 (1,180) (1,472)
- ---------------------------------------------------------------------------------------------------------------------------
(6) (5,565) (6,170)
Total:
Federal 15,078 9,857 6,333
State 5,312 3,409 2,437
- ---------------------------------------------------------------------------------------------------------------------------
$ 20,390 $ 13,266 $ 8,770
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Income tax expense of $20.4 million, $13.3 million and $8.8 million for the
years ended December 31, 1996, 1995 and 1994, respectively, differed from the
amounts computed by applying the Federal income tax rate of 35% in 1996, 1995
and 1994 to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "Expected" Tax Expense $ 19,207 $ 13,720 $ 11,608
Reduction in Income Taxes Resulting From:
Dividends Received Deduction (433) (273) (202)
State Income Taxes, Net of Federal Income
Tax Benefit, Including Change in
Valuation Allowance and Rate 3,469 2,229 1,598
Adjustment to Deferred Tax Assets and Liabilities:
Change in Federal Tax Rate - - (265)
Change in Valuation Allowance (Federal) (2,000) (2,294) (3,781)
Other, Net 147 (116) (188)
- ----------------------------------------------------------------------------------------------------------------------------
Income Taxes $ 20,390 $ 13,266 $ 8,770
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 Webster had a net deferred tax asset of $18.1 million. In
order to fully realize the net deferred tax asset, Webster must either incur tax
losses to carryback or generate future taxable income. Based on Webster's
historical and current taxable earnings, management believes it is more likely
than not that Webster will realize the net deferred tax asset. There can be no
assurance, however, that Webster will generate taxable earnings or a specific
level of continuing taxable earnings in the future.
Webster's deferred tax valuation allowance is principally for a portion of
temporary differences that may be subject to review by taxing authorities. The
net decreases in the valuation allowance in 1996, 1995 and 1994 were due to
favorable reassessments of known risks and resulted in reductions of income tax
expense in these years.
42
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below.
(IN THOUSANDS)
<TABLE>
<CAPTION>
Deferred Tax Assets: December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loan Loss Allowances & Other Allowances, Net $ 21,012 $ 25,426
Accrued Compensation and Pensions 3,488 2,984
Tax Loss Carry Forwards - 2,025
Intangibles 3,669 3,256
Other 2,236 2,817
- ---------------------------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 30,405 36,508
Less Valuation Allowance (6,207) (8,207)
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Tax Asset after Valuation Allowance 24,198 28,301
- ---------------------------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Loan Discount 2,815 6,317
Plant and Equipment, Principally due to
Differences in Depreciation 194 403
Unrealized Gain on Securities 1,975 1,950
Other 1,120 1,518
- ---------------------------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 6,104 10,188
- ---------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 18,094 $ 18,113
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15: SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity increased $1.3 million to $292.1 million at December 31,
1996 from $290.8 million at December 31, 1995. Included in the change in
shareholders' equity from 1995 to 1996 was the repurchase of 804,900 shares of
common stock in 1996 as part of two share repurchase programs. See Consolidated
Statements of Shareholders' Equity.
On January 31, 1997, Webster acquired Derby (see Note 2). In connection with the
acquisition, Webster issued 3,501,370 shares of its common stock for all the
outstanding shares of Derby common stock. Under the terms of the agreement,
Derby shareholders received 1.14158 shares of Webster common stock in a tax free
exchange for each of their shares of Derby common stock.
In December 1995, Webster completed the sale of 1,249,600 shares of common stock
in an underwritten public offering raising $32.1 million of additional capital,
net of expenses, which was invested in the Bank to facilitate its completion of
the Shawmut Transaction and to have the Bank remain well capitalized for
regulatory purposes.
On November 1, 1995, Webster acquired Shelton (See Note 2). In connection with
the acquisition, Webster issued 1,292,549 shares of its common stock for all the
outstanding shares of Shelton common stock. Under the terms of the agreement,
Shelton shareholders received .92 of a share of Webster common stock in a tax
free exchange for each of their shares of Shelton common stock.
On December 16, 1994, Webster acquired Shoreline (See Note 2). In connection
with the acquisition, Webster issued 266,500 shares of its common stock for all
533,000 outstanding shares of Shoreline common stock, based on an exchange ratio
of 1 share of Webster's common stock for 2 shares of Shoreline's common stock.
On March 3, 1994, Webster completed the sale of 1,150,000 shares of its common
stock in subscription and underwritten public offerings that were conducted in
connection with the Bristol acquisition. Of the 1,150,000 shares sold in the
subscription and public offerings, 100,000 shares were purchased by Webster
Bank's ESOP. The ESOP's outstanding loan balance was increased by approximately
$2.1 million in connection with the purchase.
On December 30, 1992, through a registered offering, Webster issued 250,000
shares of Series B 7 1/2% Cumulative Convertible Preferred Stock (the "Series B
Stock") for $25 million. Webster used 50% of the net proceeds of $23.5 million
from this equity offering to redeem $11.75 million of its Series A Preferred
Stock issued to the FDIC in connection with
43
<PAGE>
the purchase of certain assets and liabilities of First Constitution Bank in
October 1992. On June 29, 1993, Webster completed a registered offering of $40
million aggregate principal amount of 8 3/4% Senior Notes due 2000. Webster used
$18.25 million of the proceeds from this offering to redeem the remaining shares
of its Series A Preferred Stock. During 1996 and 1995 holders of the Series B
Stock converted 73,785 shares and 260 shares into 423,525 shares and 1,492
shares, respectively of Webster's common stock. The remaining 98,084 shares of
Series B Stock converted into 563,002 shares of common stock in January 1997.
Retained earnings at December 31, 1996 included $22.5 million of earnings of the
Bank appropriated to bad debt reserves (pre-1988), which were deducted for
federal income tax purposes. Tax law changes were enacted in August 1996 to
eliminate the "thrift bad debt" method of calculating bad debt deductions for
tax years after 1995 and to impose a requirement to recapture into taxable
income (over a six-year period) all bad debt reserves accumulated after 1987.
Since Webster previously recorded a deferred tax liability with respect to these
post-1987 reserves, its total income tax expense for financial reporting
purposes will not be affected by the recapture requirement. The tax law changes
also provide that taxes associated with the recapture of pre-1988 bad debt
reserves would become payable under more limited circumstances than under prior
law. Under the tax laws, as amended, events that would result in recapture of
the pre-1988 bad debt reserves include stock and cash distributions to the
holding company from the Bank in excess of specified amounts. Webster does not
expect such reserves to be recaptured into taxable income.
Applicable OTS regulations require federal savings banks such as the Bank, to
satisfy certain minimum capital requirements, including a leverage capital
requirement (expressed as a ratio of core or Tier 1 capital to adjusted total
assets) and risk-based capital requirements (expressed as a ratio of core or
Tier 1 capital and total capital to total risk-weighted assets). As an OTS
regulated institution, Webster Bank is also subject to a minimum tangible
capital requirement (expressed as a ratio of tangible capital to adjusted total
assets). At December 31, 1996 the Bank exceeded all OTS regulatory capital
requirements and met the FDIC requirements for a "well capitalized" institution.
In order to be considered "well capitalized" a depository institution must have
a ratio of Tier 1 capital to adjusted total assets of 5%, a ratio of Tier 1
capital to risk-weighted assets of 6% and a ratio of total capital to
risk-weighted assets of 10%. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that if undertaken, could have a direct material effect on Webster's
Consolidated Financial Statements. Webster's capital amounts and classifications
are also subject to qualitative judgements by the OTS about components, risk
weightings, and other factors. At December 31, 1996, the Bank was in full
compliance with all applicable capital requirements as detailed below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
OTS
Minimum Capital Well
Actual Requirements Capitalized
(DOLLARS IN THOUSANDS) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk-Weighted Assets) $321,134 11.84% $217,005 8.00% $271,257 10.00%
Tier 1 Capital (to Risk-Weighted Assets) $288,066 10.62% $108,503 4.00% $162,754 6.00%
Tier 1 Capital (to Adjusted Total Assets) $288,066 5.68% $152,175 3.00% $253,626 5.00%
Tangible Capital (to Adjusted Total Assets) $283,665 5.59% $ 76,088 1.50% No Requirement
As of December 31, 1995
Total Capital (to Risk-Weighted Assets) $292,302 12.82% $182,453 8.00% $228,066 10.00%
Tier 1 Capital (to Risk-Weighted Assets) $265,666 11.65% $ 91,226 4.00% $136,840 6.00%
Tier 1 Capital (to Adjusted Total Assets) $265,666 6.02% $132,322 3.00% $220,537 5.00%
Tangible Capital (to Adjusted Total Assets) $260,452 5.90% $ 66,161 1.50% No Requirement
</TABLE>
At the time of the respective conversions of the Bank and certain predecessors
from mutual to stock form, each institution established a liquidation account
for the benefit of eligible depositors who continue to maintain their deposit
accounts after conversion. In the event of a complete liquidation of the Bank,
each eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account. The Banks may not declare or pay a cash dividend
on or repurchase any of its capital stock if the effect thereof would cause its
regulatory capital to be reduced below applicable regulatory capital
requirements or the amount required for its liquidation accounts.
44
<PAGE>
The OTS capital distribution regulations establish three tiers of institutions
for purposes of determining the level of dividends that can be paid. Since the
Bank's capital levels exceeded all fully phased-in OTS capital requirements at
December 31, 1996, it is considered a Tier 1 Institution. Tier 1 Institutions
generally are able to pay dividends up to an amount equal to one-half of their
excess capital at the beginning of the year plus all income for the calendar
year. In accordance with the OTS capital distribution regulations, the Bank must
provide a 30 day notice prior to the payment of any dividends to Webster. As of
December 31, 1996, the Bank had $74.8 million available for the payment of
dividends under the OTS capital distribution regulations. The Bank has paid
dividends to Webster amounting to $20.8 million and $13.1 million for 1996 and
1995, respectively. Under the prompt corrective action regulations adopted by
the OTS and the FDIC, the Bank is precluded from paying any dividends if such
action would cause it to fail to comply with applicable minimum capital
requirements.
The Bank has an ESOP that invests in Webster common stock as discussed in Notes
10 and 16. Since Webster has secured and guaranteed the ESOP debt, the
outstanding ESOP loan balance is shown as a reduction of shareholders' equity.
Shareholders' equity is increased by the amount of principal repayments on the
ESOP loan. Principal repayments totaled $583,000, $545,000 and $384,000 during
the years ended December 31, 1996, 1995 and 1994, respectively.
On February 6, 1996, Webster's Board of Directors adopted a stockholders' rights
plan in which preferred stock purchase rights have been granted as a dividend at
the rate of one right for each share of common stock held of record as of the
close of business on February 16, 1996. The plan is designed to protect all
Webster shareholders against hostile acquirers who may seek to take advantage of
Webster and its shareholders through coercive or unfair tactics aimed at gaining
control of Webster without paying all shareholders a fair price. Each right
initially would entitle the holder thereof to purchase under certain
circumstances one 1/1,000th of a share of a new Series C Preferred Stock at an
exercise price of $100 per share. The rights will expire in February 2006. The
rights will be exercisable only if a person or group in the future becomes the
beneficial owner of 15% or more of the common stock, or announces a tender or
exchange offer which would result in its ownership of 15% or more of the common
stock, or if the Board declares any person or group to be an "adverse person"
upon a determination that such person or group has acquired beneficial ownership
of 10% or more and that such ownership is not in the best interests of the
company.
NOTE 16: EMPLOYEE BENEFIT AND STOCK OPTION PLANS
- --------------------------------------------------------------------------------
The Bank maintains a noncontributory pension plan for employees who meet certain
minimum service and age requirements. Pensions are based upon earnings of
covered employees during the period of credited service. The Bank also has an
employee investment plan under section 401(k) of the Internal Revenue Code.
Under the savings plan the Bank will match $.50 for every $1.00 of the
employee's contribution up to 6% of the employee's annual compensation.
Operations were charged with $830,000, $530,000 and $474,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, for contributions to the
investment plan.
The Bank's ESOP, which is noncontributory by employees, is designed to invest,
on behalf of employees of the Bank who meet certain minimum age and service
requirements, in Webster common stock. The Bank may make contributions to the
ESOP in such amounts as the board of directors may determine on an annual basis.
To the extent that the Bank's contributions are used to repay the ESOP loan,
Webster common stock is allocated to the accounts of participants in the ESOP.
Stock and other amounts allocated to a participant's account become fully vested
after the participant has completed five years of service under the ESOP.
Operations were charged with $847,000, $848,000 and $384,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, for contributions to the ESOP.
The 1996 ESOP charge includes $583,525 for principal payments and $77,283 of
interest payments (net of $133,052 of dividends on unallocated ESOP shares) and
$315,266 of compensation expense recorded as required under the Accounting
Standards Executive Committee's Statement of Position 93-6, "Employers
Accounting for Stock Ownership Plans."
45
<PAGE>
The following table sets forth the funded status of the Bank's pension plan and
amounts recognized in Webster's Consolidated Statements of Condition as of
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 13,698 $ 12,061
Nonvested benefit obligation 1,293 762
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 14,991 12,823
Effect of projected future compensation levels 3,023 3,704
- ---------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date 18,014 16,527
Plan assets at fair value, primarily listed
stocks and U.S. bonds 16,656 15,583
- ---------------------------------------------------------------------------------------------------------------------------
Excess (Deficiency) of plan assets over
benefit obligation (1,358) (944)
Items not yet recognized in earnings:
Unrecognized prior service cost (2,221) (1,913)
Unrecognized net gain (loss) 1,344 1,473
Unrecognized net asset at January 1, 1987
being recognized over 20.9 years (204) (223)
- ---------------------------------------------------------------------------------------------------------------------------
Unfunded Accrued Pension Benefit (Liability) $ (2,439) $(1,607)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate, rate of increase of future compensation
levels and the expected long-term rate of return on assets used in determining
the actuarial present value of the projected benefit obligation were 7.25%, 5.0%
and 9.0% for 1996 and 1995.
Net pension expense for 1996, 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the period $ 1,643 $ 1,047 $ 1,322
Interest cost on projected benefit obligations 1,221 1,046 767
Return on plan assets (1,764) (2,807) 584
Amortization and deferral 244 1,510 (1,597)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,344 $ 796 $ 1,076
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of postretirement benefits cost were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 224 $ 212 $ 300
Interest cost 227 226 226
Amortization 78 68 102
Immediate recognition of net transition obligation - - 822
- ---------------------------------------------------------------------------------------------------------------------------
Net Periodic Postretirement Benefit Cost $ 529 $ 506 $ 1,450
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
The following table sets forth the status of Webster's accumulated
postretirement benefit obligation:
<TABLE>
<CAPTION>
December 31,
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $(3,375) $(3,254)
Unrecognized transition obligation 1,707 1,812
Unrecognized net (loss) gain (998) (784)
- ----------------------------------------------------------------------------------------
Unfunded Accrued Postretirement Benefit (Liability) $(2,666) $(2,226)
- ----------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%. The assumed weighted average health
care cost trend rate was 4.25% for 1996. An increase of 1% in the assumed health
care cost trend rate would result in an increase in the accumulated benefit
obligation by $33,000.
Webster maintains stock option plans (the "Option Plans") for the benefit of its
directors and officers. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 123 ("SFAS No. 123")
"Accounting for Stock-Based Compensation." This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
Under the provisions of this statement, Webster has elected to continue to
measure compensation for its option plans using the accounting prescribed by APB
Opinion No. 25 "Accounting for Stock Issued to Employees." Disclosure
information requirements are effective for financial statements for fiscal years
beginning after December 15, 1995, or for an earlier fiscal year for which this
statement is initially adopted for recognizing compensation cost. Pro forma
disclosures required for entities that elect to continue to measure compensation
cost using APB Opinion No. 25 must include the effects of all awards granted in
fiscal years that begin after December 31, 1994.
At December 31, 1996, Webster had multiple-fixed stock option based compensation
plans, which are described below. Webster applies the provisions of APB Opinion
No. 25 and related interpretations in accounting for these plans. Accordingly,
no compensation cost has been recognized for its fixed stock option plans in the
Consolidated Statements of Income. Had compensation cost for Webster's stock
option based compensation plans been determined consistent with SFAS No. 123;
Webster's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net Income:
As Reported $ 34,487 $ 25,933
Pro Forma $ 33,873 $ 24,657
Primary Earnings Per Share:
As Reported $ 2.82 $ 2.35
Pro Forma $ 2.77 $ 2.23
Fully Diluted Earnings Per Share:
As Reported $ 2.70 $ 2.25
Pro Forma $ 2.65 $ 2.14
</TABLE>
During the initial phase-in period, the effects of applying this Statement for
providing pro forma disclosures are not likely to be representative of the
effects on reported net income and earnings per share for future years. This is
due to the fact that awards may vest over several years and stock options may be
granted each year.
Webster's four fixed stock option plans were established in 1994, 1992, 1986 and
1985. The 1994 and 1985 plans were acquired through bank acquisitions. Under
these plans, the number of shares that may be granted are 286,650, 780,500,
385,085 and 312,069, respectively, after having been adjusted for a 10% stock
dividend that occurred in June 1993 that affected the number of shares under the
plans and amendments to the 1992 plan. The 1992 plan was amended in April 1994
and 1996 to increase shares under the Plan by an additional 235,000 and 375,000
shares, respectively. Stock appreciation rights (SARS) have been granted in
tandem with stock options under the Company's 1985 option plan. In accordance
with generally accepted accounting principles, compensation is required for SARS
when the market value
47
<PAGE>
exceeds the option exercise price. During the years ended December 31, 1996,
1995 and 1994, the number of SARS exercised were: 1,102, 19,634 and 8,429,
respectively, which resulted in payments to employees aggregating $18,800,
$177,900 and $121,700, respectively. These amounts are included in compensation
expense in the accompanying Consolidated Statements of Income for the respective
years then ended. Under the terms of the plans, the exercise price of each
option granted equals the market price of the Company's stock on the date of
grant and each option has a maximum contractual life of ten years. Tables that
follow provide disclosures and information required under SFAS No. 123 and
summarizes stock compensation activity for the years 1996, 1995 and 1994 for
which Consolidated Statements of Income are presented.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option-Pricing Model with the following weighted average
assumptions used for grants issued during 1996 and 1995: expected option term 10
years, expected dividend yield 1.91%, expected volatility 21.0%, expected
forfeiture rate 1.14%, and weighted average risk-free interest rate of 6.42%.
A summary of the status of Webster's fixed stock option plans at December 31,
1996, 1995, and 1994 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding at Beginning of Year 1,050,249 $17.28 831,497 $ 14.48 724,239 $ 12.29
Granted 171,354 32.15 303,411 23.51 247,392 19.72
Exercised (542,849) 15.89 (77,759) 12.50 (137,034) 11.64
Forfeited/Canceled (8,250) 22.68 (6,900) 18.75 (3,100) 18.99
- ---------------------------------------------------------------------------------------------------------------------------
Options Outstanding at End of Year 670,504 $22.16 1,050,249 17.28 831,497 $ 14.59
- ---------------------------------------------------------------------------------------------------------------------------
Options Exercisable at Year End 357,404 827,699 705,147
Weighted Average Per Share Fair Value
of Options Granted During the Year $ 12.05 $ 10.13 N/A
</TABLE>
The following table summarizes information about Webster's fixed stock option
plans for options granted that are outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding at December 31, 1996 Options Exercisable at December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (In Years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$4.55-$9.77 61,145 3.2 $ 7.91 61,145 $ 7.91
$10.91-$20.24 278,056 6.7 $17.72 201,906 $ 17.51
$20.50-$24.75 119,190 7.6 $21.55 67,390 $ 21.79
$25.25-$28.13 115,613 9.0 $27.64 26,963 $ 26.70
$34.25-$38.19 96,500 10.0 $37.90 - -
- ---------------------------------------------------------------------------------------------------------------------------
Totals 670,504 7.4 $22.12 357,404 $17.34
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Webster also has two restricted stock plans consisting of a Director Fee
Retainer Restricted Stock Plan, which was established in 1996 and a Restricted
Stock Plan, which was established in 1992. Under the Director Fee Restricted
Stock Plan, a total of 3,120 shares were issued to ten directors with each
receiving 312 shares. These restricted shares were reissued from treasury stock
and the cost was measured as of the grant date using the fair market value of
Webster's stock as of the grant date. Under the Restricted Stock Plan, there
were no shares granted in 1996 or 1995 and 8,944 shares granted in 1994. The
cost of all restricted shares are amortized to compensation expense over the
contractual service period and such expense is reflected in Webster's
Consolidated Statements of Income.
48
<PAGE>
NOTE 17: NON-RECURRING EXPENSES
- --------------------------------------------------------------------------------
A summary of non-recurring expenses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SAIF Recapitalization Expense $ 4,730 $ - $ -
Non-recurring Acquisition Expenses:
Shawmut Transaction 500 1,000 -
Shelton - 3,271 -
Shoreline - - $ 700
Name Change and Subsidiary Merger Expense - 2,100 -
Core Deposit Intangible Writedown - - 5,000
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 5,230 $ 6,371 $5,700
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 18: SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On January 30, 1997, Webster completed the sale of $100 million of Webster
Capital Trust I Capital Securities. Webster Capital Trust I is a business trust
formed for the purpose of issuing capital securities and investing the proceeds
in subordinated debentures, due 2027, issued by Webster. Interest payments on
the debentures are tax deductible by Webster. The securities have an annual rate
of 9.36%, payable semiannually, beginning July 29, 1997. Webster will use the
capital for general corporate purposes.
NOTE 19: LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Webster is party to various legal proceedings normally incident to the kind of
business conducted. Management believes that no material liability will result
from such proceedings.
NOTE 20: PARENT COMPANY CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Statements of Condition for 1996 and 1995 and the Statements of Income and
Cash Flows for the three-year period ended December 31, 1996 (parent only) are
presented below.
<TABLE>
<CAPTION>
Statements of Condition
December 31,
(IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Depository Institutions $ 2,248 $ 1,252
Securities Available for Sale 18,765 61,400
Investment in Subsidiaries 330,132 271,319
Due from Subsidiaries 117 -
Other Assets 2,251 3,189
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 353,513 $ 337,160
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Senior Notes due 2000 $ 40,000 $ 40,000
Line of Credit 18,400 -
ESOP Borrowings 2,546 3,130
Due to Subsidiaries - 2,149
Other Liabilities 474 1,099
Shareholders' Equity 292,093 290,782
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 353,513 $ 337,160
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from Subsidiary $ 20,826 $ 13,072 $ 5,163
Interest on Securities 984 1,148 1,003
Gain (Loss) on Sale of Securities 1,520 503 (413)
Other Noninterest Income 2 2 -
Interest Expense on Borrowings 3,780 3,660 3,703
Other Noninterest Expenses 2,950 3,601 1,740
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and
Equity in Undistributed Earnings of Subsidiaries 16,602 7,464 310
Income Tax Benefit 1,582 2,470 2,064
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed
Earnings of Subsidiaries 18,184 9,934 2,374
Equity in Undistributed Earnings of Subsidiaries 16,303 15,999 22,021
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 34,487 25,933 24,395
Preferred Stock Dividends 1,149 1,296 1,716
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 33,338 $ 24,637 $ 22,679
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Cash Flows
Years Ended December 31,
(IN THOUSANDS) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 34,487 $ 25,933 $ 24,395
Decrease (Increase) in Interest Receivable 42 (16) (15)
Decrease in Other Assets 117 2,048 6,666
(Gains) Losses on Sale of Securities (1,520) (503) 413
Equity in Undistributed Earnings of Subsidiaries (16,303) (15,999) (22,021)
Other, Net 3,402 1,964 2,329
------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 20,225 13,427 11,767
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of Securities Available for Sale (35,076) (45,168) (2,369)
Sales of Securities Available for Sale 76,465 4,445 8,400
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 41,389 (40,723) 6,031
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of Borrowings (7,000) - (1,450)
Proceeds from Borrowings 25,400 - -
Net Proceeds from Sale of Common Stock - 32,112 21,923
Cash Dividends to Shareholders (7,407) (5,714) (4,724)
Common Stock Repurchases (27,611) - -
Investment in Subsidiary (44,000) - (32,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (60,618) 26,398 (16,251)
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents 996 (898) 1,547
Cash and Cash Equivalents at Beginning of Year 1,252 2,150 603
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,248 $ 1,252 $ 2,150
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
NOTE 21: SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Selected quarterly data for 1996 and 1995 follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(IN THOUSANDS, EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1996:
Interest Income $ 84,179 $ 89,292 $ 91,058 $ 91,408
Interest Expense 49,302 49,620 50,811 51,260
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 34,877 39,672 40,247 40,148
Provision for Loan Losses 1,650 2,050 2,250 2,900
Gain on Sale of Loans and Securities, Net 697 956 827 2,456
Other Noninterest Income 5,037 6,539 6,687 6,325
Noninterest Expenses 26,679 29,493 34,338 30,231
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 12,282 15,624 11,173 15,798
Income Taxes 4,594 5,758 3,973 6,065
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 7,688 9,866 7,200 9,733
Preferred Stock Dividends 323 321 283 222
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 7,365 $ 9,545 $ 6,917 $ 9,511
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Primary $ 0.62 $ 0.80 $ 0.58 $ 0.82
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted $ 0.60 $ 0.77 $ 0.56 $ 0.78
- ---------------------------------------------------------------------------------------------------------------------------
1995:
Interest Income $ 71,538 $ 75,564 $ 78,607 $ 79,691
Interest Expense 40,578 45,008 48,393 49,129
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 30,960 30,556 30,214 30,562
Provision for Loan Losses 985 1,055 1,180 2,405
Gain on Sale of Loans and Securities, Net 220 945 1,567 2,536
Other Noninterest Income 5,113 4,911 4,950 5,417
Noninterest Expenses 24,865 25,230 23,783 29,249
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 10,443 10,127 11,768 6,861
Income Taxes 3,591 3,282 4,147 2,246
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 6,852 6,845 7,621 4,615
Preferred Stock Dividends 324 324 324 324
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 6,528 $ 6,521 $ 7,297 $ 4,291
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Primary $ 0.63 $ 0.63 $ 0.70 $ 0.39
- ---------------------------------------------------------------------------------------------------------------------------
Fully Diluted $ 0.60 $ 0.60 $ 0.67 $ 0.38
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
All periods presented have been retroactively restated to reflect the inclusion
of the results of Derby and Shelton, which were acquired on January 31, 1997 and
November 1, 1995, respectively, and were accounted for using the pooling of
interests method.
51
<PAGE>
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
To Our Shareholders:
The management of Webster is responsible for the integrity and objectivity of
the financial and operating information contained in this annual report,
including the consolidated financial statements covered by the Report of
Independent Auditors. These statements were prepared in conformity with
generally accepted accounting principles and include amounts that are based on
the best estimates and judgements of management.
Webster has a system of internal accounting controls which provides management
with reasonable assurance that transactions are recorded and executed in
accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that financial records are maintained so as to permit
preparation of financial statements in accordance with generally accepted
accounting principles. This system includes formal procedures, an organizational
structure that segregates duties, and a comprehensive program of periodic audits
by the internal auditors. Webster has also instituted policies which require
employees to maintain the highest level of ethical standards.
In addition, the Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with management, the internal auditors and
the independent auditors to review internal accounting controls, audit results
and accounting principles and practices, and annually recommends to the Board of
Directors the selection of independent public accountants.
James C. Smith John V. Brennan
Chairman and Chief Executive Officer Executive Vice President,
Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders of
Webster Financial Corporation
Waterbury, Connecticut
We have previously audited and reported on the consolidated financial statements
of Webster Financial Corporation and subsidiaries as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996,
prior to their restatement for the 1997 pooling of interests. Separate financial
statements of DS Bancor, Inc. included in the restated consolidated financial
statements were audited and reported on separately by other auditors. We also
audited the combination of the accompanying consolidated financial statements as
of December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996, after restatement for the 1997 pooling interests; in
our opinion, such consolidated statements have been properly combined on the
basis described in Note 2 of the notes to the consolidated financial statements.
KPMG Peat Marwick LLP
Hartford, Connecticut
May 16, 1997
52
<PAGE>
Corporate Headquarters
Webster Financial Corporation and Webster Bank
Webster Plaza
Waterbury, CT 06702
(203) 753-2921
Transfer Agent and Registrar
American Stock Transfer & Trust Co.
Shareholder Services
40 Wall Street
New York, NY 10005
1-800-937-5449
Dividend Reinvestment and Stock Purchase Plan
Stockholders wishing to receive a prospectus for the Dividend Reinvestment and
Stock Purchase Plan are invited to write to American Stock Transfer & Trust Co.
at the address listed above, or call 1-800-278-4353.
Stock Listing Information
The common stock of Webster is traded over-the-counter on the NASDAQ National
Market System under the symbol "WBST."
General Inquiries: Contact Lee A. Gagnon (203) 578-2217
Financial Inquiries: Contact John V. Brennan (203) 578-2335
Webster Financial Corporation
Webster Plaza
Waterbury, Connecticut 06702
Form 10K and Other Reports
Our annual report to the Securities and Exchange Commission (Form 10K),
additional copies of this report, and quarterly reports may be obtained free of
charge by contacting Lee A. Gagnon, Executive Vice President and Secretary,
Webster Plaza, Waterbury, CT 06702.
53
<PAGE>
Common Stock Dividends and Market Prices
The following table shows dividends declared and the market price per share by
quarter for 1996 and 1995.
- --------------------------------------------------------------------------------
Common Stock (Per Share)
- --------------------------------------------------------------------------------
Market Price
- --------------------------------------------------------------------------------
Cash
Dividends End of
1996 Declared Low High Period
- --------------------------------------------------------------------------------
Fourth $ .18 $ 33 1/2 $38 1/4 $ 36 3/4
Third .18 28 35 3/4 35 1/4
Second .16 26 3/4 29 3/8 28
First .16 27 1/2 30 1/4 28
1995
- --------------------------------------------------------------------------------
Fourth $ .16 $ 24 1/2 $ 29 1/2 $ 29 1/2
Third .16 23 31 26 1/4
Second .16 21 1/4 26 23 7/8
First .16 18 22 1/4 21 1/4
- --------------------------------------------------------------------------------
Market Makers:
Advest, Inc.
First Albany Corporation
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
Legg Mason Wood Walker Inc.
M.A. Schapiro & Co., Inc.
MacAllister Pitfield MacKay
Mayer & Schweitzer Inc.
Merrill Lynch, Pierce, Fenner & Smith
OTA Limited Partnership
Paine Webber Inc.
Ryan Beck & Co., Inc.
Sandler O'Neill & Partners
Sherwood Securities Corp.
Smith Barney Inc.
Troster Singer Corp.
Tucker Anthony Incorporated
Webster Bank Information
For more information on Webster Bank products and services, call 1-800-325-2424,
or write:
Webster Bank
Telebanking Center
P.O. Box 191
CH420
Waterbury, Connecticut 06720-0191
<PAGE>
DIRECTORS
JAMES C. SMITH, Chairman and Chief Executive Officer
JOEL S. BECKER, Chairman and Chief Executive Officer, Torrington Supply Company
O. JOSEPH BIZZOZERO, Jr., M.D., BCB Medical Group
JOHN J. CRAWFORD, Chairman and Chief Executive Officer, Aristotle Corporation
President and Chief Executive Officer, South Central Connecticut Regional
Water Authority
ROBERT A. FINKENZELLER, President, Eyelet Crafters, Inc.
WALTER R. GRIFFIN, Griffin, Griffin & O'Brien, P.C.
J. GREGORY HICKEY, CPA, Retired Managing Partner of Hartford office of Ernst &
Young
C. MICHAEL JACOBI, President and Chief Executive Officer, Timex Corporation
J. ALLEN KOSOWSKY*, CPA, J. Allen Kosowsky, CPA, P.C.
HAROLD W. SMITH, Chairman Emeritus
Sr. MARGUERITE WAITE, President and Chief Executive Officer, St. Mary's Hospital
SENIOR MANAGEMENT GROUP
JAMES C. SMITH, Chairman and Chief Executive Officer
LEE A. GAGNON, CPA, Executive Vice President, Chief Operating Officer and
Secretary
JOHN V. BRENNAN, CPA, Executive Vice President, Chief Financial Officer and
Treasurer
WILLIAM T. BROMAGE, Executive Vice President, Business Banking
GEORGE M. BROPHY*, Executive Vice President, Information Technologies
JEFFREY N. BROWN*, Executive Vice President, Marketing and Communications
PETER K. MULLIGAN, Executive Vice President, Consumer and Small Business Banking
RENEE P. SEEFRIED*, Senior Vice President, Human Resources
ROSS M. STRICKLAND, Executive Vice President, Mortgage Banking
*Webster Bank only
DS BANCOR, INC. AND SUBSIDIARIES
Consolidated
Financial Statements
YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
CONTENTS
Independent auditor's report
CONSOLIDATED FINANCIAL STATEMENTS
Statements of position.............................................Exhibit A
Statements of earnings.............................................Exhibit B
Statements of stockholders' equity.................................Exhibit C
Statements of cash flows...........................................Exhibit D
Notes to consolidated financial statements
<PAGE>
Independent Auditor's Report
----------------------------
The Board of Directors and Stockholders
DS Bancor, Inc. and Subsidiaries
Derby, Connecticut
We have audited the accompanying consolidated statements of position of DS
Bancor, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of DS Bancor, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the results of their operations, changes in their stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the accompanying consolidated financial statements,
the Company will be merged into Webster Financial Corporation during 1997.
Friedberg, Smith & Co., P.C.
Bridgeport, Connecticut
January 29, 1997, except as
to Note 1, as to which the
date is January 30, 1997
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT A
CONSOLIDATED STATEMENTS OF POSITION
DECEMBER 31, 1996 AND 1995
(Note 1)
1996 1995
---- ----
A S S E T S (Dollar Amounts in Thousands)
- -----------
Cash and Due from Banks (Note 1) $ 14,950 $ 18,425
Federal Funds Sold (Note 1) - 2,305
Securities (Notes 1, 2 and 7)
Trading - 1,171
Available-for-Sale 232,963 241,136
Held-to-Maturity (Fair Value: $67,150 in 1996
and $77,394 in 1995) 68,528 77,881
--------- ---------
301,491 320,188
Loans Held-for-Sale (Notes 1, 3 and 7) 228 2,035
Loans Receivable, Net of Allowances for credit
losses of $8,154 in 1996 and $6,906 in 1995
(Notes 1, 3, 7 and 15) 858,694 873,304
Federal Home Loan Bank of Boston
Stock, At Cost (Note 7) 9,793 9,793
Accrued Income Receivable (Note 1) 7,253 7,746
Bank Premises and Equipment, Net (Notes 1 and 5) 6,790 6,504
Deferred Income Tax Asset, Net (Notes 1 and 9) 4,380 3,293
Foreclosed Assets, Net of Allowances of $22 in
1996 and $230 in 1995 (Notes 1, 4 and 15) 3,502 3,712
Other Assets (Note 13) 6,205 7,178
--------- ---------
TOTAL ASSETS $1,213,286 $1,254,483
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities
Deposits (Note 6):
Non-Interest Bearing $ 40,413 $ 35,999
Interest Bearing 963,212 1,022,146
--------- ---------
1,003,625 1,058,145
Mortgagors' Escrow 10,662 11,193
Advances from Federal Home Loan
Bank of Boston (Note 7) 102,396 96,876
Other Liabilities (Note 8) 6,198 7,460
--------- ---------
Total Liabilities 1,122,881 1,173,674
--------- ---------
Commitments and Contingent
Liabilities (Notes 5 and 10)
Stockholders' Equity (Notes 1, 2, 11, 12 and 19)
Preferred Stock, No Par Value;
Authorized 2,000,000 shares; None Issued - -
Common Stock, Par Value $1.00;
Authorized 6,000,000 shares;
Issued 3,688,773 shares in 1996,
3,368,527 in 1995;
Outstanding 3,189,272 in 1996,
3,029,027 in 1995 3,689 3,368
Additional Paid-In Capital 53,157 44,514
Retained Earnings 45,165 37,014
Net Unrealized (Losses) Gains on Securities
Available-for-Sale, Net of tax effect of
$203 in 1996 and ($301) in 1995 (293) 426
Less: Treasury Stock, At Cost (499,501 shares
in 1996 and 339,500 shares in 1995) (11,313) (4,513)
--------- ---------
Total Stockholders' Equity 90,405 80,809
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,213,286 $1,254,483
========= =========
See notes to consolidated financial statements.
- 3 -
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT B
Page 1 of 2
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Note 1)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollar amounts in thousands,
except per share data)
<S> <C> <C> <C>
Interest Income (Note 1)
Interest and Fees on Loans $ 69,960 $ 65,148 $ 56,802
Taxable Interest on Securities 18,571 20,147 19,528
Dividends on Securities 1,872 1,294 952
-------- -------- --------
Total Interest Income 90,403 86,589 77,282
-------- -------- --------
Interest Expense
Deposits (Note 6) 45,229 46,408 36,102
Borrowed Funds (Note 7) 6,136 5,308 6,810
Less: Penalties on Premature
Time Deposit Withdrawals (117) (141) (94)
-------- -------- --------
Net Interest Expense 51,248 51,575 42,818
-------- -------- --------
Net Interest Income 39,155 35,014 34,464
Provision for Credit Losses (Notes 1 and 3) 4,850 2,525 2,325
-------- -------- --------
Net Interest Income after
Provision for Credit Losses 34,305 32,489 32,139
-------- -------- --------
Non-Interest Income
Service Charges and Other Income (Note 14) 2,892 2,705 2,453
Net Securities Gains (Losses) (Note 2) 1,308 (520) 546
Net (Loss) Gain on Sale of Loans (206) 1,499 102
-------- -------- --------
Total Non-Interest Income, Net 3,994 3,684 3,101
-------- -------- --------
Non-Interest Expense
Salaries and Wages (Note 11) 8,665 8,074 7,820
Employee Benefits (Note 8) 2,627 2,485 2,312
Occupancy (Note 5) 1,932 1,814 2,094
Furniture and Equipment (Note 5) 1,148 1,363 1,039
Foreclosed Asset Expense, Net (Notes 1 and 4) 1,316 1,776 2,904
Other (Note 14) 7,804 8,028 9,441
-------- -------- --------
Total Non-Interest Expense 23,492 23,540 25,610
-------- -------- --------
Income Before Income Taxes 14,807 12,633 9,630
Provision for Income Taxes, Net (Notes 1 and 9) 5,928 5,020 3,920
-------- -------- --------
Net Income $ 8,879 $ 7,613 $ 5,710
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT B
Page 2 of 2
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Note 1)
<TABLE>
<CAPTION>
1996 1995 1994
(Dollar amounts in thousands,
except per share data)
<S> <C> <C> <C>
Weighted Average Number of Shares
Outstanding (Notes 1 and 12)
Primary 3,149,161 3,091,578 3,070,492
Fully Diluted 3,169,765 3,103,253 3,072,672
Earnings Per Share
(Notes 1 and 12)
Primary $ 2.82 $ 2.46 $ 1.86
========== ========== ==========
Fully Diluted $ 2.80 $ 2.45 $ 1.86
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT C
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Note 1)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common Paid-In Retained Gains Treasury Stockholders'
Stock Capital Earnings (Losses) Stock Equity
(Notes 1 and 2)
(Dollar amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1994 $ 2,991 $ 36,007 $ 30,652 $ 1,303 $ (4,513) $ 66,440
Net Income -- -- 5,710 -- -- 5,710
Stock Options Exercised (93,455 Shares) (Notes 11 and 12) 94 1,773 -- -- -- 1,867
Change in Unrealized Gains (Losses), Net -- -- -- (6,880) -- (6,880)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1994 3,085 37,780 36,362 (5,577) (4,513) 67,137
Net Income -- -- 7,613 -- -- 7,613
Stock Dividend Declared on Common Stock (5% - March 15, 1995
and 5% - November 10, 1995) (Note 12) 280 6,658 (6,938) -- -- --
Shares Issued for Fractional Interest -- 12 -- -- -- 12
Cash in Lieu of Fractional Shares -- -- (23) -- -- (23)
Stock Options Exercised (3,062 shares) (Notes 11 and 12) 3 64 -- -- -- 67
Change in Unrealized Gains (Losses), Net -- -- -- 6,003 -- 6,003
-------- -------- -------- -------- -------- --------
Balance - December 31, 1995 3,368 44,514 37,014 426 (4,513) 80,809
Net Income -- -- 8,879 -- -- 8,879
Cash Dividends Paid on Common Stock ($.24 per share) (Note 12) -- -- (728) -- -- (728)
Stock Options Exercised (320,246 shares) (Notes 11 and 12) 321 8,643 -- -- -- 8,964
Treasury Shares Acquired from Exercise
of Stock Options (160,001 shares) (Notes 11 and 12) -- -- -- -- (6,800) (6,800)
Change in Unrealized Gains (Losses), Net -- -- -- (719) -- (719)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1996 $ 3,689 $ 53,157 $ 45,165 ($ 293) ($11,313) $ 90,405
======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT D
Page 1 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Note 1)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income $ 8,879 $ 7,613 $ 5,710
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Credit Losses 4,850 2,525 2,325
Provision for Estimated
Losses on Foreclosed Assets 750 1,500 2,235
Depreciation and Amortization 894 1,111 807
Amortization of Intangible Assets 721 716 718
Net Amortization of Premiums/
Discounts on Securities 668 601 1,208
Net Amortization (Accretion) of
Deferred Loan Fees 149 30 (83)
Benefit for Deferred Income Taxes (583) (271) (340)
Decrease in Deferred Income Tax Asset -- -- 492
Net (Gains) Losses on Securities
Available for Sale (977) 1,059 (625)
Net Loss (Gain) on Sale of Loans 206 (1,499) (102)
Gains on Sales of Foreclosed Assets (299) (120) (93)
Net Decrease (Increase)
in Trading Securities 1,171 (401) (770)
Decrease (Increase) in
Accrued Income Receivable 493 (519) (686)
Net Decrease (Increase) in Other Assets 2,676 (1,555) 2,423
Net (Decrease) Increase in
Other Liabilities (1,262) 2,683 234
Other, Net -- -- 74
--------- --------- ---------
Net Cash Provided by
Operating Activities 18,336 13,473 13,527
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Matured Securities
Available-for-Sale 55,104 54,928 43,553
Proceeds from Sale of Securities
Available-for-Sale 9,124 52,908 39,020
Proceeds from Matured Securities
Held-to-Maturity 12,672 15,178 34,895
Purchase of Securities Available-for-Sale (56,788) (103,541) (54,779)
Purchase of Securities Held-to-Maturity (3,500) (8,500) (73,827)
Purchase of FHLBB Stock -- (894) (877)
Proceeds from Loans Sold to Others 17,506 34,111 12,245
Purchases of Loans from Others (67,440) (97,112) (21,938)
Net Decrease (Increase) in Loans Receivable 57,764 24,527 (47,714)
Bank Premises and Equipment Additions (1,180) (640) (794)
Proceeds from Sale of Foreclosed Assets 3,141 2,170 3,328
Net Decrease in Foreclosed Assets -- -- 44
--------- --------- ---------
Net Cash Provided (Used)
by Investing Activities 26,403 (26,865) (66,844)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
-7-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES EXHIBIT D
Page 2 of 2
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Note 1)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities
Net (Decrease) Increase in Deposits ($54,520) $ 30,399 $ 21,525
Net (Decrease) Increase in
Mortgagors' Escrow (531) (692) 1,409
Net Decrease in Repurchase
Agreements and Other Borrowings -- -- (1,450)
Net Increase (Decrease) in
Short-Term FHLBB Advances 7,174 (26,822) 11,754
Proceeds from Long-Term FHLBB Advances 70,000 54,604 35,000
Repayment of Long-Term FHLBB Advances (71,654) (42,051) (40,600)
Proceeds from Exercise of Stock Options 960 79 1,189
Treasury Stock Acquired for Payment of
Employee Tax Withholding on Stock Options (1,220) -- --
Dividends Paid to Stockholders (728) (23) --
-------- -------- --------
Net Cash (Used) Provided by
Financing Activities (50,519) 15,494 28,827
-------- -------- --------
Net (Decrease) Increase in Cash
and Cash Equivalents (Note 1) (5,780) 2,102 (24,490)
Cash and Cash Equivalents at Beginning of Year 20,730 18,628 43,118
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 14,950 $ 20,730 $ 18,628
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest $ 51,365 $ 51,716 $ 42,912
======== ======== ========
Income Taxes $ 6,900 $ 3,493 $ 3,089
======== ======== ========
Loans Transferred to Foreclosed Assets $ 4,798 $ 3,414 $ 3,208
======== ======== ========
Foreclosed Assets Transferred to Loans $ -- $ -- $ 1,173
======== ======== ========
Loans Transferred to Loans Held-for-Sale $ -- $ -- $ 55,190
======== ======== ========
Bank-Financed Foreclosed Asset Sales $ 1,416 $ 1,908 $ 2,352
======== ======== ========
Income Tax Benefits from Stock
Options Exercised $ 2,424 $ -- $ 678
======== ======== ========
Treasury Stock Acquired in Exchange
for Stock Option Exercises $ 5,580 $ -- $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-8-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------
The following is a summary of significant accounting policies followed
by DS Bancor, Inc. (Company), its wholly owned subsidiary Derby Savings
Bank (Bank) and Derby Financial Services Corp., the Bank's wholly owned
subsidiary, and reflected in the accompanying Consolidated Financial
Statements. The financial statements of Derby Financial Services Corp.
are not significant to either the Bank's or the Consolidated Financial
Statements.
Nature of Operations
The Bank is primarily engaged in the business of providing credit
secured by residential real estate and retail banking services to the
consumer segment of its service area within Connecticut.
Merger Agreement and Subsequent Event. On October 7, 1996, the Company
entered into an Agreement and Plan of Merger (Agreement) with Webster
Financial Corporation (Webster) and Webster Acquisition Corp. (Merger
Sub), its wholly-owned subsidiary. The Agreement provides for the
acquisition of the Company by merging the Merger Sub into the Company
(Merger). Upon the Merger, each outstanding share of Company common
stock will be converted into 1.14158 shares of Webster common stock,
plus cash to be paid in lieu of fractional shares. It is intended that
such conversion will qualify as a tax-free exchange for federal income
tax purposes.
The Agreement has been approved by the board of directors of both
Webster and the Company. On January 30, 1997, the stockholders of the
Company and Webster approved the merger. The transaction has also been
approved by Federal and State regulatory authorities and is subject to
various customary closing conditions, which are expected to take place
sometime in the first quarter of 1997.
-9-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Subsequent Event (continued)
The accompanying Consolidated Financial Statements reflect the
financial position of the Company without considering the effects on
its financial position, if any, of the above noted merger. Such merger
could affect the realization of assets and liquidation of liabilities
as reflected at December 31, 1996, and therefore, the accompanying
Consolidated Financial Statements should be read considering the merger
and the effect it could have on the Company's financial position.
Principles of Consolidation. The accompanying Consolidated Financial
Statements include the accounts of the Company and the Bank. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Basis of Consolidated Financial Statement Presentation. The
accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and general
practice within the banking industry. In preparing the Consolidated
Financial Statements, management is required to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
income and expenses, and disclosure of contingent assets and
liabilities. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the Allowance
for credit losses and the valuation of real estate acquired in
satisfaction of loans (foreclosed assets). Such estimates reflect the
realization that the Bank's foreclosed assets and a substantial portion
of the Bank's mortgage loans receivable are related to real estate
located in markets in Connecticut, which have experienced value
fluctuations in recent years.
-10-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Material Estimates (continued)
While management uses available information to recognize possible
losses on loans and foreclosed assets, including the services of
professional appraisers for significant properties, future adjustments
to the Allowance for credit losses and the Allowance for estimated
losses on foreclosed assets may be necessary based on changes in
economic and real estate market conditions in and around the Bank's
service area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's
Allowance for credit losses and the Allowance for estimated losses on
foreclosed assets and may require the Bank to recognize adjustments
based on their judgment of information available to them at the time of
their examination.
Cash Equivalents. For the purposes of the Consolidated Statements of
Cash Flows, cash equivalents include demand deposits at other financial
institutions and federal funds sold. Generally, federal funds are sold
for one-day periods.
Securities are accounted for in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). This
statement establishes standards of financial accounting and reporting
for investments in equity securities that have readily determinable
fair values and for all investments in debt securities.
SFAS No. 115 requires the classification of investment securities into
categories of Held-to-maturity, Available-for-sale or Trading.
Investments in debt securities are classified as Held-to-maturity only
if there is a positive intent and ability to hold those securities to
maturity. Carrying basis is reflected at amortized cost and adjusted
for any premiums or discounts. Premiums are amortized and discounts are
accreted to interest income using the level yield method. Equity
securities and debt securities not classified as Held-to-maturity are
classified as either Available-for-sale or Trading. Securities
classified as Available-for-sale are carried at estimated fair value,
with net unrealized holding gains and losses reported as a separate
component of Stockholders' Equity, net of applicable income taxes.
Trading securities are carried at fair value with unrealized holding
gains and losses recognized in Earnings.
-11-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Securities (continued)
A decline in the estimated fair value of any security below its
carrying value that is deemed by management to be other than temporary
results in a write-down of the individual security to its estimated
fair value, with the resulting write-down recognized in Earnings as a
realized loss.
Mortgage-backed securities are accounted for in the same manner as debt
securities and consist of certificates that are participation
interests in pools of long-term first mortgage loans.
Gain or loss on dispositions of securities is based on the net proceeds
and adjusted carrying amount of the securities sold using the specific
identification method.
Loans Held-for-sale generally consist of certain first mortgage loans
that management has identified will most likely be sold for reasons of
managing rate risk, liquidity, and/or asset growth, and are reflected
at the lower of aggregate cost or estimated market value. Net
unrealized losses, if any, resulting from market value less than cost
are recognized through a valuation allowance by charges against income.
Loans receivable that the Bank has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reflected at
amortized cost (unpaid principal balances reduced by any partial
charge-offs or specific valuation accounts) net of any net deferred
fees or costs on originated loans or any unamortized premiums or
discounts on purchased loans, and less an Allowance for credit losses.
-12-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Loans Receivable (continued)
Effective January 1, 1995, the Bank implemented the provisions of SFAS
Nos. 114/118, "Accounting by Creditors for Impairment of a Loan." These
statements address the accounting for loans considered impaired and the
recognition of impairment. A loan is considered impaired when, in
management's judgment, current information and events indicate it is
probable that collection of all amounts due according to the
contractual terms of the loan agreement will not be met. The provisions
of these statements are prospective, with any adjustments resulting
from initial application reflected as an adjustment to the provision
for credit losses. The effect on the accompanying Consolidated
Financial Statements of adopting these statements was not significant.
Interest on loans is included in income as earned based on rates
applied to principal amounts outstanding. The accrual of interest
income is generally discontinued and all previously unpaid accrued
interest is reversed when a loan becomes past due 90 days or more as to
contractual payment of principal or interest, or is determined to be
impaired. Interest on purchased loans is adjusted for the accretion of
discounts and the amortization of premiums using the interest method
over the contractual lives of the loans, adjusted for estimated
prepayments.
Loan origination fees and certain direct related costs are deferred,
and the net fee or cost is amortized as an adjustment of loan yield
over the life of the related loan.
Allowances for credit losses have been established by provisions
charged to income and decreased by loans charged off (net of
recoveries). These Allowances represent amounts which, in management's
judgment, are adequate to absorb possible losses on loans that may
become uncollectible based on such factors as the Bank's past loan loss
experience, changes in the nature and volume of the loan portfolio,
current and prospective economic conditions that may affect the
borrowers' ability to pay, overall portfolio quality, and review of
specific problem loans. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
cash flows.
-13-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Loans Receivable (continued)
Effective January 1, 1996, the Bank implemented the provisions of SFAS
No. 122, "Accounting for Mortgage Servicing Rights an Amendment to SFAS
65" (SFAS No. 122). This statement requires recognition as a separate
asset of the value of the rights to service mortgage loans (MSR's) for
others, however those servicing rights are acquired, and assessment for
impairment based on fair value. Capitalized MSR's are amortized to
Non-interest income in proportion to estimated mortgage service fee
revenues. Any impairment adjustments are reflected through a valuation
allowance recognized by a charge or credit to Non-interest income. The
effect on the accompanying Consolidated Financial Statements of
adopting this statement was not significant.
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. The Bank uses primarily accelerated
methods of calculating depreciation. Leasehold improvements are
amortized over the shorter of the estimated service lives or the terms
of the leases. Bank premises are depreciated over a period of between
30 and 40 years; furniture and equipment are depreciated over a period
of between 1 and 20 years. For income tax purposes, the Bank uses the
appropriate depreciation provisions of the Internal Revenue Code.
Foreclosed assets include real estate properties acquired through
foreclosure proceedings or deeds accepted in lieu of foreclosure. These
properties are initially recorded at the lower of the carrying value of
the related loans or the estimated fair value of the real estate
acquired, with any excess of the loan balance over the estimated fair
value of the property charged to the Allowance for credit losses.
Subsequent changes in the net realizable values are reflected by
charges or credits to the Allowance for estimated losses on foreclosed
assets. Costs relating to the subsequent development or improvement of
a property are capitalized when value is increased. All other holding
costs and expenses, net of rental income, if any, are expensed as
incurred.
-14-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Core Deposit Intangible. In connection with the Burritt transaction
(Note 13), the core deposit intangible is being amortized on a straight
line basis over seven years.
Income Taxes. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences,
which are differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The
effect on deferred income tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Provisions for income taxes are computed based on all taxable revenue
and deductible expense items included in the accompanying Consolidated
Statements of Earnings regardless of the period in which such items are
recognized for income tax filing purposes. The Company and its
subsidiaries file consolidated Federal and combined Connecticut income
tax returns.
Primary and fully diluted earnings per share are based on the weighted
average number of common shares outstanding during the period and
additional common shares assumed to be outstanding to reflect the
dilutive effect of common stock equivalents. Stock options and their
equivalents are included in earnings per share computations using the
treasury stock method, which assumes that the options are exercised at
the beginning of the period. Proceeds from such exercise are assumed to
be used to repurchase common stock. The difference between the number
of common shares assumed to have been issued from the exercise of
options and the number of common shares assumed to have been purchased
are added to the weighted average number of common shares outstanding.
-15-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Employee retirement benefits and related deferred assets and
liabilities are accounted for in accordance with SFAS No. 87,
"Employers' Accounting for Pensions" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." Pension
expense and postretirement health care expense are based on actuarial
computations of current and future benefits for employees and retirees.
Stock Options. The Company accounts for stock options in accordance
with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Accordingly, no
compensation cost is recognized at the time options are granted.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123), stock-based compensation awards granted in 1995 and
1996 that continue to be accounted for under APB 25 require pro forma
disclosures of net income and earnings per share as if the fair value
based method of accounting under SFAS No. 123 had been applied (Note
11).
Financial instruments include substantially all of the Bank's financial
assets and liabilities, and certain off-balance-sheet rights and/or
obligations. Such items generally reflect cash and cash equivalents and
contractual rights or obligations to receive cash or other financial
instruments, respectively.
Derivative financial instruments are financial instruments used to
construct a transaction that is derived from and reflects the
underlying value of assets, other instruments or various indices. The
primary purpose of derivative financial instruments is to transfer
price risk associated with the fluctuations in asset values rather than
borrow or lend funds. Such items include forward contracts, interest
rate swap contracts, options and futures, and other financial
instruments with similar characteristics, which include the Bank's
off-balance-sheet financial instruments. All derivative financial
instruments held or issued by the Bank are held or issued for purposes
other than trading.
-16-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------
Financial Instruments (continued)
In accordance with SFAS No. 105, "Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Concentrations of
Credit Risk," SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," and SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments," the Company is
required to disclose information about financial instruments with
off-balance-sheet market or credit risk and concentrations of credit
risk associated with its financial instruments, (Notes 15 and 16), fair
values of its financial instruments (Note 16), and information about
its derivative financial instruments (Note 16), respectively.
Reclassification. Certain reclassifications have been made to the
accompanying 1995 and 1994 Consolidated Financial Statements to conform
to the 1996 presentation.
NOTE 2 - SECURITIES
- -------------------
Securities have been classified in the accompanying Consolidated
Statements of Position according to management's intent. Carrying
amounts and approximate fair values of Securities were as follows:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------
Gross Unrealized Holding
Amortized ------------------------ Fair
Cost Gains Losses Value
-------- -------- -------- --------
(Amounts in thousands)
Available-for-Sale
<S> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $ 9,700 $ 9 $ 71 $ 9,638
Mortgage-Backed Securities 204,930 1,964 2,536 204,358
Other Bonds and Notes 2,167 -- 2 2,165
-------- -------- -------- --------
Total Debt Securities 216,797 1,973 2,609 216,161
Marketable Equities 16,662 181 41 16,802
-------- -------- -------- --------
Total $233,459 $ 2,154 $ 2,650 $232,963
======== ======== ======== ========
</TABLE>
-17-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SECURITIES (continued)
- -------------------------------
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Gross Unrealized Holding
Amortized ------------------------ Fair
Cost Gains Losses Value
------- ------- ------- -----
(Amounts in thousands)
Held-to-Maturity
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $60,528 $ 28 $ 1,406 $59,150
------- ------- ------- -------
Total Debt Securities 60,528 28 1,406 59,150
Money Market
Preferred Stock 8,000 -- -- 8,000
------- ------- ------- -------
Total $68,528 $ 28 $ 1,406 $67,150
======= ======= ======= =======
<CAPTION>
December 31, 1995
---------------------------------------------
Gross Unrealized Holding
Amortized ------------------------ Fair
Cost Gains Losses Value
(Amounts in thousands)
Trading
<S> <C> <C> <C> <C>
Marketable Equities $ 1,148 $ 23 $ -- $ 1,171
======== ======== ======== ========
Available-for-Sale
U.S. Government and
Agency Obligations $ 8,297 $ 109 $ -- $ 8,406
Mortgage-Backed Securities 213,538 2,378 1,826 214,090
Other Bonds and Notes 4,175 3 11 4,167
-------- -------- -------- --------
Total Debt Securities 226,010 2,490 1,837 226,663
Marketable Equities 13,329 307 294 13,342
Mutual Funds 1,070 61 -- 1,131
-------- -------- -------- --------
Total $240,409 $ 2,858 $ 2,131 $241,136
======== ======== ======== ========
</TABLE>
-18-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SECURITIES (continued)
- -------------------------------
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------
Gross Unrealized Holding
Amortized ------------------------ Fair
Cost Gains Losses Value
------- ------- ------- -------
(Amounts in thousands)
Held-to-Maturity
<S> <C> <C> <C> <C>
U.S. Government and
Agency Obligations $ 2,000 $ -- $ -- $ 2,000
Mortgage-Backed Securities 70,881 62 549 70,394
------- ------- ------- -------
Total Debt Securities 72,881 62 549 72,394
Money Market Preferred Stock 5,000 -- -- 5,000
------- ------- ------- -------
Total $77,881 $ 62 $ 549 $77,394
======= ======= ======= =======
</TABLE>
The scheduled contractual maturities of debt securities at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Due in One Year or Less $ 2,000 $ 1,999 $ -- $ --
Due After One Year
Through Five Years 167 166 -- --
Due After Ten Years 9,700 9,638 -- --
Mortgage-Backed
Securities 204,930 204,358 60,528 59,150
-------- -------- -------- --------
Total $216,797 $216,161 $ 60,528 $ 59,150
======== ======== ======== ========
</TABLE>
-19-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SECURITIES (continued)
- -------------------------------
Proceeds from sales of securities, realized gains (losses) from sales
of securities, and unrealized holding gains (losses) on securities were
as follows:
<TABLE>
<CAPTION>
For The Year Ended December 31, 1996
----------------------------------------------
Gross Realized Net
Proceeds -------------------- (Losses)
from Sales Gains Losses Gains
------- ------- ------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Government and
Agency Obligations $ 758 $ 10 $ -- $ 10
Marketable Equities 7,039 903 163 740
Mutual Funds 1,327 227 -- 227
------- ------- ------- -------
Total 9,124 1,140 163 977
Trading
Net Trading
Gains Realized 11,316 366 35 331
------- ------- ------- -------
Total, Net $20,440 $ 1,506 $ 198 $ 1,308
======= ======= ======= =======
</TABLE>
-20-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SECURITIES (continued)
- -------------------------------
For The Year Ended December 31, 1995
-----------------------------------------
Gross realized Net
Proceeds ----------------- (Losses)
from Sales Gains Losses Gains
---------- ------- -------- ---------
(Amounts in thousands)
Available-for-Sale
U.S. Government and
Agency Obligations $27,964 $ - $1,223 ($1,223)
Other Bonds and Notes 17,583 - 555 (555)
------ --- ----- -----
45,547 - 1,778 (1,778)
Marketable Equities 7,361 720 1 719
------ --- ----- -----
Total 52,908 720 1,779 (1,059)
Trading
Net Trading
Gains Realized 5,946 - - 516
Net Trading Unrealized
Holding Gains - - - 23
------ --- ----- ---
Total, Net $58,854 $720 $1,779 ($520)
====== === ===== ===
For The Year Ended December 31, 1994
----------------------------------------
Gross Realized Net
Proceeds ---------------- (Losses)
from Sales Gains Losses Gains
---------- ------- ------- ---------
(Amounts in thousands)
Available-for-Sale
U.S. Government and
Agency Obligations $ 4,020 $ 20 $ - $ 20
Other Bonds and Notes 33,929 455 3 452
------ --- -- ---
37,949 475 3 472
Marketable Equities 1,071 208 55 153
------ --- -- ---
Total 39,020 683 58 625
Trading
Net Trading
Gains Realized 772 - - 69
Net Trading Unrealized
Holding Losses - - - (148)
------ --- -- ---
Total, Net $39,792 $683 $58 $546
====== === == ===
-21-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 2 - SECURITIES (continued)
- -------------------------------
At December 31, 1996, the aggregate amortized cost of securities
pledged as collateral against public funds and treasury tax and loan
deposits was approximately $4.0 million, which approximated fair value.
The aggregate amortized cost and fair value of securities issued by a
single issuer, excluding obligations of the U.S. Government and its
agencies, which exceeded 10% of Stockholders' Equity at December 31
were as follows:
Amortized Fair
Cost Value
------ ------
(Amounts in thousands)
1996
CWBS Inc. $12,515 $12,657
Greenwich Capital Acceptance Inc. 11,236 11,424
Salomon Brothers
Mortgage Securities VII, Inc. 10,250 10,395
------ ------
Total $34,001 $34,476
====== ======
1995
CWBS Inc. $12,696 $12,856
Greenwich Capital Acceptance Inc. 14,311 14,739
Salomon Brothers
Mortgage Securities VII, Inc. 16,507 16,713
------ ------
Total $43,514 $44,308
====== ======
The Financial Accounting Standards Board issued a "Special Report" in
November 1995, "A Guide to Implementation of SFAS No. 115" (Note 1).
This guide provided additional guidance as to the criteria for the
financial statement classifications prescribed in SFAS No. 115. As a
result of this additional guidance, the Bank could reassess the
appropriateness of the classification of all its securities held and,
accordingly, in December 1995, reclassified securities Held-to-maturity
with an aggregate amortized cost of approximately $20.4 million, which
approximated fair value, to the classification of Available-for-sale.
-22-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3 - LOANS RECEIVABLE AND LOANS HELD-FOR-SALE
- -------------------------------------------------
The components of Loans receivable, net in the accompanying
Consolidated Statements of Position were as follows:
December 31,
1996 1995
------- -------
(Amounts in thousands)
Mortgage
Residential Real Estate $650,887 $695,419
Commercial Real Estate 38,946 31,234
Multi-Family Real Estate 12,848 11,237
Residential Construction 4,814 3,518
------- -------
707,495 741,408
------- -------
Consumer
Home Equity Lines of Credit 97,851 78,523
Home Equity Installment 23,186 21,735
Collateral 3,114 3,330
All Other 13,174 21,492
------- -------
137,325 125,080
------- -------
Commercial
Commercial 16,989 15,463
Real Estate Development 7,770 3,603
------- -------
24,759 19,066
------- -------
869,579 885,554
Net Deferred Loan Fees,
Premiums and Discounts (2,503) (3,309)
Allowance for Credit Losses (8,154) (6,906)
------- -------
858,922 875,339
Residential Real Estate
Loans Held-for-Sale (228) (2,035)
------- -------
Loans Receivable, Net $858,694 $873,304
======= =======
-23-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3 - LOANS RECEIVABLE AND LOANS HELD-FOR-SALE (continued)
- -------------------------------------------------------------
Loans are summarized between fixed and adjustable rates as follows:
December 31,
1996 1995
(Amounts in thousands)
Fixed Rate $225,060 $224,741
Adjustable Rate 644,519 660,813
------- -------
Total $869,579 $885,554
======= =======
The Bank has sold certain mortgage loans and retained the related
servicing rights (Note 20). The principal balances of loans serviced
for others, which are not included in the accompanying Consolidated
Statements of Position, were approximately $146.9 million and $147.1
million at December 31, 1996 and 1995, respectively.
SFAS Nos. 114/118 (Note 1) applies to loans that are individually
evaluated for impairment in accordance with the Bank's ongoing loan
review procedures. The Bank's recorded investment in impaired loans and
related Allowance for credit losses measured under SFAS Nos. 114/118
approximated $18.2 million and $1.9 million at December 31, 1996 and
$13.8 million and $1.6 million at December 31, 1995, respectively. Such
impaired loans included approximately $15.6 million in mortgage loans,
$1.6 million in consumer loans and $1.0 million in commercial loans at
December 31, 1996 and $11.1 million in mortgage loans, $1.5 million in
consumer loans and $1.2 million in commercial loans at December 31,
1995. The average recorded investment in impaired loans during the
years ended December 31, 1996 and 1995 was approximately $15.8 and
$14.6 million, respectively. During the years ended December 31, 1996
and 1995, amounts recognized as interest income on impaired loans were
not significant. At December 31, 1996, the Bank had no commitments
outstanding to lend additional funds to debtors whose loans were
impaired.
At December 31, 1996, the Company's mortgage servicing rights
aggregated approximately $464,000, which approximated fair value,
including approximately $200,000 capitalized during the year ended
December 31, 1996 under SFAS No. 122 (Note 1).
-24-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 3 - LOANS RECEIVABLE AND LOANS HELD-FOR-SALE (continued)
- -------------------------------------------------------------
Activity in the Allowances for credit losses for each of the three
years in the period ended December 31, 1996 was as follows:
<TABLE>
<CAPTION>
Mortgage Consumer Commercial Total
-------- -------- ---------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Balance - January 1, 1994 $4,605 $1,193 $1,181 $6,979
Provision for Credit Losses 1,675 600 50 2,325
Loans Charged Off (1,848) (573) (195) (2,616)
Recoveries of Loans
Previously Charged Off 63 46 6 115
----- ----- ----- -----
Balance - December 31, 1994 4,495 1,266 1,042 6,803
Provision for Credit Losses 1,725 800 - 2,525
Loans Charged Off (2,306) (399) (78) (2,783)
Recoveries of Loans
Previously Charged Off 269 84 8 361
----- ----- ----- -----
Balance - December 31, 1995 4,183 1,751 972 6,906
Provision for Credit Losses 1,400 3,450 - 4,850
Loans Charged Off (1,323) (2,741) (157) (4,221)
Recoveries of Loans
Previously Charged Off 248 149 222 619
----- ----- ----- -----
Balance - December 31, 1996 $4,508 $2,609 $1,037 $8,154
===== ===== ===== =====
</TABLE>
In connection with the Burritt transaction (Note 13), the Bank
purchased loans at a discount of approximately $10.4 million, which was
added to the Bank's Allowance for credit losses as of December 31,
1992. During 1993, the Bank completed a valuation analysis of these
loans and allocated approximately $6.0 million from these amounts to a
purchased loan discount, which is being accreted to interest income
over the remaining terms of the acquired loans. At December 31, 1996
and 1995, the Allowance for credit losses, which totaled approximately
$8.2 million and $6.9 million, respectively, included approximately
$764,000 and $1.2 million, respectively, allocated to the loans
acquired in the Burritt transaction.
-25-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 4 - FORECLOSED ASSETS
- --------------------------
Foreclosed assets consisted of the following:
December 31,
1996 1995
----- -----
(Amounts in thousands)
One-to-Four Family Residential $1,637 $1,384
Multi-Family 139 -
Commercial Real Estate 125 10
Land 1,623 2,548
----- -----
3,524 3,942
Allowance for Estimated Losses (22) (230)
----- -----
Foreclosed Assets, Net $3,502 $3,712
===== =====
Activity in the Allowance for estimated losses on Foreclosed assets was
as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Balance at January 1 $230 $ 439 $1,040
Provision Charged to Expense 750 1,500 2,235
Net Losses Charged
to the Allowance (958) (1,709) (2,836)
--- ----- -----
Balance at December 31 $22 $230 $439
== === ===
Losses and expenses related to Foreclosed assets are summarized as
follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Provision Charged to Expense $ 750 $1,500 $2,235
Gain on Sales (299) (120) (93)
Holding Costs and Expenses 897 532 1,005
Rental Income (32) (136) (243)
----- ----- -----
Foreclosed Asset Expense, Net $1,316 $1,776 $2,904
===== ===== =====
-26-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 5 - BANK PREMISES AND EQUIPMENT
- ------------------------------------
Bank premises and equipment were comprised of the following:
December 31,
-----------------------
1996 1995
---- ----
(Amounts in thousands)
Buildings and Land $ 7,795 $ 7,381
Leasehold Improvements 832 870
Furniture and Equipment 6,826 6,077
------ ------
15,453 14,328
Accumulated Depreciation
and Amortization 8,663 7,824
------ ------
Bank Premises and Equipment, Net $6,790 $6,504
===== =====
Depreciation and amortization included in Non-interest expense
aggregated approximately $894,000, $1.1 million, and $806,900 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Rent expense for banking premises of approximately $736,800, $705,400,
and $847,100 is included in Occupancy expense in the accompanying
Consolidated Statements of Earnings for the years ended December 31,
1996, 1995 and 1994, respectively.
Future minimum payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining terms of one
year or more consist of the following at December 31, 1996 (amounts in
thousands):
Years Ending December 31, Amount
------------------------- ------
1997 $ 626
1998 456
1999 300
2000 128
2001 35
Thereafter 73
-----
Total Future Minimum
Lease Payments $1,618
=====
These leases include options to renew for periods ranging from 5 to 22
years.
-27-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6 - DEPOSITS
- -----------------
Deposits were comprised of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1995
------------------------ ------------------------
(Dollar amounts in thousands)
Rates % Amount Rates % Amount
------- ------ ------- ------
<S> <C> <C> <C> <C>
Demand $ 40,413 $ 35,999
NOW 1.75-2.00(a) 43,821 1.75-2.00(a) 47,460
Regular and
Club Savings 2.00 103,053 2.00 185,610
Money Market
Deposit Accounts 1.75-3.75(a) 177,757 5.57(b) 209,265
Time Accounts 5.43(b) 638,581 5.66(b) 579,811
--------- ---------
Total Deposits $1,003,625 $1,058,145
========= =========
(a) Ranges indicate tiers
(b) Weighted average stated rate
</TABLE>
Time accounts at December 31, 1996 mature as follows:
Weighted Average
Year of Maturity Stated Rate Amount
---------------- ---------------- --------
(Dollar amounts in thousands)
1997 5.36% $515,785
1998 5.46% 53,308
1999 5.69% 27,160
2000 6.35% 34,307
2001 5.46% 8,021
-------
Total 5.43% $638,581
=======
Time deposit accounts of $100,000 or more approximated $52.4 million at
December 31, 1996. Of that amount, approximately $30.5 million mature
in six months or less, $11.1 million mature after six months to one
year, and $10.8 million mature after one year.
-28-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 6 - DEPOSITS (continued)
- -----------------------------
Interest expense on deposits is summarized as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
NOW $ 873 $ 901 $ 931
Regular and Club Savings 3,707 3,937 4,488
Money Market Deposits 5,896 11,320 7,979
Time Accounts 34,549 30,058 22,530
Escrow 204 192 174
------ ------ ------
Total Interest Expense
on Deposits $45,229 $46,408 $36,102
====== ====== ======
NOTE 7 - BORROWED FUNDS
- -----------------------
Terms of the Advances from the Federal Home Loan Bank of Boston (FHLBB)
were as follows:
<TABLE>
<CAPTION>
December 31,
Maturity/ -------------------------------------------------------
Reprice Date 1996 1995
------------- ----------------------- --------------------------
(Dollar amounts in thousands)
Weighted Average Weighted Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C>
1996 $ - - % $ 1,011 - %
1996 - - 301 6.4
1996 - - 71,654 5.45
1997 955 - - -
1997 7,531 7.32 - -
1997 89,190 5.46 19,190 5.55
1998 1,600 5.48 1,600 5.48
1999 2,200 8.60 2,200 8.60
2000 920 9.16 920 9.16
------- ------
Total Advances
from the FHLBB $102,396 $96,876
======= ======
</TABLE>
The Bank has a cash management line of credit from the FHLBB in the
amount of $20.0 million at December 31, 1996. At December 31, 1996 and
1995, the Bank had advances on the cash management line of credit of
approximately $7.5 million and $301,000, respectively, and book
overdrafts of approximately $955,200 and $1.0 million, respectively,
which are included in Advances from the FHLBB in the accompanying
Consolidated Statements of Position.
-29-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 7 - BORROWED FUNDS (continued)
- -----------------------------------
The Company had a $3.0 million line of credit (Note 18), which was paid
off in June 1994.
The Bank had borrowings from Securities Sold under Agreements to
Repurchase (Repurchase agreements) during the year ended December 31,
1995. There were no Repurchase agreements during the year ended
December 31, 1996 and none at December 31, 1996 or 1995. The
approximate average daily balance, maximum month-end balance and
weighted average interest rate for Repurchase agreements for the year
ended December 31, 1995 were $12.2 million, $36.3 million and 5.96%,
respectively.
Interest expense on borrowed funds is summarized as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
FHLBB $6,136 $4,579 $6,767
Line of Credit - - 43
Repurchase Agreements - 729 -
----- ----- -----
Total Interest Expense
on Borrowed Funds $6,136 $5,308 $6,810
===== ===== =====
Stock of the FHLBB, mortgage loans and mortgage-backed securities with
fair values, as determined in accordance with FHLBB's collateral pledge
agreement, at least equal to the outstanding advances and any unused
lines of credit were pledged against outstanding advances from the
FHLBB at December 31, 1996 and 1995.
-30-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - BENEFIT PLANS
- ----------------------
A. Retirement Plan. The Bank sponsors a defined benefit pension plan
which is noncontributory and covers all full-time employees who meet
certain age and length of service requirements. Benefits are based on
years of service and the employee's highest compensation during any
consecutive five year period during the last ten years before normal
retirement. The Bank's funding policy is to contribute annually amounts
at least equal to minimum required contributions under the Employee
Retirement Income Security Act of 1974 (ERISA). Contributions are
intended to provide not only for benefits attributed to service to
date, but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Consolidated Statements of Position:
December 31,
----------------------
1996 1995
---- ----
(Amounts in thousands)
Actuarial Present Value
of Benefit Obligations:
Accumulated Benefit Obligation - Vested ($4,794) ($4,543)
Accumulated Benefit Obligation - Nonvested (157) (120)
----- -----
Total Accumulated Benefit Obligation (4,951) (4,663)
Effect of Projected Future
Compensation Levels (1,302) (1,964)
----- -----
Projected Benefit Obligation (PBO) for
Service Rendered to Date (6,253) (6,627)
Plan Assets, at Fair Value * 5,472 4,801
----- -----
PBO in Excess of Plan Assets (781) (1,826)
Unrecognized Net Asset Existing
at January 1, 1987 Being Recognized Over
Approximately 18 Years (74) (84)
Unrecognized Net Loss Resulting from Past
Experience Different from that Assumed,
and Effects of Changes in Assumptions 762 1,785
--- -----
Accrued Pension Cost Included
in Other Liabilities ($93) ($125)
===== ======
* The plan's assets are allocated among equity securities and
various short and intermediate term bond funds.
-31-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - BENEFIT PLANS (continued)
- ----------------------------------
A. Retirement Plan (continued)
The components of the net pension expense reflected in Employee
benefits expense were as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Service Cost-Benefits Earned
During the Period $466 $347 $400
Interest Cost on Projected
Benefit Obligation 422 381 305
Actual Return on Plan Assets (388) (637) 67
Net Amortization and Deferral (20) 229 (466)
--- --- ---
Net Pension Expense $480 $320 $306
=== === ===
Assumptions used in the accounting were:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Discount/Settlement Rates 7.5% 7.00% 7.00%
Rates of Increase in
Compensation Levels 5.00% 5.00% 5.00%
Long-Term Rate of
Return on Assets 9.50% 9.50% 9.50%
-32-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - BENEFIT PLANS (continued)
- ----------------------------------
B. Deferred Compensation Plan. The Bank has adopted deferred
compensation agreements for its directors whereby directors can defer
earned fees to future years with benefits commencing at retirement or
pre-retirement benefits at death prior to retirement. The deferred
compensation expense for the years ended December 31, 1996, 1995 and
1994 was $106,800, $115,300, and $96,100, respectively. The Bank has
purchased life insurance policies, which it intends to use to fund the
retirement benefits. For income tax purposes, no deduction is allowed
for the insurance premium expense or deferred compensation expense, but
a deduction will be allowed at the time compensation is paid to the
participant. For the years ended December 31, 1996, 1995 and 1994, the
Bank had no insurance premium expenses inasmuch as policy loans were
utilized to fund premiums due.
In September 1995, both the Bank and the Company adopted a deferred
compensation plan for non-employee directors. Under the plan,
non-employee directors may elect to defer the payment of all or any
portion of their Board or Committee fees, with deferred amounts to be
payable commencing upon the director's death, disability or termination
of service for reason other than death or disability. Deferred amounts
bear interest at a rate equal to the one year U.S. Treasury rate, plus
50 basis points, adjusted monthly.
C. Thrift Plan. The Bank has established a defined contribution thrift
plan (Thrift Plan) covering eligible employees. Full-time employees are
eligible to participate in the Thrift Plan upon completion of six
months of service. Eligible employees participating in the Thrift Plan
may contribute between one percent and ten percent of their pre-tax
annual compensation. If an employee contributes the maximum ten percent
of annual compensation, the employee may also contribute an additional
ten percent of post-tax annual compensation. The Bank contributes $.50
out to the Thrift Plan for each $1.00 contributed by participants up to
three percent of each participant's compensation. The Bank's expense
during the years ended December 31, 1996, 1995 and 1994 was
approximately $102,000, $91,700, and $85,800, respectively.
-33-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - BENEFIT PLANS (continued)
- ----------------------------------
D. Postretirement Benefits Other Than Pensions. The Bank provides
certain health care and life insurance benefits for retired employees.
Substantially all of the Bank's employees become eligible if they reach
normal retirement age while still working for the Bank. These benefits
are provided through an insurance company whose premiums are based on
the benefits paid during the year. The premiums paid by the Bank are
based on the retiree's length of service with the Bank.
The following table sets forth the accumulated postretirement benefit
obligation (APBO) reconciled to the accrued post-retirement benefit
cost included in the accompanying Consolidated Statements of Position:
December 31,
-----------------------
1996 1995
---- ----
(Amounts in thousands)
Accumulated Postretirement
Benefit Obligation:
Retirees $ (483) $ (518)
Fully Eligible Active
Plan Participants (212) (213)
Other Active Plan Participants (2,125) (1,973)
----- -----
Total APBO (2,820) (2,704)
Unrecognized Transition Obligation 1,707 1,812
Unrecognized Net Gain Resulting from
Past Experience Different from that
Assumed, and Effects of Changes
in Assumptions (1,017) (780)
----- -----
Accrued Postretirement Benefit Cost
Included in Other Liabilities ($2,130) ($1,672)
======= =======
The APBO includes approximately $2.2 million and $2.1 million at
December 31, 1996 and December 31, 1995, respectively, attributable to
the Company's postretirement health care plan.
-34-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 8 - BENEFIT PLANS (continued)
- ----------------------------------
D. Postretirement Benefits Other Than Pensions (continued)
Net periodic postretirement benefit cost included in Employee benefits
expense in the accompanying Consolidated Statements of Earnings
included the following components:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Service Cost-Benefits
Attributable to Service
During the Period $224 $212 $280
Interest Cost on APBO 188 187 168
Amortization 78 68 102
--- --- ---
Net Periodic Postretirement
Benefit Cost $490 $467 $550
=== === ===
For measurement purposes, a 13.0% annual rate of increase in the per
capita cost of covered health care benefits was assumed in 1996. The
rate was assumed to decrease gradually to 4.0% in year 11 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing
the assumed health care cost trend rates by 1% in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1996 by approximately $290,000 and the aggregate of the
service and interest cost components of net periodic postretirement
benefit expense for the year then ended by approximately $81,000.
The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation were 7.5%, 7.0%, and 8.5% in 1996,
1995 and 1994, respectively.
-35-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES
- ---------------------
The components of federal and state income tax provisions consisted of
the following:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Current Income
Tax Provision
Federal $4,846 $3,872 $3,102
State 1,665 1,419 1,158
----- ----- -----
Total Current
Income Tax Provision 6,511 5,291 4,260
----- ----- -----
Deferred Income
Tax Benefit
Federal (487) (214) (246)
State (96) (57) (94)
----- ----- -----
Total Deferred
Income Tax Benefit (583) (271) (340)
----- ----- -----
Provision for Income
Taxes, Net $5,928 $5,020 $3,920
===== ===== =====
The Company's effective income tax rate differed from the Federal
statutory tax rate as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollar amounts in thousands)
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
Tax at Statutory
Federal Rate $5,034 34.0 $4,296 34.0 $3,274 34.0
State Tax* 1,036 7.0 899 7.1 703 7.3
Dividend Income
Exclusion (308) (2.1) (150) (1.2) (67) (0.7)
Other 166 1.1 (25) (0.2) 10 0.1
----- ---- ----- ---- ----- ----
Effective Rate
on Operations $5,928 40.0 $5,020 39.7 $3,920 40.7
===== ==== ===== ==== ===== ====
* Net of Federal tax benefit
-36-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
The components of the net deferred income tax asset are as follows:
December 31,
------------
1996 1995
---- ----
(Amounts in thousands)
Deferred Income Tax Liability
Federal $ 728 $ 677
State 252 253
----- -----
980 930
----- -----
Deferred Income Tax Asset
Federal 3,985 3,077
State 1,375 1,146
----- -----
5,360 4,223
----- -----
Net Deferred Income Tax Asset $4,380 $3,293
===== =====
The tax effects of each item of income and expense and net unrealized
(losses) gains on securities Available-for-sale that give rise to
deferred income taxes are as follows:
December 31,
------------
1996 1995
---- ----
(Amounts in thousands)
Allowances for Losses $2,726 $2,141
Depreciation (194) (122)
Deferred Loan Fees (478) (185)
Deferred Compensation 249 244
Loan Expense 347 311
Employee Benefits 908 745
Trading Gains - (10)
Intangible Asset 619 470
----- -----
4,177 3,594
Unrealized Losses (Gains) 203 (301)
----- -----
Net Deferred Income Tax Asset $4,380 $3,293
===== =====
-37-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
A summary of the change in the net deferred income tax asset is as
follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Net Deferred Income Tax
Asset - Beginning $3,293 $7,293 $2,055
Deferred Income Tax Provision:
-----------------------------
Income and Expense 583 271 340
Unrealized Losses (Gains) 504 (4,271) 4,898
----- ----- -----
Net Deferred
Income Tax Asset - Ending $4,380 $3,293 $7,293
===== ===== =====
The Company has reflected a net deferred income tax asset of
approximately $4.4 million. Realization is dependent on various factors
and is not assured. However, management is of the opinion that it is
more likely than not that all of the net deferred tax asset will be
realized.
Deductions from taxable income in prior years have been claimed as loan
loss provisions for qualifying (real estate) loans in accordance with
the Internal Revenue Code. Retained earnings includes a tax reserve for
qualifying loans. If the reserve is used for any purpose other than to
absorb losses on loans, an income tax liability could be incurred.
Management does not anticipate that this reserve will be made available
for any other purposes. In accordance with generally accepted
accounting principles, no deferred income taxes have been provided for
this temporary difference.
In August 1996, Congress amended the Internal Revenue Code
retroactively to January 1, 1996, relative to existing tax bad debt
reserves of savings banks as well as to allowable methods of taking
future tax bad debt deductions. The amendment requires savings banks
with "excess tax bad debt reserves", as defined, to recapture such
excess into taxable income ratably over the next six to eight years
beginning in 1996. In addition, future tax bad debt deductions will be
based solely on loan charge-offs.
-38-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (continued)
- ----------------------------------
Based on the Bank's tax returns as filed for the year ended December
31, 1995, the Bank has excess tax bad debt reserves approximating
$750,000, which are subject to recapture into taxable income in
accordance with the change in the law.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The accompanying Consolidated Financial Statements do not reflect
various commitments and contingent liabilities which arise in the
normal course of business and which involve elements of credit risk,
interest-rate risk and liquidity risk. These commitments and contingent
liabilities are described in Note 16.
The Company is party to litigation and claims arising from the normal
course of business. After consultation with legal counsel, management
is of the opinion that the liabilities, if any, arising from such
litigation and claims will not be material to the consolidated
financial position.
NOTE 11 - STOCK OPTIONS
- -----------------------
At December 31, 1996, 135,334 shares of common stock, adjusted to
reflect any stock dividends, were reserved under the Company's stock
option plans. The Company accounts for its stock options under APB 25
(Note 1). Accordingly, at the time options are granted no accounting
entry is made; however, when options are exercised, proceeds are
credited to Common stock for the par value of shares purchased and the
excess of the option price over the par value of shares issued is
credited to Additional paid-in capital. The exercise price of options
granted has approximated the fair market value of the shares on the
dates granted.
-39-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11 - STOCK OPTIONS (continued)
- -----------------------------------
Additionally, stock appreciation rights (SARS) have been granted in
tandem with stock options under the Company's 1985 Stock Option Plan.
In accordance with generally accepted accounting principles,
compensation accruals are required for SARS when the market value
exceeds the option exercise price. However, compensation expense should
be measured according to the terms the Company's SARS holders are most
likely to elect based upon the facts available each period.
Accordingly, no expense accruals were made for the years ended December
31, 1996, 1995 and 1994 inasmuch as management did not anticipate
exercise of significant SARS at those times.
The following table and the data below summarizes the shares subject to
option under the plan which have been adjusted to reflect stock
dividends declared:
For The Years Ended December 31,
--------------------------------
1996 1995
---- ----
Outstanding at
Beginning of Period 351,140 237,918
Granted 50,520 135,918
Exercised
For Stock (320,246) (3,062)
For SARS (1,102) (19,634)
------- -------
(321,348) (22,696)
------- -------
Outstanding at End of Period 80,312 351,140
======= =======
As of December 31, 1996, 80,312 options were exercisable at prices
ranging from $9.05 to $29.88.
Through December 31, 1996, 471,962 options have been exercised and
45,590 options, adjusted to reflect subsequent stock dividends, have
been canceled. Options available for grant were 55,022.
During the years ended December 31, 1996, 1995 and 1994, 1,102, 19,634
and 8,429 SARS were exercised, respectively, which resulted in payments
to employees aggregating $18,800, $177,900 and $121,700, respectively.
These amounts are included in Salaries and wages in the accompanying
Consolidated Statements of Earnings for the respective years then
ended.
-40-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 11 - STOCK OPTIONS (continued)
- -----------------------------------
In accordance with SFAS No. 123 (Note 1), the Company has elected to
continue accounting for its stock options under APB 25. Had
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards granted during
the years ended December 31, 1996 and 1995 under those plans consistent
with the method under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts as
follows:
For The Years Ended December 31,
--------------------------------
1996 1995
---- ----
(Dollar amounts in thousands,
except per share data)
Net Income
As Reported $8,879 $7,613
===== =====
Pro Forma $8,457 $7,526
===== =====
Primary Earnings Per Share
As Reported $2.82 $2.46
==== ====
Pro Forma $2.69 $2.43
==== ====
Fully Diluted Earnings Per Share
As Reported $2.80 $2.45
==== ====
Pro Forma $2.67 $2.43
==== ====
NOTE 12 - STOCKHOLDERS' EQUITY
- ------------------------------
A. Dividends. Pursuant to Connecticut law, cash dividends may be paid
by the Bank to the Company out of net profits, defined as the remainder
of earnings from current operations plus actual recoveries on loans and
investments and other assets, after deducting all current operating
expenses, actual losses, accrued dividends on preferred stock and all
federal and state taxes. The total dividends declared by the Bank in
any calendar year shall not exceed the total of its net profits for
that year combined with its net profits for the preceding two years. In
connection with the termination of the Memorandum of Understanding (the
"Memorandum") with the Connecticut Commissioner of Banking and the FDIC
in August 1995, the Bank's Board of Directors adopted a policy that
limits the payment of cash dividends by the Bank to the Company to 10%
of the Bank's net income (Note 19).
-41-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 12 - STOCKHOLDERS' EQUITY (continued)
- ------------------------------------------
A. Dividends (continued)
During the year ended December 31, 1996, the Company declared four
consecutive quarterly cash dividends on common stock of $0.06 per
share, which totaled approximately $728,000 and which were paid during
the year ended December 31, 1996.
On January 16, 1997, the Company declared a cash dividend of $.06 per
share, totaling approximately $191,400, to be paid on February 14, 1997
to stockholders of record on January 24, 1997.
The Board of Directors declared 5% stock dividends on March 15, 1995
and November 10, 1995. Cash was paid in lieu of fractional shares for
the November 10, 1995 dividend. For the March 15, 1995 dividend, due to
the restrictions stipulated under the Memorandum regarding dividends,
the Company arranged for the sale of the aggregate fractional interests
and distributed the cash proceeds to the stockholders. In accordance
with generally accepted accounting principles, weighted average shares
outstanding, and thus earnings per share, for each of the periods have
been retroactively adjusted.
B. Stock Options Exercised. During the years ended December 31, 1996,
1995 and 1994, 321,348, 22,696, and 93,455 stock options, including
SARS, were exercised, respectively (Note 11), resulting in increases to
Additional paid-in capital of approxi-mately $8.6 million, $64,000 and
$1.8 million, respectively. Included in these amounts for the years
ended December 31, 1996 and 1994, are tax benefits approximating $2.4
million and $678,000, respectively.
C. Treasury Stock. The increase in treasury stock of approximately $6.8
million during the year ended December 31, 1996 reflects the Company's
acquisition of approximately 160,000 shares of common stock and relates
to the Company's stock option plan, which provides that the Company's
common stock may be accepted at fair value in lieu of cash upon the
exercise of stock options by directors and employees.
-42-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 13 - ACQUISITION OF BURRITT INTERFINANCIAL BANCORPORATION
- --------------------------------------------------------------
On December 4, 1992, the Bank entered into an Insured Deposit Purchase
and Assumption Agreement with the FDIC, pursuant to which the Bank
purchased certain assets and assumed the insured deposits and certain
other liabilities of Burritt Interfinancial Bancorporation (Burritt),
New Britain, Connecticut in an FDIC-assisted transaction.
In the transaction, the Bank assumed approximately $460 million of
insured deposits and approximately $5.5 million of other liabilities of
Burritt. The assets of Burritt acquired included, among others, loans
totaling approximately $169.3 million that were purchased at a $10.4
million discount (Note 3). The Bank recorded approximately $5.0 million
as a core deposit intangible, which is included in Other assets and
approximated $2.1 million, net of amortization, at December 31, 1996
(Note 1).
NOTE 14 - NON-INTEREST INCOME AND NON-INTEREST EXPENSE
- ------------------------------------------------------
Included in Service charges and other income were the following:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Fees on Loans $ 786 $ 729 $ 552
Deposit Service Charges 887 784 814
All Other, None Greater
Than 1% of Income 1,219 1,192 1,087
----- ----- -----
Total $2,892 $2,705 $2,453
===== ===== =====
Included in Other Non-interest expense were the following:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
Data Processing $1,450 $1,345 $1,266
FDIC Insurance Premium 2 1,518 2,770
Marketing 1,239 1,285 1,291
Amortization of
Intangible Assets (Note 13) 721 716 711
All Other, None Greater
Than 1% of Income 4,392 3,164 3,403
----- ----- -----
Total $7,804 $8,028 $9,441
===== ===== =====
-43-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 15 - SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
- --------------------------------------------------------
The concentration of the Bank's loan portfolio by type of loan at
December 31, 1996 and 1995, is set forth in Note 3. These loans include
one-to-four family mortgages, construction loans and home equity loans
aggregating approximately $784.5 and $802.8 million at December 31,
1996 and 1995, respectively, or approximately 91.3% and 90.7% of total
loans, respectively. Approximately 83.7% and 85.6% of these loans are
secured by residential real estate located in Connecticut at December
31, 1996 and 1995, respectively.
The Bank also has loan commitments, including unused lines of credit
and amounts not yet advanced on construction loans, secured by
Connecticut real estate. In addition, at December 31, 1996 a
substantial portion of the Bank's foreclosed assets (Note 4) were
located in those same markets. Accordingly, the ultimate collectibility
of a substantial portion of the Bank's loan portfolio and the recovery
of a substantial portion of the carrying amount of foreclosed assets
are particularly susceptible to changes in real estate market
conditions in Connecticut.
In the normal course of business, the Bank may have deposits in
correspondent accounts substantially in excess of depository insurance
limits. To reduce the credit risk associated with such activities, the
Bank periodically reviews the financial condition of such correspondent
banks.
NOTE 16 - FINANCIAL INSTRUMENTS
- -------------------------------
A. Financial Instruments with Off-Balance-Sheet Risk. The Bank is a
party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers
and manage its interest rate risk. These financial instruments
substantially include commitments to extend credit and commitments to
sell mortgage loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of amounts
recognized in the accompanying Consolidated Statements of Position. The
contract or notional amounts of these instruments reflect the extent of
the Bank's involvement in particular classes of financial instruments.
-44-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16 - FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------
The Bank's exposure to credit loss in the event of non-performance by
the counterparty for commitments to extend credit is represented by the
contractual notional amount of those instruments. The Bank's exposure
to market risk associated with commitments to sell residential mortgage
loans relates to the possible inability of counterparties to meet
contract terms or the Bank's inability to originate loans to fulfill
these commitments.
Commitments to Extend Credit. Loan commitments are agreements to lend
to a customer as long as there is no violation of any condition
established in the contract. These financial instruments are recorded
in the financial statements when they are funded or when related fees
are incurred or received. Loan commitments are subject to the same
credit policies as loans and generally have fixed expiration dates or
other termination clauses. Since commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of the collateral
obtained is based on management's credit evaluation of the
counterparty. Collateral held is primarily residential and commercial
real property. Interest rates are generally variable with the exception
of the unadvanced portions of construction loans, which have fixed
rates of interest and generally mature within one year. The Bank also
issues traditional letters of credit which commit the Bank to make
payments on behalf of its customers based upon specific future events.
Since many of the letters of credit are expected to expire without
being drawn upon, the total letters of credit do not necessarily
represent future cash requirements. Collateral is obtained based upon
management's credit assessment of the customer.
-45-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16 - FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------
Commitments to Extend Credit (continued)
The Bank's exposure to credit risk is represented by the contractual
notional amount of those instruments and is summarized below:
December 31,
------------
1996 1995
---- ----
(Amounts in thousands)
Loan Commitments
Commitments to Extend Credit $ 5,734 $ 15,648
Commitments to Purchase Loans - 6,151
Unadvanced Commercial Lines of Credit 10,689 10,021
Unadvanced Portion of
Construction Loans 7,158 3,751
Unused Portion of Home
Equity Lines of Credit 85,173 65,458
Other Consumer Lines of Credit - 1,263
------- -------
Total $108,754 $102,292
======= =======
Letters of Credit $2,469 $2,291
===== =====
Commitments to Sell Residential Mortgage Loans. The Bank enters into
forward commitments to sell residential mortgage loans to reduce market
risk associated with originating loans for sale in the secondary
market. In order to fulfill a forward commitment, the Bank delivers
originated loans at prices specified by the contracts. At December 31,
1996 and 1995, the Bank had no commitments to sell mortgage loans.
B. Fair Values of Financial Instruments. Estimating the fair values of
the Bank's financial instruments includes the use of information that
is highly subjective. The subjective factors include, among other
things, the estimated timing and amount of cash flows, risk
characteristics, and credit quality and interest rates, all of which
are subject to change. As a result, fair values estimated could be
significantly different from amounts actually realized or paid at
settlement or maturity of the financial instruments. The following
methods and assumptions were used to estimate the fair value of each
class of financial instruments.
-46-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16 - FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------
Cash and Short-Term Investments. For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities. Fair values for investment securities are based on quoted
market prices.
Loans Held-for-Sale and Loans Receivable. The fair values for loans are
estimated using discounted cash flow analyses. Discount rates used are
comprised of the risk-free rate associated with the remaining term to
maturity, adjusted for risk and the expenses associated with servicing
the loans. Fair values of purchased mortgages are estimated using the
quoted market prices for securities collateralized by similar loans.
FHLBB Stock and Accrued Income Receivable. The carrying amount
approximates fair value.
Deposits. The fair values disclosed for interest and non-interest
checking, passbook savings, money market deposit accounts and
mortgagors' escrow are equal to the amount payable on demand at the
reporting date. The fair values of certificates of deposit are
estimated using rates currently offered for deposits of similar
remaining maturities.
Advances from the FHLBB. The fair values of advances from the FHLBB are
estimated using rates which approximate the rates currently being
offered by the FHLBB for similar remaining maturities.
Off-Balance-Sheet Instruments. The fair values of commitments to extend
credit and unadvanced lines of credit are estimated based on interest
rates and fees currently charged to enter into similar transactions,
considering the remaining terms of the commitments and the
creditworthiness of the potential borrowers. The fair value of
commitments to sell residential mortgage loans are estimated based on
secondary market prices available for commitments with similar terms.
-47-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 16 - FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------
Off-Balance-Sheet Instruments (continued)
Using the preceding assumptions, the estimated fair values of the
Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
---------------------- ------------------------
(Amounts in thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets
Cash and Short
Term Investments $ 14,950 $ 14,950 $ 20,730 $ 20,730
Securities 301,491 300,113 320,188 319,701
Loans Held-for-Sale 228 228 2,035 2,035
Loans Receivable,
Net 858,694 885,002 873,304 885,002
FHLBB Stock 9,793 9,793 9,793 9,793
Accrued Income
Receivable 7,253 7,253 7,746 7,746
Financial Liabilities
Deposits and
Escrow 1,014,287 1,017,162 1,069,338 1,071,988
Advances from FHLBB 102,396 102,614 96,876 97,471
Off-Balance-Sheet
Financial Instruments
Commitments to
Extend Credit - * - *
Commitments to Sell
Mortgage Loans - - - -
</TABLE>
* Amounts were not significant.
-48-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 17 - RELATED PARTY TRANSACTIONS
- ------------------------------------
At December 31, 1996 and 1995 loans to directors aggregated
approximately $536,000 and $558,000, respectively. During the year
ended December 31, 1996, no new loans were granted to directors,
existing loans to new directors approximated $67,000, and repayments
totaled approximately $89,000. During the years ended December 31,
1996, 1995 and 1994, payments aggregating approximately $623,000,
$190,000 and $364,000, respectively, were made for legal, insurance and
appraisal services to entities in which certain directors have an
interest. These loans and payments were made in the ordinary course of
business. The loans were granted on substantially the same terms,
including interest rates and collateral on loans, as those prevailing
at the same time for comparable transactions with others.
NOTE 18 - CONDENSED FINANCIAL INFORMATION
OF DS BANCOR, INC. (PARENT COMPANY ONLY)
- ----------------------------------------------------
The condensed Statements of Position for DS Bancor, Inc. were as
follows:
December 31,
------------
1996 1995
---- ----
(Amounts in thousands)
Assets
Cash in Subsidiary Bank $ 2,080 $ 812
Investment in
Bank Subsidiary, at Equity 88,356 79,658
Other Assets 6 344
------ ------
Total Assets $90,442 $80,814
====== ======
Liabilities and Stockholders' Equity
Liabilities
Other Liabilities $ 37 $ 5
------ ------
Stockholders' Equity
Common Stock 3,689 3,368
Additional Paid-In Capital 53,157 44,514
Retained Earnings 44,872 37,440
Less: Treasury Stock, at Cost
(499,501 shares in 1996
and 339,500 shares in 1995) (11,313) (4,513)
------ ------
Total Stockholders' Equity 90,405 80,809
------ ------
Total Liabilities
and Stockholders' Equity $90,442 $80,814
====== ======
-49-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 18 - CONDENSED FINANCIAL INFORMATION
OF DS BANCOR, INC. (PARENT COMPANY ONLY) (continued)
- ---------------------------------------------------------------
The condensed Statements of Earnings were as follows:
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollar amounts in thousands,
except per share data)
Income
Dividends from Subsidiary $ - $ - $ 567
Other 20 50 39
----- ----- -----
Total Income 20 50 606
----- ----- -----
Expense
Interest Expense * - - 43
Other 617 148 265
----- ----- -----
Total Expense 617 148 308
----- ----- -----
(Loss) Income before
Income Taxes and Change
in Equity of Subsidiary (597) (98) 298
Income Tax Benefit 59 41 109
----- ----- -----
(Loss) Income before Change
in Equity of Subsidiary (538) (57) 407
Change in Equity of Subsidiary 9,417 7,670 5,303
----- ----- -----
Net Income $8,879 $7,613 $5,710
===== ===== =====
Weighted Average Shares Outstanding (Notes 1 and 12)
Primary 3,149,161 3,091,578 3,070,492
Fully Diluted 3,169,765 3,103,253 3,072,672
Earnings Per Share (Notes 1 and 12)
Primary $2.82 $2.46 $1.86
==== ==== ====
Fully Diluted $2.80 $2.45 $1.86
==== ==== ====
* The Board of Directors authorized and the Company established a
$3.0 million line of credit to partially fund the repurchase of
the Company's common stock in 1989 and 1990. This loan, which had
an interest rate of prime plus one percent, was paid in full in
June, 1994. (Notes 7 and 19)
-50-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 18 - CONDENSED FINANCIAL INFORMATION
OF DS BANCOR, INC. (PARENT COMPANY ONLY) (continued)
- ---------------------------------------------------------------
The condensed changes in the components of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
------- -------- -------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Balance - January 1, 1994 $2,991 $36,007 $31,955 $(4,513)
Net Income - - 5,710 -
Stock Options Exercised
(93,455 shares)
(Notes 11 and 12) 94 1,773 - -
Change in Unrealized
Gains (Losses) of Securities
Held by Subsidiary (Note 2) - - (6,880) -
----- ------ ------ ------
Balance - December 31, 1994 3,085 37,780 30,785 (4,513)
Net Income - - 7,613 -
Stock Dividend Declared
on Common Stock (Note 12) 280 6,658 (6,938) -
Shares Issued for
Fractional Interest - 12 - -
Cash in Lieu of
Fractional Shares - - (23) -
Stock Options Exercised
(3,062 shares)
(Notes 11 and 12) 3 64 - -
Change in Unrealized
Gains (Losses) of Securities
Held by Subsidiary (Note 2) - - 6,003 -
----- ------ ------ ------
Balance - December 31, 1995 3,368 44,514 37,440 (4,513)
Net Income - - 8,879 -
Cash Dividend Declared
on Common Stock (Note 12) - - (728) -
Stock Options Exercised
(320,246 shares)
(Notes 11 and 12) 321 8,643 - -
Treasury Shares Acquired
from Exercise of Stock
Options (Notes 11 and 12) - - - (6,800)
Change in Unrealized
Gains (Losses) of Securities
Held by Subsidiary (Note 2) - - (719) -
----- ------ ----- ------
Balance - December 31, 1996 $3,689 $53,157 $44,872 ($11,313)
===== ====== ====== ======
</TABLE>
-51-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 18 - CONDENSED FINANCIAL INFORMATION
OF DS BANCOR, INC. (PARENT COMPANY ONLY) (continued)
- -----------------------------------------------------------------------
The condensed Statements of Cash Flows were as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Dividends Received from Subsidiary $ - $ - $ 567
Interest Income 20 50 39
Tax Benefit Received from Subsidiary 397 - 80
Interest Paid - - (68)
Cash Paid to Suppliers (585) (154) (260)
----- --- -----
Net Cash (Used) Provided by
Operating Activities (168) (104) 358
----- --- -----
Cash Flows from Financing Activities
Payments on Notes Payable - Bank - - (1,450)
Dividends Paid to Stockholders (728) (23) -
Proceeds from Exercise of Stock Options 960 79 1,189
Treasury Stock Acquired for
Payment of Employee Withholding
on Stock Options (1,220) - -
Tax Benefit Reimbursement from
Subsidiary for Stock Options
Exercised 2,424 - 678
----- --- -----
Net Cash Provided by
Financing Activities 1,436 56 417
----- --- ---
Net Increase (Decrease) in Cash 1,268 (48) 775
Cash at Beginning of Year 812 860 85
----- --- ---
Cash at End of Year $2,080 $812 $860
===== === ===
</TABLE>
A reconciliation of net income to cash (used) provided by
operating activities was as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Net Income $8,879 $7,613 $5,710
Items Not Resulting in Cash Flow:
--------------------------------
Equity in Undistributed
Earnings of Subsidiary (9,417) (7,670) (5,303)
Decrease (Increase) in Income
Tax Benefits Receivable 338 (41) (29)
Increase (Decrease)
in Accrued Expenses 32 (6) (20)
----- ----- -----
Net Cash Flow (Used) Provided
by Operating Activities ($168) ($104) $358
=== === ===
</TABLE>
-52-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 19 - REGULATORY MATTERS
- ---------------------------------
DS Bancor and Derby Savings Bank, pursuant to the regulations of
the Federal Reserve Board (Board) and the FDIC, respectively, are
subject to risk-based capital standards. These risk-based
standards require a minimum ratio of total capital to
risk-weighted assets of 8.0%. Of the required capital, 4.0% must
be tier 1 capital (primarily Stockholders' Equity).
The Board has supplemented these standards with a minimum
leverage ratio of 3.0% of tier 1 capital to total assets. The
Board has indicated that all but the most highly rated bank
holding companies should maintain a leverage ratio of 4% to 5% of
tier 1 capital to total assets. The FDIC has adopted a similar
leverage requirement.
In August 1995, the FDIC and the Connecticut Banking Commissioner
terminated the Memorandum entered into by the Bank in April 1992.
The Memorandum, as amended, required that the Bank achieve a tier
1 capital to total assets ratio of at least 5.75% by June 30,
1995. Additionally, the Memorandum limited the payment of cash
dividends by the Bank to DS Bancor to the Company's debt service
and non-salary expenses.
By June 30, 1995, the Bank had achieved a tier 1 capital to total
assets ratio of 5.9%, which led to the termination of the
Memorandum by the FDIC and the Connecticut Banking Commissioner.
At December 31, 1995, this ratio was 6.1%. In connection with the
termination of the Memorandum, the Bank's Board of Directors has
adopted a policy that limits the payment of cash dividends by the
Bank to the Company up to 10% of the Bank's net income.
The following table summarizes the capital ratios of DS Bancor
and Derby Savings Bank at December 31, 1996:
Risk-based
Leverage ratio Tier 1 Total
-------------- ------ -----
DS Bancor 7.3% 12.12% 13.24%
Derby Savings Bank 7.1% 11.84% 12.96%
-53-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 20 - RECENT ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," (SFAS No. 125) which was amended by SFAS No. 127
in December 1996 to defer the effective date of certain
provisions of SFAS No. 125 for one year. SFAS No. 125 provides
for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings and bases such
distinguishment on control. It also amends SFAS No. 115 to
clarify that a debt security may not be classified as
held-to-maturity if it can contractually be prepaid in a way that
an institution would not recover substantially all of its
recorded investment. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, except as amended by SFAS No.
127, and is to be applied prospectively. Management has not yet
determined the effect, if any, which application of SFAS No. 125
will have on the Bank's financial condition.
NOTE 21 - QUARTERLY RESULTS OF EARNINGS (UNAUDITED)
- --------------------------------------------------------
The following is a summary of the quarterly results of
consolidated earnings for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
Quarters Ended
---------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest Income $22,765 $22,881 $22,510 $22,247
Interest Expense 12,564 12,752 12,556 13,376
------ ------ ------ ------
Net Interest Income 10,201 10,129 9,954 8,871
Provision for Credit Losses 1,900 1,250 1,050 650
------ ------ ------ -----
Net Interest Income
After Provision for
Credit Losses 8,301 8,879 8,904 8,221
Non-Interest Income, Net 1,360 844 896 894
Non-Interest Expense 6,230 5,887 5,870 5,505
----- ----- ----- -----
Income before Income Taxes 3,431 3,836 3,930 3,610
Provision for Income
Taxes, Net 1,479 1,485 1,511 1,453
----- ----- ----- -----
Net Income $1,952 $2,351 $2,419 $2,157
===== ===== ===== =====
Earnings Per Share
Primary $0.63 $0.74 $0.76 $0.69
==== ==== ==== ====
Fully Diluted $0.64 $0.73 $0.76 $0.67
==== ==== ==== ====
</TABLE>
-54-
<PAGE>
DS BANCOR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 21 - QUARTERLY RESULTS OF EARNINGS (UNAUDITED) (continued)
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95
-------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest Income $22,670 $22,059 $21,276 $20,584
Interest Expense 13,790 13,486 12,628 11,671
------ ------ ------ ------
Net Interest Income 8,880 8,573 8,648 8,913
Provision for Credit Losses 700 625 600 600
------ ------ ------ ------
Net Interest Income
After Provision for
Credit Losses 8,180 7,948 8,048 8,313
Non-Interest Income, Net 1,335 944 862 543
Non-Interest Expense 5,752 5,414 6,232 6,142
----- ----- ----- -----
Income before Income Taxes 3,763 3,478 2,678 2,714
Provision for Income
Taxes, Net 1,439 1,429 1,056 1,096
----- ----- ----- -----
Net Income $2,324 $2,049 $1,622 $1,618
===== ===== ===== =====
Earnings Per Share (a)
Primary $0.75 $0.66 $0.53 $0.53
==== ==== ==== ====
Fully Diluted $0.75 $0.66 $0.52 $0.53
==== ==== ==== ====
</TABLE>
(a) Adjusted retroactively to reflect stock dividends declared
(Note 12).
-55-
