UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _____ .
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1187536
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 753-2921
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 per value
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Based upon the closing price of the registrant's common stock as of
March 25, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $916,700,397. Solely for purposes of this
calculation, the shares held by directors and executive officers of the
registrant have been excluded because such persons may be deemed to be
affiliates. This reference to affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share
Issued and Outstanding at March 25, 1998: 13,701,649
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II: Portions of the Annual Report to Shareholders for fiscal year
ended December 31, 1997
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 1998.
<PAGE>
WEBSTER FINANCIAL CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business........................................................... 3
General......................................................... 3
Acquisition Pending Consummation................................ 4
Recent Acquisitions............................................. 4
FDIC Assisted Acquisitions...................................... 6
Lending Activities.............................................. 7
Segregated Assets .............................................. 13
Investment Activities........................................... 13
Trust Activities................................................ 14
Sources of Funds .............................................. 15
Bank Subsidiaries............................................... 17
Employees....................................................... 17
Market Area and Competition..................................... 18
Regulation...................................................... 18
Taxation........................................................ 19
ITEM 2. Properties......................................................... 20
ITEM 3. Legal Proceedings.................................................. 21
ITEM 4. Submission of Matters to a Vote of Security Holders................ 21
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 21
ITEM 6. Selected Financial Data............................................ 22
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 23
ITEM 7.a Quantitative and Qualitative Disclosures About Market Risk......... 23
ITEM 8. Financial Statements and Supplementary Data........................ 23
ITEM 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................ 24
PART III
ITEM 10. Directors and Executive Officers of the Registrant................ 24
ITEM 11. Executive Compensation............................................ 24
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.... 24
ITEM 13. Certain Relationships and Related Transactions.................... 24
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 24
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Webster Financial Corporation, ("Webster" or the "Corporation"),
through its subsidiary, Webster Bank (the "Bank"), delivers financial services
to individuals, families and businesses located throughout Connecticut. Webster
Bank is organized along four business lines: consumer, business, mortgage
banking and trust and investment management services, each supported by
centralized administration and operations. The Corporation has grown
significantly in recent years, primarily through a series of acquisitions which
have expanded and strengthened its franchise.
At December 31, 1997, total assets were $7.0 billion as compared to
$5.6 billion a year earlier. Net loans receivable amounted to $3.8 billion at
December 31, 1997 as compared to $3.6 billion a year ago. Deposits were $4.4
billion at December 31,1997 as compared to $4.5 billion at December 31, 1996.
Webster expanded its banking operations by acquiring Sachem Trust
National Association ("Sachem Trust") in August 1997, People's Savings Financial
Corp. ("People's") in July 1997 and DS Bancor, Inc. ("Derby") in January 1997.
(See "Recent Acquisitions"). In preceding years, Webster expanded its operations
through the acquisitions of 20 former Shawmut Bank Connecticut National
Association ("Shawmut") branch banking offices in the Greater Hartford banking
market in 1996, Shelton Bancorp, Inc. ("Shelton") in 1995, Bristol Savings Bank
("Bristol") in 1994 and Shoreline Bank & Trust ("Shoreline") in 1994 (see
"Recent Acquisitions") and the FDIC assisted acquisitions of First Constitution
Bank ("First Constitution") in 1992 and Suffield Bank ("Suffield") in 1991. (See
"FDIC Assisted Acquisitions"). These acquisitions have significantly expanded
the market areas served by the Corporation.
At December 31, 1997, the assets of the Corporation, on an
unconsolidated basis, consisted primarily of its investment in the Bank and
$87.6 million of cash and investment securities. The principal sources of
Webster's revenues on an unconsolidated basis are dividends from the Bank and
interest and dividend income from other investments. See Note 22 to Webster's
Consolidated Financial Statements for parent-only financial statements.
The Bank's deposits are federally insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and at December 31, 1997, approximately 81% of the Bank's deposits
were subject to BIF assessment rates and 19% were subject to Savings Association
Insurance Fund ("SAIF") assessment rates. (See "Regulation").
Webster, as a holding company, and the Bank are subject to
comprehensive regulation, examination and supervision by the OTS, as the primary
federal regulator. The Bank is also subject to regulation, examination and
supervision by the FDIC as to certain matters. Webster's executive offices are
located at Webster Plaza, Waterbury, Connecticut, 06702. Its telephone number is
(203) 753-2921.
3
<PAGE>
ACQUISITION PENDING CONSUMMATION
The Eagle Acquisition. During the second quarter of 1998, Webster expects
to complete its acquisition of Eagle Financial Corp ("Eagle") and its
subsidiary, Eagle Bank, a $2.1 billion savings bank headquartered in Bristol,
Connecticut. In connection with the acquisition of Eagle, Webster had expected
to issue 5.1 million shares of its common stock for all the outstanding shares
of Eagle common stock. Under the original terms of the argeement, each
outstanding share of Eagle common stock was expected to be converted into .84
shares of Webster common stock. On March 17, 1998, Webster announced a
two-for-one stock split to shareholders of record as of April 6, 1998, subject
to shareholder approval of an amendment to the Corporation's Certificate of
Incorporation to increase the authorized number of shares of Webster common
stock from 30,000,000 to 50,000,000. Due to the stock split, and subject to
shareholder approval of the Eagle acquisition on April 2, 1998, the exchange
ratio will change to 1.68 shares and accordingly, approximately 10.2 million
shares of Webster common stock are expected to be issued for all of the
outstanding shares of Eagle common stock. This acquisition will be accounted for
as a pooling of interests, and as such, future Consolidated Financial Statements
of the Corporation will include Eagle's financial data as if Eagle had been
combined at the beginning of the earliest period presented.
RECENT ACQUISITIONS
The Sachem Acquisition. On August 1, 1997, Webster acquired Sachem Trust, a
trust company headquartered in Guilford, Connecticut with $300 million of assets
under management, in a tax-free stock-for-stock exchange. Under the terms of the
agreement, Webster issued 83,385 shares of Webster common stock for all 173,000
outstanding shares of Sachem Trust. This acquisition was accounted for as a
purchase, and as such, results are reported in the Corporation's Consolidated
Financial Statements only for the periods subsequent to the acquisition date.
The People's Acquisition. On July 31, 1997, Webster acquired People's and
its subsidiary, People's Savings Bank & Trust, headquartered in New Britain,
Connecticut, which had $482 million of assets. In connection with the
acquisition of People's, Webster issued 1,575,996 shares of its common stock for
all the outstanding shares of People's common stock. Under the terms of the
merger agreement each outstanding share of People's common stock was converted
into .85 shares of Webster common stock. This acquisition was accounted for as a
pooling of interests, and as such, the Corporation's Consolidated Financial
Statements include People's financial data as if People's had been combined at
the beginning of the earliest period presented.
The Derby Acquisition. On January 31, 1997, Webster acquired Derby and its
subsidiary, Derby Savings Bank, headquartered in Derby, Connecticut, which had
$1.2 billion of assets. In connection with the acquisition of 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, the Corporation's Consolidated Financial Statements include Derby's
financial data as if Derby had been combined at the beginning of the earliest
period presented.
4
<PAGE>
The Shawmut Transaction. On February 16, 1996, Webster Bank acquired 20
branches in the Greater Hartford market from Shawmut (the "Shawmut
Transaction"), as part of a divesture 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, and as such, results are reported in the Corporation's Consolidated
Financial Statements only for the periods subsequent to the consummation of the
Shawmut Transaction.
The Shelton Bancorp, Inc. Acquisition. On November 1, 1995, Webster
acquired Shelton and its subsidiary, Shelton Savings Bank, headquartered in
Shelton, Connecticut, which had $295 million of assets. In connection with the
acquisition of Shelton, Webster issued 1,292,549 shares of its common stock for
all 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. This acquisition was accounted for as a pooling of interests,
and as such, the Corporation's Consolidated Financial Statements include
Shelton's financial data as if Shelton had been combined at the beginning of the
earliest period presented.
Shoreline Bank and Trust Company. On December 16, 1994, Webster acquired
Shoreline, a commercial bank headquartered in Madison, Connecticut, which had
$51 million of assets. Shoreline was merged into Webster Bank and its Madison
banking office became a full service office of Webster Bank. In connection with
the acquisition, the Corporation issued 266,500 shares of its common stock for
all of the outstanding shares of Shoreline common stock. This acquisition was
accounted for as a pooling of interests, and as such, the Corporation's
Consolidated Financial Statements include Shoreline's financial data as if
Shoreline had been combined at the beginning of the earliest period presented.
Bristol Savings Bank. On March 3, 1994, Webster acquired Bristol, a state
chartered savings bank with $486 million in assets which became a wholly-owned
subsidiary of Webster. In connection with the conversion of Bristol from a
mutual to a stock charter, concurrently with the acquisition, Webster completed
the sale of 1,150,000 shares of its common stock in related subscription and
public offerings. Webster invested in Bristol a total of $31.0 million,
including the net proceeds of approximately $21.9 million from subscription and
public offerings plus existing funds from the holding company. As a result of
this investment, Bristol met all ratios required by the FDIC for a
"well-capitalized" savings bank. The Bristol acquisition was accounted for as a
purchase. Results of operations relating to Bristol are included in the
Corporation's Consolidated Financial Statements only for the period subsequent
to the effective date of the acquisition. Webster maintained Bristol as a
separate savings bank subsidiary until November 1, 1995, when First Federal Bank
and Bristol were merged and concurrently renamed as Webster Bank.
5
<PAGE>
FDIC ASSISTED ACQUISITIONS
Webster Bank significantly expanded its retail banking operations through
assisted acquisitions of First Constitution in October 1992 and Suffield in
September 1991 from the FDIC. These acquisitions, which were accounted for as
purchases, involved financial assistance from the FDIC and extended Webster
Bank'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.
6
<PAGE>
LENDING ACTIVITIES
General. Webster originates residential, consumer and business loans. Total
loans receivable, before the allowance for loan losses, were $3.8 billion at
December 31, 1997 and $3.6 billion at December 31, 1996. All references to loan
and allowance for loan loss balances and ratios in the Lending Activities
section exclude Segregated Assets, which are discussed immediately after this
section. At December 31, 1997, first mortgage loans secured by one-to-four
family properties comprised 73.9% of the Corporation's loan portfolio. The
allowance for losses on residential mortgage loans was $22.0 million at December
31, 1997.
Nonaccrual loans, which include loans delinquent 90 days or more, were
$37.7 million at December 31, 1997, compared to $41.6 million at December 31,
1996, out of a total loan portfolio, before net items, of approximately $3.9
billion at December 31, 1997 and $3.7 billion at December 31, 1996. The ratio of
nonaccrual loans to total loans before net items was 1.0% and 1.1% at December
31, 1997 and 1996, respectively. Nonaccrual assets, which include nonaccrual
loans and foreclosed properties were $45.9 million and $54.8 million at December
31, 1997 and 1996, respectively.
One-to-Four Family First Mortgage Loans. Webster originates both fixed-rate
and adjustable-rate residential mortgage loans. At December 31, 1997,
approximately 55% of Webster's total residential mortgage loans before net items
were adjustable-rate loans. Webster offers adjustable-rate mortgage loans at
initial interest rates discounted from the fully indexed rate. Adjustable-rate
loans originated during 1997, when fully indexed, will be 2.75% above the
constant maturity one-year U.S. Treasury yield index.
At December 31, 1997, $1.3 billion or approximately 45% of Webster's total
residential mortgage loans before net items had fixed rates. Webster sells
mortgage loans in the secondary market when such sales are consistent with its
asset/liability management objectives. At December 31, 1997, Webster had $1.7
million of adjustable and fixed-rate mortgage loans held for sale.
Commercial and Commercial Real Estate Mortgage Loans. Webster had $493.8
million, or 12.9% of its total loans receivable, net of fees and costs, in
commercial and commercial real estate loans outstanding as of December 31, 1997,
excluding Segregated Assets. At December 31, 1997, $19.2 million of Webster's
$49.8 million allowance for loan losses was allocated to commercial and
commercial real estate loans. See "Management's Discussion and Analysis of
Financial Condition & Results of Operations" ("MD&A") contained in the Annual
Report to Shareholders incorporated herein by reference. Portions of the Annual
Report are filed as an exhibit hereto. Also see "Business -- Lending Activities
- --Nonaccrual Assets and Delinquencies" for more information about Webster's
asset quality, allowance for loan losses and provisions for loan losses.
Consumer Loans. At December 31, 1997, consumer loans were $455.0 million or
11.9% of Webster's total loans receivable net of fees and costs. Consumer loans
consist primarily of home equity credit lines, home improvement loans, passbook
loans and other consumer loans. The allowance for losses on consumer loans was
$8.6 million at December 31, 1997.
7
<PAGE>
The following table sets forth the composition of Webster's loan portfolio,
excluding Segregated Assets, in dollar amounts and in percentages at the dates
shown, and a reconciliation of loans receivable, net.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------ -----------------
AMOUNT % AMOUNT % AMOUNT %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
1-4 family units............................... $ 2,824,280 73.9% $ 2,686,792 73.8% $ 2,379,622 79.2%
Multi-family units............................. 787 0.0 21,151 0.5 28,226 0.9
Construction................................... 100,524 2.6 93,973 2.6 60,836 2.0
---------- ------ ----------- ------ ----------- ------
Total residential mortgage loans............. 2,925,591 76.5 2,801,916 76.9 2,468,684 82.1
--------- ----- ---------- ------ ---------- ------
Commercial loans:
Commercial real estate......................... 251,997 6.6 245,714 6.8 172,836 5.8
Commercial construction........................ 22,203 0.6 9,079 0.2 9,895 0.3
Commercial non-mortgage........................ 219,610 5.7 202,900 5.6 72,253 2.4
------------ ------ ----------- ------ ------------ ------
Total commercial loans....................... 493,810 12.9 457,693 12.6 254,984 8.5
------------ ------ ----------- ----- ----------- ------
Consumer loans:
Home equity credit lines....................... 384,274 10.1 343,112 9.4 262,634 8.8
Other consumer................................ 70,680 1.8 82,986 2.3 68,993 2.3
------------ ------ ----------- ------ ----------- ------
Total consumer loans......................... 454,954 11.9 426,098 11.7 331,627 11.1
------------ ------ ----------- ----- ----------- ------
Loans receivable (net of fees and costs)......... 3,874,355 101.3 3,685,707 101.2 3,055,295 101.7
Allowance for loan losses........................ 49,753 1.3 43,185 1.2 50,281 1.7
------------ ------ ----------- ------ --------- -----
Loans receivable, net ........................ $ 3,824,602 100.0% $ 3,642,522 100.0% $ 3,005,014 100.0%
============ ===== ============== ===== ============ =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------
1994 1993
------------------ ------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential mortgage loans:
1-4 family units............................... $2,377,182 81.0% $2,098,920 85.3%
Multi-family units............................. 18,512 0.7 12,220 0.5
Construction................................... 59,252 2.0 33,930 1.4
---------- ----- ---------- -----
Total residential mortgage loans............. 2,454,946 83.7 2,145,070 87.2
---------- ----- --------- -----
Commercial loans:
Commercial real estate......................... 167,364 5.7 71,637 2.9
Commercial construction........................ 4,237 0.1 2,083 0.1
Commercial non-mortgage........................ 69,094 2.4 42,214 1.7
--------- ---- --------- ----
Total commercial loans....................... 240,695 8.2 115,934 4.7
--------- ---- ------- ----
Consumer loans:
Home equity credit lines....................... 243,097 8.3 212,059 8.6
Other consumer................................. 51,595 1.7 40,702 1.7
--------- ------ --------- ----
Total consumer loans......................... 294,692 10.0 252,761 10.3
-------- ----- --------- ------
Loans receivable (net of fees and costs)......... 2,990,333 101.9 2,513,765 102.2
Allowance for loan losses........................ 55,366 1.9 54,370 2.2
--------- ----- --------- ------
Loans receivable, net ........................ $2,934,967 100.0% $ 2,459,395 100.0%
========== ======= ============= =====
</TABLE>
8
<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, 1997.
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
--------------------------------------------------
MORE THAN
ONE YEAR ONE TO MORE THAN
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Contractual Maturity:
Construction loans:
Residential mortgage............... $ 100,378 $ 146 $ -- $ 100,524
Commercial mortgage................ 3,529 15,987 2,687 22,203
Commercial non-mortgage loans........ 93,688 84,533 41,389 219,610
---------- ---------- --------- --------
Total .......................... $ 197,595 $ 100,666 $ 44,076 $ 342,337
========== =========== ========== ========
Interest-Rate Sensitivity:
Fixed rates.......................... $ 23,120 $ 24,854 $ 8,510 $ 56,484
Variable rates....................... 174,475 75,812 35,566 285,853
---------- ---------- --------- ----------
Total .......................... $ 197,595 $ 100,666 $ 44,076 $ 342,337
========== =========== ========== ==========
</TABLE>
Purchase and Sale of Loans and Loan Servicing. Webster has been a
seller and purchaser of whole loans and participations in the secondary market.
Webster, in general sells fixed-rate mortgage loans and retains servicing for
the loans sold whenever possible. During the 1997 period, Webster reduced its
level of mortgage loans sold as it retained both fixed and variable-rate loans
for its own loan portfolio. Loans purchased in the secondary market by Webster
are typically adjustable-rate mortgage loans and purchased, in most cases, with
serving retained by the seller.
The following table sets forth information as to Webster's mortgage
loan servicing portfolio at the dates shown. The increase of total loans
serviced for 1996 is primarily due to the loans acquired in the Shawmut
Transaction and purchased mortgage loan servicing.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans owned and serviced............... $ 2,553,336 69.0% $ 2,571,474 68.5% $ 2,313,355 70.5%
Loans serviced for others.............. 1,146,853 31.0 1,184,713 31.5 967,008 29.5
--------- ------- ----------- ------- ------------- ------
Total loans serviced by Webster.... $3,700,189 100.0% $3,756,187 100.0% $ 3,280,363 100.0%
========== ======== ========== ========= ============= =======
</TABLE>
9
<PAGE>
The table below shows mortgage loan origination, purchase, sale and
repayment activities of Webster for the periods indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31 ,
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
First mortgage loan originations and purchases:
- -----------------------------------------------
Permanent:
Mortgage loans originated..................................... $ 406,870 $ 411,967 $ 338,122
Construction:
1-4 family units.............................................. 152,298 61,844 64,528
----------- ------------ ------------
Total permanent and construction loans originated............... 559,168 473,811 402,650
Loans and participations purchased.............................. 187,815 77,440 99,224
Loans acquired in the Shawmut Transaction. . . . . . ........... -- 344,036 --
------------ ------------ ------------
Total loans originated and purchased.......................... 746,983 895,287 501,874
----------- ------------ -----------
First mortgage loan sales and principal reductions:
- ---------------------------------------------------
Loans securitized and sold...................................... 56,649 84,838 145,655
Loan principal reductions....................................... 542,124 459,076 326,706
Reclassified to Foreclosed Properties........................... 24,535 18,141 15,775
----------- ------------ ------------
Total loans sold and principal reductions..................... 623,308 562,055 488,136
----------- ------------ ------------
Increase in mortgage loans receivable....................... $ 123,675 $ 333,232 $ 13,738
=========== ============ ============
</TABLE>
Nonaccrual Assets and Delinquencies. When an insured institution classifies
problem assets as either "substandard" or "doubtful," it is required to
establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets as "loss,"
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional valuation allowances. See "Classification
of Assets" below.
Interest on nonaccrual loans that would have been recorded as additional
income for the years ended December 31, 1997, 1996 and 1995 had the loans been
current in accordance with their original terms approximated $3,178,000,
$3,984,000, and $5,528,000, respectively.
See MD&A and Note 1(e) to the Consolidated Financial Statements contained
in the Annual Report to Shareholders incorporated herein by reference for
further nonaccrual loan information and a description of Webster's nonaccrual
loan policy.
10
<PAGE>
The following table sets forth information as to delinquent loans in
Webster's loans receivable portfolio before net items. Delinquency information
for Segregated Assets has been excluded.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
---------------------------------------------------------
PRINCIPAL PRINCIPAL
BALANCES % BALANCES %
-------- - -------- -
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Past due 30-89 days and still accruing:
Residential real estate.................... $ 30,986 0.79% $ 54,260 1.47%
Commercial................................. 12,689 0.33 5,214 0.14
Consumer................................... 6,413 0.16 7,810 0.21
--------- ------ ---------- -----
Total................................... $ 50,088 1.28% $ 67,284 1.82%
======== ======= ========== ======
</TABLE>
Classification of Assets. Under the OTS' problem assets classification
system, a savings institution's problem assets are classified as "substandard,"
"doubtful" or "loss" (collectively "classified assets"), depending on the
presence of certain characteristics. An asset is considered "substandard" if
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the institution will sustain
"some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full"on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified "loss" are those
considered "uncollectible" and of such little value that to continue to report
them as assets without the establishment of a specific loss reserve is not
warranted. In addition, assets that do not currently warrant classification in
one of the foregoing categories but which are deserving of management's close
attention are designated as "special mention" assets.
At December 31, 1997, the Bank's classified assets totaled $72.9 million,
consisting of $70.8 million in loans classified as "substandard," $2.1 million
in loans classified as "doubtful" and none classified as "loss". At December 31,
1996, the Bank's classified loans totaled $91.7 million, consisting of $89.6
million in loans classified as "substandard," $1.4 million in loans classified
as "doubtful" and $700,000 classified as "loss." In addition, at December 31,
1997 and 1996, the Bank had $8.9 million and $13.2 million, respectively, of
special mention loans.
Allowance for Loan Losses. Webster's allowance for loan losses at December
31, 1997 totaled $49.8 million. See MD&A - "Asset Quality" and "Comparison of
1997 and 1996 Years" contained in the Annual Report to Shareholders incorporated
herein by reference. In assessing the specific risks inherent in the portfolio,
management takes into consideration the risk of loss on Webster's nonaccrual
loans, classified loans and watch list loans including an analysis of the
collateral for the loans. Other factors considered are Webster's loss
experience, loan concentrations, local economic conditions and other factors.
11
<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 loan receivable portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at End of Period
Applicable to:
Residential mortgage loans.............. $ 21,979 75.51% $ 14,090 75.26% $ 23,898 80.43%
Commercial mortgage loans............... 10,711 7.08 10,549 7.65 12,385 6.47
Commercial non-mortgage loans........... 8,448 5.67 10,975 5.50 4,185 2.25
Consumer loans.......................... 8,615 11.74 7,571 11.59 9,813 10.85
--------- ------ ---------- ------ ---------- ------
Total............................... $ 49,753 100.00% $ 43,185 100.00% $ 50,281 100.00%
======== ====== ======== ======= ======= ======
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT %
------ ---- -------- ----
<S> <C> <C> <C> <C>
Balance at End of Period
Applicable to:
Residential mortgage loans.............. $ 30,787 81.81% $ 41,010 84.86%
Commercial mortgage loans............... 11,426 6.16 3,820 3.59
Commercial non-mortgage loans........... 4,325 2.18 1,992 1.52
Consumer loans.......................... 8,828 9.85 7,548 10.03
--------- -------- ------- -----
Total............................... $ 55,366 100.00% $ 54,370 100.00%
======== ======= ========= ======
</TABLE>
During 1997, Webster recorded an additional $7.2 million to the provision
for loan losses related to the loans acquired in the Derby and People's
acquisitions in order to bring the allowance allocated to these loans into
conformity with Webster's allowance policy.
During 1996, Webster sold $18.0 million of nonaccrual residential and
foreclosed properties in a bulk sale, and incurred charge-offs of $6.3 million
related to the sale. Approximately 50% of the assets sold were secured by
two-four family properties, condominiums or non-owner occupied single family
properties. Charge-offs of $6.3 million reduced the allowance for residential
mortgage loans and had no impact on 1996 earnings. The increase in the allowance
for commercial non-mortgage loans in 1996 was primarily a result of acquired
allowances for purchased loans related to the Shawmut Transaction.
12
<PAGE>
SEGREGATED ASSETS
Segregated Assets consist of the assets purchased from the FDIC in the
First Constitution acquisition which are subject to a loss-sharing arrangement
with the FDIC.
The following table sets forth information regarding Segregated Assets
delinquencies and nonaccruals at December 31, 1997 and 1996:
AT DECEMBER 31,
---------------
1997 1996
------ ------
(IN THOUSANDS)
Past due 30-89 days and still accruing:
Commercial real estate loans................ $ 1,967 $ 1,318
Multi-family loans.......................... -- 769
--------- ---------
1,967 2,087
--------- ---------
Loans accounted for on a nonaccrual basis:
Commercial real estate loans................ 2,912 3,337
Commercial non-mortgage loans............... 500 192
Multi-family real estate loans.............. -- 495
--------- ---------
3,412 4,024
--------- ---------
Total.................................... $ 5,379 $ 6,111
======= =======
Interest on nonaccrual Segregated Assets that would have been recorded as
additional income had the loans been current in accordance with their original
terms approximated $374,000, $433,000 and $1,207,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the contractual maturity and interest rate
sensitivity of commercial loans contained in the Segregated Assets portfolio at
December 31, 1997.
<TABLE>
<CAPTION>
CONTRACTUAL MATURITY
--------------------
MORE THAN
ONE YEAR ONE TO MORE THAN
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Contractual Maturity:
Commercial loans................ $ 500 $ 1,914 $ 1,903 $ 4,317
---------- ---------- ---------- ----------
Interest Rate Sensitivity:
Fixed Rates..................... $ -- $ 198 $ -- $ 198
Variable Rates.................. 500 1,716 1,903 4,119
---------- ---------- ---------- ----------
Total....................... $ 500 $ 1,914 $ 1,903 $ 4,317
========== ========== ======= ==========
</TABLE>
Additional information concerning Segregated Assets is included in the MD&A
and in Note 5 of the Consolidated Financial Statements contained in the 1997
Annual Report to Shareholders incorporated herein by reference.
INVESTMENT ACTIVITIES
The Bank has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of federal agencies,
certificates of deposit of federally insured banks and savings institutions,
federal funds and mortgage-backed securities and collateralized mortgage
obligations. Subject to various restrictions, the Bank may also invest a portion
of its assets in commercial paper, corporate debt securities, and mutual funds
13
<PAGE>
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly. The Bank also is required
to maintain liquid assets at regulatory minimum levels which vary from time to
time. See "Regulation."
Webster, as a Delaware corporation, has authority to invest in any type of
investment permitted under Delaware law. As a unitary holding company, however,
its investment activities are subject to certain regulatory restrictions.
Webster, directly or through the Bank, maintains an investment portfolio
that provides not only a source of income but also, due to staggered maturity
dates, a source of liquidity to meet lending demands and fluctuations in deposit
flows. The securities constituting Webster's investments in corporate bonds and
notes generally are publicly traded and are considered investment grade quality
by a nationally recognized rating firm. The commercial paper and collateralized
mortgage obligations ("CMOs") in Webster's investment portfolio are all rated in
at least the top two rating categories by at least one of the major rating
agencies at the time of purchase. One of the inherent risks of investing in
mortgage-backed securities, including CMOs, 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
mortgage-backed securities are sensitive to fluctuations in market interest
rates, declining in value as interest rates rise and increasing in value as
interest rates decrease. If interest rates decrease, as had been the case during
1997, the market value of loans and mortgage-backed securities generally will
increase causing the level of prepayments to increase. Webster also utilizes
interest-rate financial instruments to hedge mismatches in interest rate
maturities to reduce exposure to movements in interest rates. The objective of
interest-rate financial instruments is to offset the change in value of the
available for sale securities and trading account portfolios. See Notes 3 and 11
contained in the Annual Report to Shareholders incorporated herein by reference.
Except for $85.8 million invested by Webster at the holding company level in
common and preferred stock of certain entities and mutual funds at December 31,
1997, Webster's investments, directly and through the Bank, were investments of
the type permitted by federally chartered savings institutions. Webster's
investment portfolio is managed by its Treasurer in accordance with a written
investment policy approved by the Board of Directors. A report on investment
activities is presented to the Board of Directors monthly.
The average remaining life of the securities portfolio, exclusive of
equity securities with no maturity, is 23.4 and 22.6 years at December 31,1997
and 1996, respectively. Although the stated final maturity of these obligations
are long-term, the weighted average life generally is much shorter due to
prepayments of principal. At December 31, 1997, the duration of the trading,
available for sale and held to maturity portfolios: were approximately less than
one month, 1.7 years and 1.6 years, respectively.
Additional information for Investments is included in Note 3 of the
Consolidated Financial Statements contained in the 1997 Annual Report to
Shareholders incorporated herein by reference.
TRUST ACTIVITIES
The Bank through its subsidiary trust company, manages the assets of
individuals, small to medium size companies, as well as non-profit
organizations. At December 31, 1997, approximately $646 million in trust assets
were under management.
14
<PAGE>
SOURCES OF FUNDS
Deposits, loan repayments, securities payments and maturities, as well as
earnings, are the primary sources of the Bank's funds for use in its lending and
investment activities. While scheduled loan repayments and securities payments
are a relatively stable source of funds, deposit flows and loan prepayments are
influenced by prevailing interest rates, money market and local economic
conditions. The Bank also derives funds from Federal Home Loan Bank ("FHL Bank")
advances and other borrowings, as necessary, when the cost of these alternative
sources of funds are favorable.
Webster's main sources of liquidity are dividends from the Bank and net
proceeds from capital offerings and borrowings, while the main outflows are the
payments of dividends to common stockholders, capital securities expense and the
payment of interest to holders of Webster's 8 3/4% Senior Notes.
Webster attempts to control the flow of funds in its deposit accounts
according to its need for funds and the cost of alternative sources of funds.
Webster controls the flow of funds primarily by the pricing of deposits, which
is influenced to a large extent by competitive factors in its market area and
overall asset/liability management strategies.
Deposit Activities. Webster has developed a variety of innovative deposit
programs that are designed to meet depositors needs and attract both short-term
and long-term deposits from the general public. Webster's checking account
programs offer a full line of accounts with varying features that include
non-interest-bearing and interest-bearing account types. Webster's savings
account programs includes statement and passbook accounts, money market savings
accounts, club accounts and certificate of deposit accounts that offer short and
long-term maturity options. Webster offers IRA savings and certificate of
deposit accounts that earn interest on a tax-deferred basis. Webster also offers
special rollover IRA accounts for individuals who have received lump-sum
distributions. Webster's checking and savings deposit accounts have several
features that include: ATM Card and Check Card use, direct deposit, combined
statements, 24 hour automated telephone banking services, bank by mail services
and overdraft protection. Deposit customers can access their accounts in a
variety of ways including ATMs, PC banking, telephone banking or by visiting a
nearby branch. Webster had $25.0 million of brokered certificate of deposit
accounts at December 31, 1997.
Webster receives retail and commercial deposits through its 84 full service
banking offices. Webster relies primarily on competitive pricing policies and
effective advertising to attract and retain deposits while emphasizing the
objectives of quality customer service and customer convenience. The WebsterOne
Account is a banking relationship that affords customers the opportunity to
avoid fees, receive free checks, earn premium rates on savings and simplify
their bookkeeping with one combined account statement that links account
balances. Webster's Check Card can be used at over twelve million Visa merchants
worldwide to pay for purchases with money in a linked checking account. The
Check Card also serves as a ATM Card for receiving cash, for processing deposits
and transfers, and to obtain account balances 24 hours per day. Customer
services also include ATM facilities that use state-of-the-art technology with
membership in NYCE and PLUS networks and provide 24 hour access to linked
accounts. The Bank's PC Banking service allows customers the ability to transfer
money between accounts, review statements, check balances and pay bills through
personal computer use. The Bank's First Call telephone banking service provides
automated customer access to account information 24 hours per day, seven days
per week and also to service representatives at certain established hours.
Customers can transfer account balances, process stop payments and address
changes, place check reorders, open deposit accounts, inquire about account
transactions and request general information about Webster's products and
15
<PAGE>
services. Webster's services provide for automatic loan payment features from
its accounts as well as for direct deposit of Social Security, payroll, and
other retirement benefits.
Additional information concerning the deposits of Webster is included in
Note 8 of the Consolidated Financial Statements contained in the Annual Report
to Shareholders incorporated herein by reference.
The following table sets forth the deposit accounts of Webster in dollar
amounts and as percentages of total deposits at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996
---- ----
WEIGHTED % OF WEIGHTED % OF
AVERAGE TOTAL AVERAGE TOTAL
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ------ -------- ------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance by account type:
Demand deposits and NOW accounts... 1.36% $ 784,850 18.0% 1.66% $ 711,498 16.0%
Regular savings.................... 2.44 956,285 21.9 2.34 935,312 21.0
Money market accounts.............. 3.76 103,765 2.4 3.49 208,932 4.6
Time deposits...................... 5.35 2,520,856 57.7 5.39 2,601,819 58.4
---- ---------- ----- ----- ------------ -----
Total deposits.............................. 3.84% $ 4,365,756 100.0% 3.95% $ 4,457,561 100.0%
==== ========== ===== ==== ============ =====
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------
1995
----
WEIGHTED % OF
AVERAGE TOTAL
RATE AMOUNT DEPOSITS
-------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance by account type:
Demand deposits and NOW accounts... 1.85% $ 451,733 11.9%
Regular savings.................... 2.06 766,413 20.2
Money market accounts.............. 5.12 300,636 7.9
Time deposits...................... 5.61 2,278,930 60.0
----- ---------- -----
Total deposits.............................. 4.33% $ 3,797,712 100.0%
==== ========== ======
</TABLE>
16
<PAGE>
Borrowings. The FHL Bank System functions in a reserve credit capacity for
savings institutions and certain other home financing institutions. Members of
the FHL Bank System are required to own capital stock in the FHL Bank. Members
are authorized to apply for advances on the security of such stock and certain
of their home mortgages and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
creditworthiness standards have been met. Under its current credit policies, the
FHL Bank limits advances based on a member's assets, total borrowings and net
worth.
The Bank uses FHL Bank advances as an alternative source of funds to
deposits in order to fund its lending activities when it determines that it can
profitably invest the borrowed funds over their term. At December 31, 1997, the
Bank had outstanding FHL Bank advances of $1.1 billion and other borrowings of
$956.6 million compared with FHL Bank Advances of $559.9 million and other
borrowings of $166.1 million at December 31, 1996.
During 1997, reverse repurchase agreement transactions, federal funds
purchased and lines of credit with correspondent banks also were used as a
source of short-term borrowings. The Bank uses reverse repurchase agreements and
the aforementioned alternate sources of borrowed funds when the cost of such
borrowings are favorable as compared to other funding sources. The Bank's Money
Desk operation provided business and governmental customers short-term
investment services primarily through repurchase agreement and certificate of
deposit transactions.
Additional information concerning FHL Bank advances and other borrowings of
Webster is included in Notes 9 and 10 of the Consolidated Financial Statements
contained in the 1997 Annual Report to Shareholders incorporated herein by
reference.
BANK SUBSIDIARIES
At December 31, 1997, the Bank's direct investment in its service
subsidiary corporation, Webster Investment Services, Inc., totaled $496,000. As
of December 31, 1997, the activities of such service corporation subsidiary
consisted primarily of the selling of mutual funds and annuities through a third
party provider. The service corporation receives a portion of the sales
commissions generated and rental income for the office space leased to the
provider.
The Bank's direct investment in its trust subsidiary, Webster Trust
Company, N.A., totaled $9.7 million at December 31, 1997. The trust had
approximately $645.6 million in trust assets under management at December 31,
1997.
The Bank's direct investment in its operating subsidiary corporation, FCB
Properties, Inc., totaled $1.7 million at December 31, 1997. The primary
function of this operating subsidiary is the disposal of foreclosed properties.
The Bank also has a real estate investment trust ("REIT") operating
subsidiary corporation, Webster Preferred Capital Corporation. The primary
purpose of the REIT is to provide a cost effective means of raising funds,
including capital, on a consolidated basis for the Bank. The REIT's strategy is
to acquire, hold and manage real estate mortgage assets. At December 31, 1997,
the Bank's direct investment in this subsidiary totaled $737.1 million.
EMPLOYEES
At December 31, 1997, Webster had 1,449 employees (including 290 part-time
17
<PAGE>
employees), none of whom were represented by a collective bargaining group.
Webster maintains a comprehensive employee benefit program providing, among
other benefits, group medical and dental insurance, life insurance, disability
insurance, a pension plan, an employee investment plan and an employee stock
ownership plan. Management considers Webster's relations with its employees to
be good.
MARKET AREA AND COMPETITION
The Bank is headquartered in Waterbury, Connecticut (New Haven County) and
conducts business from its home office in downtown Waterbury and 83 branch
offices in Waterbury, Ansonia, Bethany, Branford, Cheshire, Derby, East Haven,
Hamden, Madison, Milford, Naugatuck, New Haven, North Haven, Orange, Oxford,
Prospect, Seymour, Southbury and West Haven (New Haven County): Watertown
(Litchfield County); Fairfield, Shelton, Stratford and Trumbull (Fairfield
County); Avon, Berlin, Bristol, East Hartford, East Windsor, Enfield,
Farmington, Glastonbury, Hartford, Manchester, Meriden, New Britain, Newington,
Plainville, Rocky Hill, Simsbury, Southington, Suffield, Terryville, West
Hartford, Wethersfield, Windsor and Windsor Locks (Hartford County); and
Cromwell and Middletown (Middlesex County). Waterbury is approximately 30 miles
southwest of Hartford and is located on Route 8 midway between Torrington and
the New Haven and Bridgeport metropolitan areas. Most of the Bank's depositors
live, and most of the properties securing its mortgage loans are located, in the
same area or the adjoining counties. The Bank's market area has a diversified
economy with the workforce employed primarily in manufacturing, financial
services, health care, industrial and technology companies. Webster has trust
offices located in the towns of Guilford, Westport, Greenwich, New Britain and
Meriden.
The Bank faces substantial competition for deposits and loans throughout
its market areas. The primary factors stressed by the Bank in competing for
deposits are interest rates, personalized services, the quality and range of
financial services, convenience of office locations, automated services and
office hours. Competition for deposits comes primarily from other savings
institutions, commercial banks, credit unions, mutual funds and other investment
alternatives. The primary factors in competing for loans are interest rates,
loan origination fees, the quality and range of lending services and
personalized service. Competition for origination of first mortgage loans comes
primarily from other savings institutions, mortgage banking firms, mortgage
brokers, commercial banks and insurance companies. The Bank faces competition
for deposits and loans throughout its market area not only from local
institutions but also from out-of-state financial institutions which have opened
loan production offices or which solicit deposits in its market area.
REGULATION
Webster, as a savings and loan holding company, and Webster Bank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator.
Webster Bank is also subject to regulation, supervision and examination by the
FDIC and as to certain matters by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). See "MD&A" and "Notes to Consolidated
Financial Statements," incorporated herein by reference in the 1997 Annual
Report to Shareholders, as to the impact of certain laws, rules and regulations
on the operations of the Corporation and Webster Bank. Set forth below is a
description of certain regulatory developments.
Legislation was enacted in September 1996 to address the
undercapitalization of the
18
<PAGE>
SAIF of the FDIC (the "SAIF Recapitalization Legislation"). The SAIF
Recapitalization Legislation, in addition to providing for a special assessment
to recapitalize the insurance fund, also contemplated the merger of the SAIF
with the BIF, of which Webster Bank is a member, and which generally insures
deposits in national and state-chartered banks. The combined deposit insurance
fund, which would be formed no earlier than January 1, 1999, would insure
deposits at all FDIC insured depository institutions. As a condition to the
combined insurance fund, however, no insured depository institution can be
chartered as a savings association (such as Webster Bank). Several proposals for
abolishing the federal thrift charter were introduced in Congress during 1997 in
bills addressing financial services modernization, including a proposal from the
Treasury Department developed pursuant to requirements of the SAIF
Recapitalization Legislation. While no legislation was passed in 1997, it is
anticipated that the issue will be taken up again by Congress in 1998. If
legislation is passed abolishing the federal thrift charter, Webster Bank may be
required to convert its federal charter to either a new federal type of bank
charter or state depository institution charter. Such future legislation also
may result in the Corporation becoming regulated as a bank holding company by
the Federal Reserve Board rather than a savings and loan holding company
regulated by the OTS. Regulation by the Federal Reserve Board could subject the
Corporation to capital requirements that are not currently applicable to the
Corporation as a holding company under OTS regulation and may result in
statutory limitations on the type of business activities in which the
Corporation may engage at the holding company level, which business activities
currently are not restricted. The Corporation and Webster Bank are unable to
predict whether such legislation will be enacted.
Various proposals were introduced in Congress in 1997 to permit the payment
of interest on required reserve balances, and to permit savings institutions and
other regulated financial institutions to pay interest on business demand
accounts. While this legislation appears to have strong support from many
constituencies, Webster and Webster Bank are unable to predict whether such
legislation will be enacted.
During 1997, the OTS continued its comprehensive review of its regulations
to eliminate duplicative, unduly burdensome and unnecessary regulations. The OTS
revised or has proposed revising regulations addressing liquidity requirements,
capital distributions, deposit accounts and application processing. The recently
adopted revisions to the OTS liquidity requirements lowered the minimum
liquidity requirement for a federal savings institution from 5% to 4%, but made
clear that an institution must maintain sufficient liquidity to ensure its safe
and sound operation. The revisions also added certain mortgage-related
securities and mortgage loans to the types of assets that can be used to meet
liquidity requirements, and provided alternatives for measuring compliance with
the requirements.
The recently proposed revisions to the OTS capital distribution
regulation would conform the definition of "capital distribution" to the
definition used in the OTS prompt corrective action regulations, and would
delete the three classifications of institutions. Under the proposal, there
would be no specific limitation on the amount of permissible capital
distributions, but the OTS could disapprove a capital distribution if the
institution would not be at least adequately capitalized under the OTS prompt
correction action regulations following the distribution, if the distribution
raised safety or soundness concerns, or if the distribution violated a
prohibition contained in any statute, regulation, or agreement between the
institution and the OTS, or a condition imposed on the institution by the OTS.
The OTS would consider the amount of the distribution when determining whether
it raised safety or soundness concerns.
TAXATION
Federal. Webster, on behalf of itself and its subsidiaries, files a
calendar tax year
19
<PAGE>
consolidated federal income tax return, except for the Bank's REIT subsidiary,
which files a stand alone return. Webster and its subsidiaries report their
income and expenses using the accrual method of accounting. 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 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. At December 31, 1997, Webster had pre-1988 reserves of approximately
$27.2 million.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax. For tax years
beginning after 1986, a savings institution must pay an alternative minimum tax
equal to the amount (if any) by which 20% of alternative minimum taxable income
("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax
due. AMTI equals regular taxable income increased or decreased by certain
adjustments and increased by certain tax preferences, including depreciation
deductions in excess of those allowable for alternative minimum tax purposes,
tax-exempt interest on most private activity bonds issued after August 7, 1986
(reduced by any related interest expense disallowed for regular tax purposes),
the amount of the bad debt reserve deduction claimed in excess of the deduction
based on the experience method and, for tax years after 1989, 75% of the excess
of adjusted current earnings over AMTI. AMTI may be reduced only up to 90% by
net operating loss carryovers, but the payment of alternative minimum tax will
give rise to a minimum tax credit which will be available with an indefinite
carryforward period, to reduce federal income taxes of the institution in future
years (but not below the level of alternative minimum tax arising in each of the
carryforward years).
Webster's federal income tax returns have been examined by the Internal
Revenue Service for tax years through 1993.
State. State income taxation is in accordance with the corporate income tax
laws of the State of Connecticut and other states on an apportioned basis. For
the State of Connecticut, the Bank and its subsidiaries, exclusive of the REIT
Subsidiary, are required to pay taxes under the larger of two methods but no
less than the minimum tax of $250 per entity. Method one is 10.50% (scheduled to
decrease to 7.5% by 2000) of the year's taxable income (which, with certain
exceptions, is equal to taxable income for federal purposes) or method two
(additional tax on capital), an amount equal to 3 and 1/10 mills per dollar on
its average capital and a special rule for banks to calculate its additional tax
base is an amount equal to 4% of the amount of interest or dividends credited by
the Bank on savings accounts of depositors or account holders during the
preceding taxable year, provided that, in determining such amount, interest or
dividends credited to the savings account of a depositor or account holder are
deemed to be the lesser of the actual interest or dividends credited or the
interest or dividend that would have been credited if it had been computed and
credited at the rate of one-eighth of 1% per annum.
ITEM 2. PROPERTIES
At December 31, 1997, Webster had 31 banking offices in New Haven County,
41 banking offices in Hartford County, 7 banking offices in Fairfield County, 2
banking offices in
20
<PAGE>
Litchfield County and 3 banking offices in Middlesex County. Of these, 46
offices are owned and 38 offices are leased. Lease expiration dates range from 1
to 24 years with renewal options of 3 to 10 years. Additionally, the Bank
maintains five trust offices: two in New Haven County, two in Fairfield County
and one in Hartford county.
The total net book value of properties and furniture and fixtures owned and
used for banking offices at December 31, 1997 was $39.9 million, which includes
the aggregate net book value of leasehold improvements on properties used for
offices of $2.3 million at that date.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997, there were no material pending legal proceedings,
other than ordinary routine litigation incident to its business, to which
Webster was a party or to which any of its property was subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Webster is traded over-the-counter on the Nasdaq
National Market System under the symbol "WBST."
The following table shows dividends declared and the market price per share
by quarter for 1997 and 1996. Webster increased its quarterly dividend to $.20
per share in 1997.
<TABLE>
<CAPTION>
Common Stock (Per Share)
----------------------------------------------------------
Market Price
Cash ------------------------------------------
Dividends End of
Declared Low High Period
-------- --- ---- ------
1997:
<S> <C> <C> <C> <C>
Fourth.............. $ .20 $ 57 $ 67 3/4 $ 66 1/2
Third............... .20 43 3/8 59 3/4 58 3/4
Second.............. .20 34 5/8 45 3/4 45 1/2
First............... .20 35 1/8 41 3/8 35 1/8
1996:
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
</TABLE>
Payment of dividends from Webster Bank to Webster is subject to certain
regulatory and other restrictions. Payment of dividends by Webster on its stock
is subject to various restrictions, none of which is expected to limit any
dividend policy which the Board of Directors may in the future decide to adopt.
Under Delaware law, Webster may pay dividends out of surplus or, in the event
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. Dividends may not be paid
out of net
21
<PAGE>
profits, however, if the capital of Webster has been diminished to an amount
less than the aggregate amount of capital represented by all classes of issued
and outstanding preferred stock.
Other Events
Webster announced on March 17, 1998 that its Board of Directors declared a
two-for-one stock split. The stock split is subject to approval by Webster's
shareholders of an amendment to Webster's certificate of incorporation to
increase the authorized number of shares of Webster common stock from 30,000,000
to 50,000,000 shares, which will be considered by shareholders at a special
meeting to be held on April 2, 1998. Webster issued a press release on March 17,
1998 describing the stock split and providing additional information about
Webster.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STATEMENT OF CONDITION DATA (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)*
- --------------------------------------------------------------------------------
AT DECEMBER 31,
--------------------------------------------------------------------
AT OR FOR YEAR ENDED: 1997 1996 1995 1994 1993
--------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $7,019,621 $5,607,210 $4,883,402 $4,677,859 $4,032,451
Loans receivable, net 3,824,602 3,642,522 3,005,014 2,934,967 2,459,395
Securities 2,787,240 1,577,702 1,505,919 1,300,793 1,135,168
Intangible assets 48,919 49,448 10,865 12,806 16,083
Deposits 4,365,756 4,457,561 3,797,712 3,781,393 3,272,262
Shareholders' equity 382,186 336,832 334,580 264,404 235,151
OPERATING DATA YEARS ENDED DECEMBER 31,
- -------------- ---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ -------------- ------------- ------------- -----------
Net interest income $191,925 $ 169,037 $ 135,331 $ 140,612 $ 117,785
Provision for loan losses 15,835 9,788 5,726 5,609 8,082
Noninterest income 35,990 32,179 27,902 17,467 20,024
Noninterest expenses:
Merger and acquisition expenses (a) 27,058 500 4,271 700 --
Other noninterest expenses 131,489 130,055 108,465 112,599 89,001
-------- -------------- ------------- ----------- -------
Total noninterest expenses 158,547 130,555 112,736 113,299 89,001
-------- -------------- ------------- ------------- -----------
Income before taxes 53,533 60,873 44,771 39,171 40,726
Income taxes 19,735 22,372 15,450 11,211 17,033
--------- -------------- ------------- ------------- ------------
Net income before cumulative change 33,798 38,501 29,321 27,960 23,693
Cumulative effect of change in method
of accounting for income taxes -- -- -- -- 6,408
--------- -------------- ------------- ------------- -----------
NET INCOME 33,798 38,501 29,321 27,960 30,101
Preferred stock dividends -- 1,149 1,296 1,716 2,653
--------- -------------- ------------- ------------- -----------
Income available to common shareholders $ 33,798 $ 37,352 $ 28,025 $ 26,244 $ 27,448
========= ============== ============= ============= ===========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SIGNIFICANT STATISTICAL DATA
<S> <C> <C> <C> <C> <C>
Interest-rate spread 3.02% 3.12% 2.80% 3.18% 3.03%
Net interest margin 3.17% 3.23% 2.96% 3.27% 3.14%
Return on average shareholders' equity 9.72% 11.20% 10.08% 10.76% 10.17%
Net income per common share (b)
Basic $ 2.51 $ 2.82 $ 2.35 $ 2.30 $ 2.04
Diluted $ 2.44 $ 2.66 $ 2.22 $ 2.17 $ 1.94
Dividends declared per common share (c) $ 0.80 $ 0.68 $ 0.64 $ 0.52 $ 0.50
Dividend payout ratio 32.79% 25.56% 28.83 23.96% 25.77%
Noninterest expenses to average assets 2.50% 2.38% 2.37% 2.47% 2.27%
Noninterest expenses (excluding foreclosed
property expenses and provisions, net)
to average assets 2.46% 2.32% 2.24% 2.25% 2.00%
Diluted weighted average shares 13,828 14,460 13,202 12,877 11,810
Book value per common share $ 27.99 $ 25.18 $ 24.41 $ 21.37 $ 20.74
Tangible book value per common share $ 24.41 $ 21.61 $ 23.57 $ 20.26 $ 19.16
Shareholders' equity to total assets 5.44% 6.01% 6.85% 5.65% 5.83%
</TABLE>
* Information for all periods presented has been restated to reflect the
inclusion of the results of People's Savings Financial Corp., DS Bancor, Inc.,
Shelton Bancorp, Inc. and Shoreline Bank and Trust Company which were acquired
on July 31, 1997, 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 1997 and 1996 Years
and 1996 and 1995 Years and Note 18 to the Consolidated Financial Statements in
the Corporation's 1997 Annual Report to Shareholders which is incorporated
herein by reference.
(b) Before cumulative change in the method of accounting for Income Taxes in
1993. After such cumulative change, basic net income per common share for 1993
was $2.72 and diluted net income per share was $2.48.
(c) 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on Pages 19 to 28 of the Corporation's 1997 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is incorporated herein by reference from pages 22
to 24 of the Corporation's 1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is incorporated herein by reference from Pages 29
to 60 of the Corporation's 1997 Annual Report to Shareholders.
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and executive officers of the
Corporation is omitted from this report as the Corporation has filed its
definitive proxy statement within 120 days after the end of the fiscal year
covered by this Report, and the information included therein is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and directors
is omitted from this Report as the Corporation has filed a definitive proxy
statement within 120 days after the end of the fiscal year covered by this
Report, and the information included therein (excluding the Personnel Resources
Committee Report on Executive Compensation and the Comparative Company
Performance information) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is omitted from this Report as the
Corporation has filed a definitive proxy statement within 120 days after the end
of the fiscal year covered by this Report, and the information included therein
is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
omitted from this Report as the Corporation has filed a definitive proxy
statement within 120 days after the end of the fiscal year covered by this
Report, and the information included therein is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following Consolidated Financial Statements of the Registrant
and its subsidiary included in its Annual Report to Shareholders
for the year ended December 31, 1997, are incorporated herein by
reference in Item 8. The remaining information appearing in the
Annual Report to Shareholders is not deemed to be filed as part
of this Report, except as expressly provided herein.
24
<PAGE>
Consolidated Statements of Condition - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report
(a)(2) All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(a)(3) The following exhibits are either filed as part of
this Report or are incorporated herein by reference; references
herein to First Federal Bank now mean Webster Bank.
Exhibit No. 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
2.1 Agreement and Plan of Merger, dated as of October 26, 1997, by
and between the Corporation and Eagle Financial Corp.
(incorporated herein by reference to Exhibit 2.1 to the
Corporation's Current Report on Form 8-K filed on November 24,
1997).
2.2 Stock Option Agreement, dated October 26, 1997, between Eagle
Financial Corp. and the Corporation (incorporated herein by
reference to Exhibit 2.2 to the Corporation's Current Report on
Form 8-K filed on November 24, 1997).
Exhibit No. 3. Certificate of Incorporation and Bylaws.
3.1 Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the Corporation's Form 10-K filed on
March 27, 1997).
3.2 Certificate of Amendment of Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.2 to the
Corporation's Form 10-K filed on March 27, 1997).
3.3 Certificate of Designation for the Series C Participating
Preferred Stock (incorporated herein by reference to Exhibit 3.5
to the Corporation's Form 10-K filed on March 27, 1997).
3.4 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.6 to the
Corporation's Form 10-K filed on March 27, 1997).
3.5 Bylaws of Registrant.
25
<PAGE>
Exhibit No. 10. Material Contracts.
10.1 1986 Stock Option Plan of Webster Financial Corporation
(incorporated herein by reference to Exhibit 10(a) to the
Corporation's Form 10-K filed on March 27, 1987).
10.2 1992 Stock Option Plan of Webster Financial Corporation
(incorporated by reference to Exhibit 10.2 to the Corporation's
Form 10-K filed on March 31, 1994).
10.3 Amendment No. 1 to 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Corporation's Form 10-K filed on
March 31, 1994).
10.4 Amendment No. 2 to 1992 Stock Option Plan.
10.5 Short-Term Incentive Compensation Plan (incorporated by reference
to Exhibit 10.4 to the Corporation's Form 10-K filed on March 31,
1995).
10.6 Economic Value Added Incentive Plan (the description of the plan
in the first full paragraph on page 15 of the Corporation's
definitive proxy materials for the 1998 Annual Meeting of
Shareholders is incorporated herein by reference).
10.7 Long-Term Incentive Compensation Plan (incorporated by reference
to Exhibit 99.6 to the Corporation's Form 8-K/A filed on November
10, 1993).
10.8 Performance Incentive Plan (incorporated by reference to Exhibit
A to the Corporation's definitive proxy materials for the
Corporation's 1996 Annual Meeting of Shareholders).
10.9 First Federal Bank Deferred Compensation Plan for Directors and
Officers, effective December 7, 1987 (incorporated herein by
reference to Exhibit 10(1) to the Corporation's Form 10-K filed
on March 29, 1988).
10.10 Directors Retainer Fees Plan (incorporated herein by reference to
Exhibit B to the Corporation's definitive proxy materials for the
Corporation's 1996 Annual Meeting of Shareholders).
26
<PAGE>
10.11 Form of Stock Option Agreement for Executive Officers (Initial)
(incorporated herein by reference to Exhibit 10(l) to the
Corporation's Form 10-K filed on March 29, 1988).
10.12 Form of Stock Option Agreement for Directors (Initial)
(incorporated herein by reference to Exhibit 10(m) to the
Corporation's Form 10-K filed on March 29, 1988).
10.13 Form of Stock Option Agreement for Employees (1987) (incorporated
herein by reference to Exhibit 10(n) to the Corporation's Form
10-K filed on March 29, 1988).
10.14 Form of Incentive Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit
10.15 to the Corporation's Form 10-K filed on March 31, 1994).
10.15 Form of Incentive Stock Option Agreement (for employees with
severance agreements) (incorporated by reference to Exhibit 10.16
to the Corporation's Form 10-K filed on March 31, 1994).
10.16 Form of Incentive Stock Option Agreement (for employees with no
employment or severance agreements) (incorporated by reference to
Exhibit 10.17 to the Corporation's Form 10-K filed on March 31,
1994).
10.17 Form of Nonqualified Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit
10.18 to the Corporation's Form 10-K filed on March 31, 1994).
10.18 Form of Non-Incentive Stock Option Agreement (for non-employee
directors) (incorporated by reference to Exhibit 10.19 to the
Corporation's Form 10-K filed on March 31, 1994).
10.19 Form of Non-Incentive Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit
10.20 to the Corporation's Form 10-K filed on March 31, 1994).
10.20 Form of Non-Incentive Stock Option Agreement (for employees with
severance agreements) (incorporated by reference to Exhibit 10.21
to the Corporation's Form 10-K filed on March 31, 1994).
10.21 Form of Non-Incentive Stock Option Agreement (for employees with
no employment or severance agreements) (incorporated by reference
to Exhibit 10.22 to the Corporation's Form 10-K filed on March
31, 1994).
10.22 Form of Incentive Stock Option Agreement (for employees)
(revised) (incorporated by reference to Exhibit 10.22 to the
Corporation's Form 10-K filed on March 31, 1995).
10.23 Form of Nonqualified Stock Option Agreement (for employees with
employment agreements) (revised) (incorporated by reference to
Exhibit 10.23 to the Corporation's Form 10-K filed on March 31,
1995).
10.24 Form of Nonqualified Stock Option Agreement (immediate vesting)
(incorporated by reference to Exhibit 10.24 to the Corporation's
Form 10-K filed on March 31, 1995).
10.25 Form of Nonqualified Stock Option Agreement (for senior officers
of Bristol Mortgage) (incorporated by reference to Exhibit 10.25
to the Corporation's Form 10-K filed on March 31, 1995).
10.26 Supplemental Retirement Plan for Employees of First Federal Bank,
as amended and restated effective as of October 1, 1994
(incorporated by reference to Exhibit 10.26 to the Corporation's
Form 10-K filed on March 31, 1995).
10.27 Employment Agreement, dated as of January 1, 1998, among Webster
Bank, the Corporation and James C. Smith. See Schedule 10.27 for
a list of other executive officers of the Corporation and Webster
Bank who have an Employment Agreement substantially identical in
all material respects to the Employment Agreement of Mr. Smith,
except as to the name of the
27
<PAGE>
executive who is a party to the agreement and as otherwise
indicated on Schedule 10.27.
10.28 Amendment To Employment Agreement, entered into as of March 17,
1998, by and among Webster Bank, the Corporation and James C.
Smith. See Schedule 10.28 for a list of other executive officers
of the Corporation and Webster Bank who have an Amendment To
Employment Agreement substantially identical in all material
respects to the Amendment To Employment Agreement of Mr. Smith,
except as to the name of the executive who is a party to the
agreement.
10.29 Change of Control Employment Agreement, dated as of December 15,
1997, by and between the Corporation and James C. Smith. See
Schedule 10.29 for a list of other executive officers of the
Corporation who have a Change of Control Employment Agreement
substantially identical in all material respects to the Change of
Control Employment Agreement of Mr. Smith, except as to the name
of the executive who is a party to the agreement.
10.30 Purchase and Assumption Agreement among the FDIC, in its
corporate capacity as receiver of First Constitution Bank, First
Federal Bank and the FDIC, dated as of October 2, 1992
(incorporated herein by reference from the Registrant's Form 8-K
filed on October 19, 1992).
10.31 Amendment No. 1 to Purchase and Assumption Agreement, dated as of
August 8, 1994, between the FDIC and First Federal (incorporated
by reference to Exhibit 10.36 to the Corporation's Form 10-K
filed on March 31, 1995).
10.32 Indenture, dated as of June 15, 1993, between the Corporation and
Chemical Bank, as Trustee, relating to the Corporation's Senior
Notes due 2000 (incorporated herein by reference to Exhibit 99.5
to the Corporation's Form 8-K/A filed on November 10, 1993).
10.33 Junior Subordinated Indenture, dated January 29, 1997 between the
Corporation and the Bank of New York as Trustee, relating to the
Corporation's Junior Subordinated Deferrable Interest Debentures
(incorporated herein by reference to Exhibit 10.44 to the
Corporation's Form 10-K filed on March 27, 1997).
Exhibit No. 13. Annual Report to Shareholders.
Exhibit No. 21. Subsidiaries.
Exhibit No. 23. Consent of KPMG Peat Marwick LLP.
28
<PAGE>
Exhibit No. 27. Financial Data Schedule.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
(b) The following current reports on Form 8-K were filed by the Registrant
during the last quarter of the fiscal year 1997.
(i) Current Report on Form 8-K filed on November 7, 1997 (date
of report October 26, 1997) relating to the proposed
acquisition of Eagle Financial Corp. by the Corporation.
(ii) Current Report on Form 8-K filed on November 24, 1997 (date
of report October 26, 1997) attaching the Agreement and Plan
of Merger and Stock Option Agreement in connection with the
proposed acquisition of Eagle Financial Corp. by the
Corporation.
(iii) Current Report on Form 8-K filed on November 17, 1997 (date
of report November 17, 1997) attaching the consolidated
financial statements of the Corporation restated to reflect
the acquisition of People's Savings Financial Corp. (as
amended by the Form 8-K/As filed on January 26, 1998,
January 26, 1998 and February 6, 1998).
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) Not applicable.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 31, 1998.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
BY: /s/ James C. Smith
---------------------------
James C. Smith, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities noted as of March 31, 1998.
By: /s/ James C. Smith
--------------------------------------------
James C. Smith, Chairman and
Chief Executive Officer
Principal Executive Officer
By: /s/ John V. Brennan
---------------------------------------------
John V. Brennan, Executive Vice President,
Chief Financial Officer and Treasurer
Principal Financial Officer
Principal Accounting Officer
By: /s/ Achille A. Apicella
---------------------------------------------
Achille A. Apicella
Director
By: /s/ Joel S. Becker
---------------------------------------------
Joel S. Becker
Director
By: /s/ O. Joseph Bizzozero, Jr.
---------------------------------------------
O. Joseph Bizzozero, Jr.
Director
30
<PAGE>
By:
----------------------------------------------
John J. Crawford
Director
By: /s/ Harry P. DiAdamo, Jr.
---------------------------------------------
Harry P. DiAdamo, Jr.
Director
By: /s/ Robert A. Finkenzeller
----------------------------------------------
Robert A. Finkenzeller
Director
By: /s/ Walter R. Griffin
----------------------------------------------
Walter R. Griffin
Director
By: /s/ J. Gregory Hickey
----------------------------------------------
J. Gregory Hickey
Director
By:
----------------------------------------------
C. Michael Jacobi
Director
By: /s/ Marguerite F. Waite
----------------------------------------------
Marguerite F. Waite
Director
31
<PAGE>
EXHIBIT INDEX*
NUMBER DESCRIPTION
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of October 26, 1997, by and
between the Corporation and Eagle Financial Corp. (incorporated herein
by reference to Exhibit 2.1 to the Corporation's Current Report on
Form 8-K filed on November 24, 1997).
2.2 Stock Option Agreement, dated October 26, 1997, between Eagle
Financial Corp. and the Corporation (incorporated herein by reference
to Exhibit 2.2 to the Corporation's Current Report on Form 8-K filed
on November 24, 1997).
3.1 Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1 to the Corporation's Form 10-K filed on March
27, 1997).
3.2 Certificate of Amendment of Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.2 to the Corporation's
Form 10-K filed on March 27, 1997).
3.3 Certificate of Designation for the Series C Participating Preferred
Stock (incorporated herein by reference to Exhibit 3.5 to the
Corporation's Form 10-K filed on March 27, 1997).
3.4 Certificate of Amendment to Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.6 to the Corporation's
Form 10-K filed on March 27, 1997).
3.5 Bylaws of Registrant.
10.1 1986 Stock Option Plan of Webster Financial Corporation (incorporated
herein by reference to Exhibit 10(a) to the Corporation's Form 10-K
filed on March 27, 1987).
10.2 1992 Stock Option Plan of Webster Financial Corporation (incorporated
by reference to Exhibit 10.2 to the Corporation's Form 10-K filed on
March 31, 1994).
10.3 Amendment No. 1 to 1992 Stock Option Plan (incorporated by reference
to Exhibit 10.3 to the Corporation's Form 10-K filed on March 31,
1994).
10.4 Amendment No. 2 to 1992 Stock Option Plan.
10.5 Short-Term Incentive Compensation Plan (incorporated by reference to
Exhibit 10.4 to the Corporation's Form 10-K filed on March 31, 1995).
10.6 Economic Value Added Incentive Plan (the description of the plan in
the first full paragraph on page 15 of the Corporation's definitive
proxy materials for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference).
10.7 Long-Term Incentive Compensation Plan (incorporated by reference to
Exhibit 99.6 to the Corporation's Form 8-K/A filed on November 10,
1993).
10.8 Performance Incentive Plan (incorporated by reference to Exhibit A to
the Corporation's definitive proxy materials for the Corporation's
1996 Annual Meeting of Shareholders).
10.9 First Federal Bank Deferred Compensation Plan for Directors and
Officers, effective December 7, 1987 (incorporated herein by reference
to Exhibit 10(1) to the Corporation's Form 10-K filed on March 29,
1988).
10.10 Directors Retainer Fees Plan (incorporated herein by reference to
Exhibit B to the Corporation's definitive proxy materials for the
Corporation's 1996 Annual Meeting of Shareholders).
10.11 Form of Stock Option Agreement for Executive Officers (Initial)
(incorporated herein by reference to Exhibit 10(l) to the
Corporation's Form 10-K filed on March 29, 1988).
10.12 Form of Stock Option Agreement for Directors (Initial) (incorporated
herein by reference to Exhibit 10(m) to the Corporation's Form 10-K
filed on March 29, 1988).
10.13 Form of Stock Option Agreement for Employees (1987) (incorporated
herein by reference to Exhibit 10(n) to the Corporation's Form 10-K
filed on March 29, 1988).
10.14 Form of Incentive Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit 10.15 to
the Corporation's Form 10-K filed on March 31, 1994).
10.15 Form of Incentive Stock Option Agreement (for employees with severance
agreements) (incorporated by reference to Exhibit 10.16 to the
Corporation's Form 10-K filed on March 31, 1994).
10.16 Form of Incentive Stock Option Agreement (for employees with no
32
<PAGE>
employment or severance agreements) (incorporated by reference to
Exhibit 10.17 to the Corporation's Form 10-K filed on March 31, 1994).
10.17 Form of Nonqualified Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit 10.18 to
the Corporation's Form 10-K filed on March 31, 1994).
10.18 Form of Non-Incentive Stock Option Agreement (for non-employee
directors) (incorporated by reference to Exhibit 10.19 to the
Corporation's Form 10-K filed on March 31, 1994).
10.19 Form of Non-Incentive Stock Option Agreement (for employees with
employment agreements) (incorporated by reference to Exhibit 10.20 to
the Corporation's Form 10-K filed on March 31, 1994).
10.20 Form of Non-Incentive Stock Option Agreement (for employees with
severance agreements) (incorporated by reference to Exhibit 10.21 to
the Corporation's Form 10-K filed on March 31, 1994).
10.21 Form of Non-Incentive Stock Option Agreement (for employees with no
33
<PAGE>
employment or severance agreements) (incorporated by reference to
Exhibit 10.22 to the Corporation's Form 10-K filed on March 31, 1994).
10.22 Form of Incentive Stock Option Agreement (for employees) (revised)
(incorporated by reference to Exhibit 10.22 to the Corporation's Form
10-K filed on March 31, 1995).
10.23 Form of Nonqualified Stock Option Agreement (for employees with
employment agreements) (revised) (incorporated by reference to Exhibit
10.23 to the Corporation's Form 10-K filed on March 31, 1995).
10.24 Form of Nonqualified Stock Option Agreement (immediate vesting)
(incorporated by reference to Exhibit 10.24 to the Corporation's Form
10-K filed on March 31, 1995).
10.25 Form of Nonqualified Stock Option Agreement (for senior officers of
Bristol Mortgage) (incorporated by reference to Exhibit 10.25 to the
Corporation's Form 10-K filed on March 31, 1995).
10.26 Supplemental Retirement Plan for Employees of First Federal Bank, as
amended and restated effective as of October 1, 1994 (incorporated by
reference to Exhibit 10.26 to the Corporation's Form 10-K filed on
March 31, 1995).
10.27 Employment Agreement, dated as of January 1, 1998, among Webster Bank,
the Corporation and James C. Smith. See Schedule 10.27 for a list of
other executive officers of the Corporation and Webster Bank who have
an Employment Agreement substantially identical in all material
respects to the Employment Agreement of Mr. Smith, except as to the
name of the executive who is a party to the agreement and otherwise
indicated on Schedule 10.27.
10.28 Amendment To Employment Agreement, entered into as of March 17, 1998,
by and among Webster Bank, the Corporation and James C. Smith. See
Schedule 10.28 for a list of other executive officers of the
Corporation and Webster Bank who have an Amendment To Employment
Agreement substantially identical in all material respects to the
Amendment To Employment Agreement of Mr. Smith, except as to the name
of the executive who is a party to the agreement.
10.29 Change of Control Employment Agreement, dated as of December 15, 1997,
by and between the Corporation and James C. Smith. See Schedule 10.29
for a list of other executive officers of the Corporation who have a
Change of Control Employment Agreement substantially identical in all
material respects to the Change of Control Employment Agreement of Mr.
Smith, except as to the name of the executive who is a party to the
agreement.
10.30 Purchase and Assumption Agreement among the FDIC, in its corporate
capacity as receiver of First Constitution Bank, First Federal Bank
and the FDIC, dated as of October 2, 1992 (incorporated herein by
reference from the Registrant's Form 8-K filed on October 19, 1992).
34
<PAGE>
10.31 Amendment No. 1 to Purchase and Assumption Agreement, dated as of
August 8, 1994, between the FDIC and First Federal (incorporated by
reference to Exhibit 10.36 to the Corporation's Form 10-K filed on
March 31, 1995).
10.32 Indenture, dated as of June 15, 1993, between the Corporation and
Chemical Bank, as Trustee, relating to the Corporation's Senior Notes
due 2000 (incorporated herein by reference to Exhibit 99.5 to the
Corporation's Form 8-K/A filed on November 10, 1993).
10.33 Junior Subordinated Indenture, dated January 29, 1997 between the
Corporation and the Bank of New York as Trustee, relating to the
Corporation's Junior Subordinated Deferrable Interest Debentures
(incorporated herein by reference to Exhibit 10.44 to the
Corporation's Form 10-K filed on March 27, 1997).
13. Annual Report to Shareholders.
21. Subsidiaries.
23. Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
* References herein to First Federal Bank now mean Webster Bank.
35
BYLAWS
OF
WEBSTER FINANCIAL CORPORATION
(hereinafter called the "Corporation")
(As amended effective November 24, 1997)
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of the Corporation shall be
in the city of Wilmington, County of New Castle, State of Delaware.
SECTION 2. Other Offices. The Corporation may also have offices at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. Place of Meetings. Meetings of shareholders for the election of
directors or for any other purpose shall be held at such time and place, either
within or without the State of Delaware, as shall be designated from time to
time by the board of directors and stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
SECTION 2. Annual Meetings. The annual meetings of shareholders shall be held at
First Federal Plaza, Waterbury, Connecticut on the third Thursday of April at
11:00 a.m. or at such other place, date and hour as shall be designated from
time to time by the board of directors and stated in the notice of the meeting,
at which meetings the shareholders shall elect by a plurality vote a board of
directors and transact such other business as may properly be brought before the
meeting. Written notice of the annual meeting stating the place, date and hour
of the meeting shall be given to each shareholder entitled to vote at such
meeting not less than 20 nor more than 50 days before the date of the meeting.
The notice shall also set forth the purpose or purposes for which the meeting is
called.
SECTION 3. Business at Annual Meeting. At an annual meeting of the shareholders,
only such business shall be conducted as shall have been properly brought before
the meeting. To be properly brought before an annual meeting, business must be
(a) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the board of directors, (b) otherwise properly brought
before the meeting by or at the direction of the board of directors, or (c)
otherwise properly brought before the meeting by a shareholder.
For business to be properly brought before an annual meeting by a shareholder,
the shareholder must have given timely notice thereof in writing to the
secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 30 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 45 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
shareholder's notice to the secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to
1
<PAGE>
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder, and (d) any material interest of the shareholder in such business.
Notwithstanding anything in these bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 3. The chairman of an annual meeting shall, if the facts
warrant, determine and declare to the annual meeting that a matter of business
was not properly brought before the meeting in accordance with the provisions of
this Section 3, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
SECTION 4. Special Meetings. Special meetings of shareholders for any purpose
may be called only as provided in the Certificate of Incorporation. Written
notice of a special meeting stating the place, date and hour of the meeting and
the purpose or purposes for which the meeting is called shall be given not less
than 20 nor more than 50 days before the date of the meeting to each shareholder
entitled to vote at such meeting.
SECTION 5. Quorum. The holders of one-third of the capital stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder entitled to vote at the
meeting.
SECTION 6. Voting. Except as otherwise required by law, the Certificate of
Incorporation or these bylaws, any matter brought before any meeting of
shareholders shall be decided by the affirmative vote of the majority of the
votes cast on the matter. Each shareholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by such shareholder. The board of directors,
in its discretion, may require that any votes cast at such meeting shall be cast
by written ballot.
SECTION 7. List of Shareholders Entitled to Vote. The officer of the Corporation
who has charge of the stock ledger of the Corporation shall prepare and make, at
least ten days before every meeting of shareholders, a complete list of the
shareholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each shareholder and the number of shares registered
in the name of each shareholder. Such list shall be open to the examination of
any shareholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any shareholder of the Corporation who is present.
SECTION 8. Stock Ledger. The stock ledger of the Corporation shall be the only
evidence as to who are the shareholders entitled to examine the list required by
Section 7 of this Article II or to vote in person or
2
<PAGE>
by proxy at any meeting of shareholders.
SECTION 9. Proxies. At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or his duly authorized
attorney-in-fact. Proxies solicited on behalf of the board of directors shall be
voted as directed by the shareholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after three years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law to
support an irrevocable power.
SECTION 10. Voting of Shares in the Name of Two or More Persons. If shares or
other securities having voting power stand of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety or otherwise, or if two or more persons have
the same fiduciary relationship respecting the same shares, unless the secretary
of the Corporation is given written notice to the contrary and is furnished with
a copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect: (1) if only one votes, his act binds all; (2) if more than one
vote, the act of the majority so voting binds all; (3) if more than one vote,
but the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or any person voting the shares, or a
beneficiary, if any, may apply to the Court of Chancery of the State of Delaware
or such other court as may have jurisdiction to appoint an additional person to
act with the persons so voting the shares, which shall then be voted as
determined by a majority of such persons and the person appointed by the Court.
If the instrument so filed shows that any such tenancy is held in unequal
interests, a majority or even-split for the purposes of this subsection shall be
a majority or even-split in interest.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the name of
another corporation may be voted by any officer, agent or proxy as the bylaws of
such corporation may prescribe, or, in absence of such provision, as the board
of directors of such corporation may determine. Shares held by an administrator,
executor, guardian or conservator may be voted by him, but no trustees shall be
entitled to vote shares held by him without a transfer of such shares into his
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer into his name if authority so to do is contained
in an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such shares
unless in the transfer by the pledgor on the books of the Corporation he has
expressly empowered that pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
Neither treasury shares of its own stock held by the Corporation, nor shares
held by another corporation, if a majority of shares entitled to vote for the
election of directors of such other corporation are held by the Corporation,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office as
inspectors of election to act at such meeting or any adjournment thereof. The
number of inspectors shall be either one or three. If the board of directors so
appoints either one or three such inspectors, that appointment shall not be
altered at the meeting. If inspectors of election are not so appointed, the
chairman of the board or the president may, and on the
3
<PAGE>
request of not less than ten percent of the votes represented at the meeting
shall, make such appointments at the meeting. If appointed at the meeting, the
majority of the votes present shall determine whether one or three inspectors
are to be appointed. In case any person appointed as inspector fails to appear
or fails or refuses to act, the vacancy may be filled by appointment by the
board of directors in advance of the meeting or by the chairman of the board or
the president.
Unless otherwise prescribed by law, the duties of such inspectors shall include:
determining the number of shares of stock entitled to vote, the voting power of
each share, the shares of stock represented at the meeting, the existence of a
quorum, the authenticity, validity and effect of proxies; receiving votes,
ballots or consents; hearing and determining all challenges and questions in any
way arising in connection with the right to vote; counting and tabulating all
votes or consents; determining the result; and such acts as may be proper to
conduct the election or the vote with fairness to all shareholders.
SECTION 14. Conduct of Meetings. Annual and special meetings shall be conducted
in accordance with rules prescribed by the presiding officer of the meeting,
unless otherwise prescribed by law or these bylaws. The board of directors shall
designate, when present, either the chairman of the board or the president to
preside at such meetings.
ARTICLE III
DIRECTORS
SECTION 1. Number and Election of Directors. The number of directors shall be
eleven. Directors need not be residents of the State of Delaware. To be eligible
for nomination as a director, a nominee must be a resident of the State of
Connecticut at the time of his nomination or, if not then a resident, have been
previously a resident for at least three years.
Directors shall be elected only by shareholders at annual meetings of
shareholders, other than the initial board of directors and except as provided
in Section 2 of this Article III in the case of vacancies and newly created
directorships.
Each director elected shall hold office for the term for which he is elected and
until his successor is elected and qualified or until his earlier resignation or
removal. After the Corporation becomes publicly-owned, each director is required
to own not less than 100 shares of the common stock of the Corporation.
SECTION 2. Classes; Terms of Office; Vacancies. The board of directors shall
divide the directors into three classes; and, when the number of directors is
changed, shall determine the class or classes to which the increased or
decreased number of directors shall be apportioned; provided, further, that no
decrease in the number of directors shall affect the term of any director then
in office. At each annual meeting of shareholders, directors elected to succeed
those whose terms are expiring shall be elected for a term of office to expire
at the third succeeding annual meeting of shareholders and when their respective
successors are elected and qualified.
Vacancies and newly created directorships resulting from any increase in the
authorized number of directors may be filled, for the unexpired term, by the
concurring vote of a majority of the directors then in office, whether or not a
quorum, and any director so chosen shall hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor shall have been elected
and qualified.
4
<PAGE>
SECTION 3. Duties and Powers. The business of the Corporation shall be managed
by or under the direction of the board of directors which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation, or by these bylaws directed or
required to be exercised or done by the shareholders. The board of directors
shall annually elect a chairman of the board and a president from among its
members and shall designate, when present, either the chairman of the board or
the president to preside at its meetings.
SECTION 4. Meetings. The board of directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. The annual regular meeting of the board of directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of the shareholders. Additional regular meetings of the
board of directors shall be held monthly, and may be held without notice at such
time and at such place as may from time to time be determined by the board of
directors. Special meetings of the board of directors may be called by the
chairman of the board, the president or a majority of directors then in office.
Notice thereof stating the place, date and hour of the meeting shall be given to
each director either by mail not less than 48 hours before the date of the
meeting, or by telephone or telegram on 24 hours' notice.
SECTION 5. Quorum. Except as may be otherwise specifically provided by law, the
Certificate of Incorporation or these bylaws, at all meetings of the board of
directors, a majority of the directors then in office shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the board
of directors. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 6. Actions Without Meeting. Any action required or permitted to be taken
at any meeting of the board of directors or of any committee thereof may be
taken without a meeting, if all the members of the board of directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board of directors or
committee.
SECTION 7. Meetings by Means of Conference Telephone. Members of the board of
directors of the Corporation, or any committee designated by the board of
directors, may participate in a meeting of the board of directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
SECTION 8. Compensation. The board of directors shall have the authority to fix
the compensation of directors. The directors may be paid their reasonable
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a reasonable fixed sum for actual attendance at each meeting of the
board of directors. Directors, as such, may receive a stated salary for their
services. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
SECTION 9. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer
5
<PAGE>
is present at or participates in the meeting of the board of directors or
committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose if (i) the material
facts as to his or their relationship or interest and as to the contract or
transaction are disclosed or are known to the board of directors or the
committee, and the board of directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (ii) the material facts as to his or their relationship or interest
and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the board of directors, a committee thereof
or the shareholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of directors or
of a committee which authorizes the contract or transaction.
SECTION 10. Corporate Books. The directors may keep the books of the Corporation
outside of the State of Delaware at such place or places as they may from time
to time determine.
SECTION 11. Presumption of Assent. A director of the Corporation who is present
at meeting of the board of directors at which action on any matter is taken
shall be presumed to have assented to the action taken unless his dissent or
abstention shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the Corporation within five days after the
date he receives a copy of the minutes of the meeting. Such right to dissent
shall not apply to a director who voted in favor of such action.
SECTION 12. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the chairman of the board or the president
of the Corporation. Unless otherwise specified therein such resignation shall
take effect upon receipt thereof by the chairman of the board or the president.
More than three consecutive absences from regular meetings of the board of
directors, unless excused by resolution of the board of directors, shall
automatically constitute a resignation, effective when such resignation is
accepted by the board of directors.
SECTION 13. Nominees. Only persons who are nominated in accordance with the
procedures set forth in this Section 13 shall be eligible for election as
directors. Nominations of persons for election to the board of directors of the
Corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 13. Such nominations, other than those made
by or at the direction of the board of directors, shall be made pursuant to
timely notice in writing to the secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 30 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
less than 45 days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the 15th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person, and (iv) any other information relating to such person that is
required to be disclosed in solicitations or proxies for election of directors,
6
<PAGE>
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (b) as to the shareholder giving
notice (i) the name and address, as they appear on the Corporation's books, of
such shareholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder. At the request of the board of
directors, any person nominated by the board of directors for election as a
director shall furnish to the secretary of the Corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 13. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with
procedures prescribed by the bylaws, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 1. Appointment. The board of directors, by resolution adopted by a
majority of the full board, may designate the chief executive officer and two or
more other directors to constitute an executive committee. The chairman of the
board shall serve as the chairman of the executive committee, unless a different
director is designated as chairman by the board of directors. The designation of
any committee pursuant to this Article IV and the delegation of authority
thereto shall not operate to relieve the board of directors, or any director, of
any responsibility imposed by law or regulation.
SECTION 2. Authority. The executive committee, when the board of directors is
not in session, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it, except to the extent, if any, that such powers and
authority shall be limited by the resolution appointing the executive committee;
and except also that the executive committee shall not have the power or
authority of the board of directors with reference to amending the Certificate
of Incorporation; adopting an agreement of merger or consolidation; recommending
to the shareholders the sale, lease or exchange of all or substantially all of
the Corporation's property and assets; recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution; amending the
bylaws of the Corporation; filling a vacancy or creating a new directorship; or
approving a transaction in which any member of the executive committee, directly
or indirectly, has any material beneficial interest; and unless the resolution
or bylaws expressly so provide, the executive committee shall not have the power
or authority to declare a dividend or to authorize the issuance of stock or
securities convertible into or exercisable for stock.
SECTION 3. Tenure. Subject to the provisions of Section 8 of this Article IV,
each member of the executive committee shall hold office until the next annual
regular meeting of the board of directors following his designation and until
his successor is designated as a member of the executive committee.
SECTION 4. Meetings. Regular meetings of the executive committee may be held
without notice at such times and places as the executive committee may fix from
time to time by resolution. Special meetings of the executive committee may be
called by the chairman of the executive committee, the chief executive officer
or any two members thereof upon not less than one day's notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the executive committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in
7
<PAGE>
person. The notice of a meeting of the executive committee need not state the
business proposed to be transacted at the meeting.
SECTION 5. Quorum. A majority of the members of the executive committee shall
constitute a quorum for the transaction of business at any meeting thereof, and
action of the executive committee must be authorized by the affirmative vote of
a majority of the members present at a meeting at which a quorum is present.
SECTION 6. Action Without a Meeting. Any action required or permitted to be
taken by the executive committee at a meeting may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the members of the executive committee and the writings are filed with the
minutes of the proceedings of the committee.
SECTION 7. Vacancies. Any vacancy in the executive committee may be filled by a
resolution adopted by a majority of the full board of directors.
SECTION 8. Resignations and Removal. Any member of the executive committee may
be removed at any time with or without cause by resolution adopted by a majority
of the full board of directors. Any member of the executive committee may resign
from the executive committee at any time by giving written notice to the
chairman of the board or the president of the Corporation. Unless otherwise
specified therein, such resignation shall take effect upon receipt. The
acceptance of such resignation shall not be necessary to make it effective.
SECTION 9. Procedure. The executive committee may fix its own rules of procedure
which shall not be inconsistent with these bylaws. It shall keep regular minutes
of its proceedings and report the same to the full board of directors for its
information at the meeting thereof held next after the proceedings shall have
been taken.
SECTION 10. Other Committees. The board of directors by resolution shall
establish an audit committee, and a stock option committee, composed in each
case only of directors who are not employees of the Corporation or any
subsidiary thereof. The board of directors by resolution may also establish such
other committees composed of directors as they may determine to be necessary or
appropriate for the conduct of the business of the Corporation and may prescribe
the duties and powers thereof.
ARTICLE V
OFFICERS
SECTION 1. Positions. The officers of the Corporation shall be a president, one
or more vice presidents, a secretary and a treasurer, each of whom shall be
elected by the board of directors. The board of directors may also designate the
chairman of the board as an officer. The president shall be the chief executive
officer, unless the board of directors designates the chairman of the board as
the chief executive officer. The president may serve as the chairman of the
board, if so designated by the board of directors. The offices of the secretary
and treasurer may be held by the same person and a vice president may also be
either the secretary or the treasurer. The board of directors may designate one
or more vice presidents as executive vice president or senior vice president.
The board of directors may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers shall have
such authority and perform such duties as the board of directors may from time
to time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and
8
<PAGE>
duties as generally pertain to their respective offices.
SECTION 2. Election. The board of directors at its first meeting held after the
annual meeting of shareholders shall elect annually the officers of the
Corporation who shall exercise such powers and perform such duties as shall be
set forth in these bylaws and as determined from time to time by the board of
directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the board of directors may be removed at any
time by the affirmative vote of a majority of the board of directors. Any
vacancy occurring in any office of the Corporation shall be filled by the board
of directors. The salaries of all officers of the Corporation shall be fixed by
the board of directors.
SECTION 3. Removal. Any officer may be removed by the board of directors
whenever in its judgment the best interests of the Corporation will be served
thereby, but such removal, other than for cause, shall be without prejudice to
the contract rights, if any, of the person so removed.
SECTION 4. Voting Securities Owned by the Corporation. Powers of attorney,
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name of and on
behalf of the Corporation by the chairman of the board, the president or any
vice president, and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The board of directors may, by resolution, from time
to time confer like powers upon any other person or persons.
ARTICLE VI
STOCK
SECTION 1. Form of Certificates. Every holder of stock in the Corporation shall
be entitled to have a certificate signed by or in the name of the Corporation by
(i) the chairman of the board or the president and (ii) by the secretary or an
assistant secretary of the Corporation, representing the number of shares
registered in certificate form.
SECTION 2. Signatures. Any and all of the signatures on a certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
SECTION 3. Lost Certificates. The chairman of the board, the president or any
vice president may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the chairman of the board, the
president or any vice president may, in his discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as such officer may require and/or to give the Corporation a bond in
such sum as he may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
9
<PAGE>
SECTION 4. Transfers. Stock of the Corporation shall be transferable in the
manner prescribed by law and in these bylaws. Transfer of stock shall be made on
the books of the Corporation only by the person named in the certificate or by
his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
SECTION 5. Record Date. In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than 50 days nor less than 20 days before the date
of such meeting, nor more than 50 days prior to any other action. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
SECTION 6. Beneficial Owners. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise required by law.
ARTICLE VII
NOTICES
SECTION 1. Notices. Whenever written notice is required by law, the Certificate
of Incorporation or these bylaws to be given to any director, members of a
committee or shareholder, such notice may be given by mail, addressed to such
director, members of a committee or shareholder, at his address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
Unites States mail. Written notice may also be given personally or by telegram,
telex or cable.
SECTION 2. Waivers of Notice. Whenever any notice is required by law, the
Certificate of Incorporation or these bylaws to be given to any director, member
of a committee or shareholder, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting with the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at nor the purpose of any regular or special meeting of the
shareholders, directors, or members of a committee of directors need be
specified in any other waiver of notice unless so required by the Certificate of
Incorporation or these bylaws.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of
10
<PAGE>
the Certificate of Incorporation and the laws of the State of Delaware, may be
declared by the board of directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of capital stock of the Corporation.
Subject to the provisions of the General Corporation Law of the State of
Delaware, such dividends may be paid either out of surplus, out of the net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
SECTION 2. Disbursement. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be December 31.
SECTION 4. Corporate Seal. The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words. "Corporate
Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE IX
INDEMNIFICATION
SECTION 1. Power to Indemnify in Actions, Suits or Proceedings Other Than Those
by or in the Right of the Corporation. Subject to Section 3 of this Article IX,
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, and any appeal therein, whether civil, criminal,
administrative, arbitrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, trustee, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, trustee, employee or
agent of another corporation, association, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding, and any appeal
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding, and any
appeals therein, by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
SECTION 2. Power to Indemnify in Actions, Suits or Proceedings by or in the
Right of the Corporation. Subject to Section 3 of this Article IX, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, trustee, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against amounts paid in
settlement and expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit, If he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best
11
<PAGE>
interests of the Corporation; provided, however, that no indemnification shall
be made against expenses in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the Corporation or against
amounts paid in settlement unless and only to the extent that there is a
determination (as set forth in Section 3 of this Article IX) that despite the
adjudication of liability or the settlement, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or amounts paid in settlement.
SECTION 3. Authorization of Indemnification. Any indemnification under this
Article IX (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, trustee, employee or agent is proper in the circumstances
because such director, officer, trustee, employee or agent has met the
applicable standard of conduct set forth in Section 1 or Section 2 of this
Article IX and, if applicable, is fairly and reasonably entitled to indemnity as
set forth in the proviso in Section 2 of this Article IX, as the case may be.
Such determination shall be made (i) by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, (ii) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the shareholders. To the extent,
however, that a director, officer, trustee, employee or agent of the Corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire board of
directors.
SECTION 4. Good Faith Defined. For purposes of any determination under Section 3
of this Article IX, a person shall be deemed to have acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, or, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe his conduct was unlawful, if his action is
based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the officers of the Corporation
or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
association, partnership, joint venture, trust or other enterprise of which such
person is or was serving at the request of the Corporation as a director,
officer, trustee, employee or agent. The provisions of this Section 4 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standards of conduct set forth
in Sections 1 or 2 of this Article IX, as the case may be.
SECTION 5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article IX, and
notwithstanding the absence of any determination thereunder, any director,
officer, trustee, employee or agent may apply to any court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IX. The basis of
such indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he has met the applicable standards of conduct set
forth in Sections 1 and 2 of this Article IX, as the case may be. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
12
<PAGE>
Corporation promptly upon the filing of such application. Notwithstanding any of
the foregoing, unless otherwise required by law, no director, officer, trustee,
employee or agent of the Corporation shall be entitled to indemnification in
connection with any action, suit or proceeding voluntarily initiated by such
person unless the action, suit or proceeding was authorized by a majority of the
entire board of directors.
SECTION 6. Expenses Payable in Advance. Expenses incurred in connection with a
threatened or pending action, suit or proceeding may be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of the director, officer, trustee,
employee or agent to repay such amount if it shall be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article IX.
SECTION 7. Contract, Non-exclusivity and Survival of Indemnification. The
indemnification provided by this Article IX shall be deemed to be a contract
between the Corporation and each director, officer, employee and agent who
serves in such capacity at any time while this Article IX is in effect, and any
repeal or modification thereof shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought based in whole or
in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification and
advancement of expenses may be entitled under any certificate of incorporation,
bylaw, agreement, contract, vote of shareholders or disinterested directors or
pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 3 of this Article IX
concerning voluntary initiation of actions, suits or proceedings,
indemnification of the person specified in Sections 1 and 2 of this Article IX
shall be made to the fullest extent permitted by law. The provisions of this
Article IX shall not be deemed to preclude the indemnification of any person who
is not specified in Sections 1 and 2 of this Article IX but whom the Corporation
has the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of each person.
SECTION 8. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, trustee, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, trustee, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have the
power or the obligation to indemnify him against such liability under the
provisions of this Article IX.
SECTION 9. Meaning of "Corporation" for Purposes of Article IX. For purposes of
this Article IX, references to "the Corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, association,
partnership, joint venture, trust or other enterprises, shall stand in the same
position under the provisions of this Article IX with respect to the
13
<PAGE>
resulting of surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
ARTICLE X
AMENDMENTS
The board of directors or the shareholders may from time to time amend the
bylaws of the Corporation. Such action by the board of directors shall require
the affirmative vote of at least two-thirds of the directors then in office at a
duly constituted meeting of the board of directors called for such purpose. Such
action by the shareholders shall require the affirmative vote of at least
two-thirds of the total votes eligible to be voted at a duly constituted meeting
of shareholders called for such purpose.
***************
The foregoing bylaws were originally adopted by the board of directors on
October 6, 1986.
14
WEBSTER FINANCIAL CORPORATION
AMENDMENT NUMBER 2
TO 1992 STOCK OPTION PLAN
The Webster Financial Corporation 1992 Stock Option Plan, as amended (the
"Plan") is hereby amended as set forth below, effective March 18, 1996 ( the
"Adoption Date"), subject to approval of this Amendment Number 2 by the
shareholders of Webster Financial Corporation (the "Corporation"), as provided
below:
1. The second sentence of Section 3 of the Plan is further amended to
increase the number of shares covered by the Plan by 375,000 shares by
substituting the figure "780,500" for the figure "405,500."
2. Section 4(b) is amended to read in its entirety as follows:
"(b) Non-Employee Directors. Each Non-Employee
Director who is elected by the shareholders of the
Corporation to serve on the Board for a term beginning
after March 18, 1996 shall be granted an Option on the
date of such election to purchase 2,000 shares of the
Stock at the price on the date of such election and
upon the other terms and conditions specified in the
Plan, except that if a Non-Employee Director is elected
to serve on the Board for a term of less than three
years, the Option shall cover a number of shares of
Stock equal to 2,000, multiplied by a fraction, the
numerator is the number of whole months of the term to
which such Non-Employee Director was elected and the
denominator of which is 36, rounded to the nearest
whole share, The foregoing numbers of shares of Stock
shall be subject to adjustment pursuant to Section 17
hereof. Except as provided in this Section 4(b), no
Non-Employee Director shall be eligible to be granted
Options under this Plan."
3. The Plan shall otherwise be unchanged by this Amendment Number 2.
4. This Amendment Number 2 is adopted subject to approval within one year
of the Adoption Date by a majority of the votes present, in person or by proxy,
and entitled to vote at a duly held meeting of the shareholders of the
Corporation at which a quorum representing a majority of all outstanding voting
stock is present, in person or by proxy; provided, however, that upon approval
of Amendment Number 2 by the shareholders of the Corporation as set forth above,
any options granted under the Plan on or after the Adoption Date pursuant to
Amendment Number 2 shall be fully effective as if the shareholders of the
Corporation had approved Amendment
<PAGE>
Number 2 on the Adoption Date. If the shareholders fail to approve Amendment
Number 2 within one year of the Adoption Date, any options granted covering
shares of stock in excess of the number permitted under the Plan (as in effect
before the Adoption Date) shall be null and void and of no effect.
* * *
Amendment Number 2 to the Plan was duly adopted and approved by the Board
of Directors of the Corporation by resolution at a meeting held on March 18,
1996, subject to approval of Amendment Number 2 shareholders of the Corporation.
/s/ Lee A. Gagnon
-------------------------
Lee A. Gagnon, Secretary
JAMES C. SMITH
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 1, 1998, among WEBSTER BANK (the "Bank"),
WEBSTER FINANCIAL CORPORATION (the "Company") and James C. Smith (the
"Employee").
WHEREAS, the respective Boards of Directors of the Company and the Bank
have approved and authorized the entry into this Agreement with the Employee;
WHEREAS, the Employee is currently serving as the Chief Executive Officer,
of both the Company and the Bank under an Employment Agreement dated as of
January 1, 1997 (the "Prior Agreement");
WHEREAS, the parties desire to enter into this Agreement to set forth the
terms and conditions for the employment relationships of the Employee with the
Company and the Bank and to replace and supersede the Prior Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT. The Prior Agreement is hereby replaced and superseded and
the Prior Agreement shall be of no further force or effect after the date of
this Agreement. The Employee is employed as the Chief Executive Officer, of both
the Company and the Bank from the date hereof through the term of this
Agreement. As an executive of the Company and of the Bank, the Employee shall
render executive, policy, and other management services to the Company and the
Bank of the type customarily performed by persons serving in similar executive
officer capacities. The Employee shall also perform such duties as the Chief
Executive Officer and the Boards of Directors of the Company and of the Bank may
from time to time reasonably direct. During the term of this Agreement, there
shall be no material increase or decrease in the duties and responsibilities of
the Employee otherwise than as provided herein, unless the parties otherwise
agree in writing. During the term of this Agreement, the Employee shall not be
required to relocate to an area more than 35 miles from the Bank's home office
in order to perform the services hereunder.
2. SALARY. The Bank agrees to pay the Employee during the term of this
Agreement a base salary as follows: from the date hereof through December 31,
1998, a salary at an annual rate equal to $ 550,000, which salary may be
adjusted in January of each subsequent year during the term of this Agreement as
determined by the Boards of Directors of the Company and the Bank. In
determining salary adjustments, the Board of Directors may compensate the
Employee for increases in the cost of living and may also provide for
performance or merit adjustments. The salary under this Section 2 shall be
payable by the Bank to the Employee not less frequently than monthly. The
Company shall reimburse the Bank for a portion of the salary paid to the
Employee hereunder, which portion shall represent an appropriate allocation for
the services rendered to the Company hereunder. The Employee shall not be
entitled to receive fees for serving as a director of the Company or of the Bank
or for serving as a member of any committee of the Board of Directors of the
Company or of the Bank if he is elected to such positions.
<PAGE>
3. DISCRETIONARY BONUSES. In addition to his salary under Section 2 hereof,
the Employee shall be eligible to receive such discretionary bonuses as may be
authorized, declared, and paid by the Board of Directors of the Company or of
the Bank. No other compensation provided for in this Agreement shall be deemed a
substitute for such bonuses when and as declared by the Board of Directors of
the Company or the Bank.
4. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS; FRINGE BENEFITS.
The Employee shall be eligible to participate in any plan of the Company or of
the Bank relating to stock options, stock purchases, pension, thrift, profit
sharing, employee stock ownership, group life insurance, medical coverage,
disability insurance, education, or other retirement or employee benefits that
the Bank or the Company has adopted or may adopt for the benefit of its
executive employees. The Employee shall also be eligible to participate in any
other fringe benefits which are now or may be or become applicable to the
Company's or the Bank's executive employees. In addition, the Employee shall be
provided with a standard automobile or an automobile allowance for business use.
Participation in these plans and fringe benefits shall not reduce the salary
payable to the Employee under Section 2 hereof.
5. TERM. The initial term of employment under this Agreement shall be for a
period commencing on the date hereof and ending on December 31, 2000. The
Company and the Bank may renew this Agreement by written notice to the Employee
for one additional year on December 31, 1998 and each subsequent December 31
during the term of this Agreement, unless the Employee gives contrary written
notice to the other parties hereto prior to such renewal date. Each initial term
and all such renewed terms are collectively referred to herein as the term of
this Agreement.
6. STANDARDS. The Employee shall perform the Employee's duties and
responsibilities under this Agreement in accordance with such reasonable
standards as may be established from time to time by the Boards of Directors of
the Company or the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the savings
institutions industry.
7. VACATIONS. The Employee shall be entitled to an annual paid vacation of
at least four weeks per year, or such longer period as the Board of Directors of
the Company or the Bank may approve, in accordance with the vacation policy of
the Company or the Bank, as applicable. The timing of paid vacations shall be
scheduled in a reasonable manner by the Employee.
8. TERMINATION OF EMPLOYMENT.
(a) (i) The Board of Directors of the Company or the Bank may terminate the
Employee's employment at any time, but any termination by such Board of
Directors other than termination for cause shall not prejudice the Employee's
right to compensation or other benefits under this Agreement. The Employee shall
have no right to receive compensation or other benefits for any period after
termination for cause. The term "termination for cause" shall mean termination
because of the Employee's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, or regulation (other
than traffic violations or similar offenses) or
-2-
<PAGE>
final cease-and-desist order, or material breach of any provision of this
Agreement. In determining incompetence, the acts or omissions shall be measured
against standards generally prevailing in the savings institutions industry;
provided, that it shall be the Company's or the Bank's burden to prove the
alleged acts and omissions and the prevailing nature of the standards the
Company or the Bank shall have alleged are violated by such acts and/or
omissions.
(ii) The parties acknowledge and agree that damages which will result
to the Employee for termination without cause shall be extremely difficult or
impossible to establish or prove, and agree that, unless the termination is for
cause, the Bank shall be obligated, concurrently with such termination, to make
a lump sum cash payment to the Employee as liquidated damages of an amount equal
to the sum of (a) the Employee's then current annual base salary under Section 2
of this Agreement and (b) the amount of any bonuses paid to the Employee
pursuant to the Webster Financial Corporation and Webster Bank Annual Incentive
Compensation Plan during the then current fiscal year (which was earned with
respect to the prior fiscal year) multiplied by a fraction, the numerator of
which is the number of full months during the then current fiscal year in which
the Employee was employed hereunder and the denominator of which is 12. The
Employee agrees that, except for such other payments and benefits to which the
Employee may be entitled as expressly provided by the terms of this Agreement,
such liquidated damages shall be in lieu of all other claims which Employee may
make by reason of such termination. Such payment to the Employee shall be made
on or before the Employee's last day of employment with the Company or the Bank.
The liquidated damages amount shall not be reduced by any compensation which the
Employee may receive for other employment with another employer after
termination of his employment with the Company or the Bank.
(iii) In addition to the liquidated damages above described that are
payable to the Employee for termination without cause, the following shall apply
in the event of any termination without cause: (1) the Employee shall continue
to be entitled to medical and dental coverage as if his employment had not been
terminated until the earliest of (A) the expiration of one year after the date
his employment terminates, (B) the expiration of the remaining term of this
Agreement under Section 5, and (C) the date on which the Employee accepts other
employment on a substantially full time basis and (2) all insurance or other
provisions for indemnification, defense or hold-harmless of officers or
directors of the Company or the Bank which are in effect on the date the notice
of termination is sent to the Employee shall continue for the benefit of the
Employee with respect to all of his acts and omissions while an officer or
director as fully and completely as if such termination had not occurred, and
until the final expiration or running of all periods of limitation against
action which may be applicable to such acts or omissions.
(b) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act, as amended, the
Company's and the Bank's obligations under this Agreement shall be suspended as
of the date of service, unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, the Bank may in its discretion (i) pay the Employee
all or part of the compensation withheld while such contractual obligations were
suspended, and (ii) reinstate in whole or in part any of its obligations which
were suspended.
-3-
<PAGE>
(c) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act, as amended, all
obligations of the Company and the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights of the parties shall not
be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, as amended), all obligations under this Agreement shall
terminate as of the date of default, but this paragraph shall not affect any
vested rights of the parties.
(e) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank, (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or Resolution Trust Company enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act, as amended, or
(ii) by the Director or his or her designee at the time the Director or his or
her designee approves a supervisory merger to resolve problems related to
operation of the Bank or when the Bank is determined by the Director or his or
her designee to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by any termination
hereunder.
(f) The Employee shall have no right to terminate employment under this
Agreement prior to the end of the term of this Agreement, unless such
termination is approved by the Board of Directors of the Company or the Bank. In
the event that the Employee violates this provision, the Company and the Bank
shall be entitled, in addition to its other legal remedies, to enjoin the
employment of the Employee with any significant competitor of the Bank for a
period of one year or the remaining term of this Agreement plus six months,
whichever is less. The term "significant competitor" shall mean any commercial
bank, savings bank, savings and loan association, or mortgage banking company,
or a holding company affiliate of any of the foregoing, which at the date of its
employment of the Employee has an office out of which the Employee would be
primarily based within 35 miles of the Bank's home office.
(g) In the event the employment of the Employee is terminated by the
Company or the Bank without cause under Section 8(a) hereof and the Bank fails
to make timely payment of the amounts then owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorneys' fees, incurred by the Employee in taking action to
collect such amounts or otherwise to enforce this Agreement, plus interest on
such amounts at the rate of one percent above the prime rate (defined as the
base rate on corporate loans at large U.S. money center commercial banks as
published by The Wall Street Journal), compounded monthly, for the period from
the date the payment is due to be paid to the Employee until payment is made.
Such reimbursement and interest shall be in addition to all rights which the
Employee is otherwise entitled to under this Agreement.
(h) If during the term of this Agreement, the Employee's employment with
the Company and the Bank is terminated (whether voluntarily or involuntarily),
the Employee agrees
-4-
<PAGE>
to maintain the confidentiality of, and not to use, any non-public information
which he acquired during his employment concerning the Company or the Bank,
their respective subsidiaries, or any director, officer, employee or agent of
the aforesaid entities, including any information as to the customers, business
or personnel practices of such entities. The Employee agrees, for a period of
one year after the date of termination of his employment with the Company and
the Bank, that he will not (i) offer employment (or a consulting, agency,
independent contractor or other similar paid position) to any employee of the
Company, the Bank or any of their respective subsidiaries, or (ii) induce,
encourage or solicit any such employee to accept employment (or any aforesaid
position) with any company or entity with which the Employee may then be
employed or otherwise affiliated.
9. DISABILITY. If the Employee shall become disabled or incapacitated to
the extent that the Employee is unable to perform the Employee's duties and
responsibilities hereunder, the Employee shall be entitled to receive disability
benefits of the type provided for other executive employees of the Company and
the Bank and the obligations of the Company and the Bank hereunder shall be
limited to providing such benefits for the period of such disability.
10. NO ASSIGNMENTS; SUCCESSORS. This Agreement is personal to each of the
parties hereto. No party may assign or delegate any rights or obligations
hereunder without first obtaining the written consent of the other party hereto.
However, in the event of the death of the Employee all rights to receive
payments hereunder shall become rights of the Employee's estate. The Company
and/or the Bank shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company or the Bank expressly to assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company and the Bank would have been required to perform if no succession had
taken place. All references herein to the "Company" and the "Bank" shall refer
to any such successor.
11. OTHER CONTRACTS. The Employee shall not, during the term of this
Agreement, have any other paid employment other than with a subsidiary of the
Company, except with the prior approval of the Boards of Directors of the
Company and the Bank.
12. AMENDMENTS OR ADDITIONS; ACTION BY BOARD OF DIRECTORS. No amendments or
additions to this Agreement shall be binding unless in writing and signed by all
parties hereto. The prior approval by the Boards of Directors of the Company and
the Bank shall be required in order for the Company and the Bank to authorize
any amendments or additions to this Agreement, to give any consents or waivers
of provisions of this Agreement, or to take any other action under this
Agreement including any termination of employment with or without cause under
Section 8(a) hereof.
13. SECTION HEADINGS. The section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
-5-
<PAGE>
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Connecticut, excluding the choice of law rules thereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
or caused this Agreement to be duly executed on their behalf, as of the day and
year first above written.
Attest: WEBSTER FINANCIAL CORPORATION
/s/ Renee P. Seefried By /s/ Joel S. Becker
- ---------------------------- ----------------------------
Chairman, Personnel Resources
Committee
Attest: WEBSTER BANK
/s/ Renee P. Seefried By /s/ Joel S. Becker
- ---------------------------- ----------------------------
Chairman, Personnel Resources
Committee
EMPLOYEE
/s/ James C. Smith
----------------------------
James C. Smith
-6-
<PAGE>
SCHEDULE 10.27 TO EXHIBIT 10.27
Set forth below are the names of the executive officers of Webster
Financial Corporation and Webster Bank who have an Employment Agreement that is
substantially identical in all material respects to the Employment Agreement of
Mr. Smith as well as the material details of those agreements that differ from
the agreement of Mr. Smith:
John V. Brennan:
Current position with the Corporation and Webster Bank:
Executive Vice President, Treasurer and Chief Financial Officer
Current salary: $235,000
William T. Brommage
Current position with the Corporation and Webster Bank:
Executive Vice President, Business Banking
Current salary: $210,000
Peter K. Mulligan
Current position with the Corporation and Webster Bank:
Executive Vice President, Consumer and Small Business Banking
Current Salary: $200,000
Ross M. Strickland
Current position with the Corporation and Webster Bank:
Executive Vice President of Mortgage Banking
Current salary: $195,000
Exhibit 10.28
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement by and among the employee named
below (James C. Smith), Webster Financial Corporation (the "Corporation"), a
Delaware corporation, and Webster Bank (the "Bank"), is entered into as of March
17, 1998.
WHEREAS, the parties have entered into an Employment Agreement dated as of
January 1, 1998 (the "Employment Agreement"); and
WHEREAS, the Corporation and the Employee have entered into a Change of
Control Employment Agreement dated as of December 15, 1997 (the "Change of
Control Employment Agreement"); and
WHEREAS, the parties desire to amend the Employment Agreement to provide
that the Employment Agreement will terminate upon the Effective Date under the
Change of Control Employment Agreement;
NOW, THEREFORE, the parties hereby agree that the Employment Agreement
shall be amended as follows:
1. Section 5 of the Employment Agreement is amended by adding the following
new sentence at the end thereof:
"This Agreement shall terminate on the "Effective Date" (as defined in
the Change of Control Employment Agreement referred to immediately
below) of that certain Change of Control Employment Agreement, dated
as of December 15, 1997, by and between the Company and the Employee,
and this Agreement shall be of no further force or effect after such
Effective Date."
2. In all other respects, the Employment Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment to Employment
Agreement effective as of the date first above written.
WEBSTER FINANCIAL CORPORATION
ATTEST: /s/ John D. Benjamin By: /s/ Harriet M. Wolfe
----------------------------- --------------------------
(Assistant Secretary) Its: Secretary
--------------------------
WEBSTER BANK
ATTEST: /s/ John D. Benjamin By: /s/ Harriet M. Wolfe
----------------------------- --------------------------
(Assistant Secretary) Its: Secretary
--------------------------
EMPLOYEE
/s/ James C. Smith
-----------------------
Name: James C. Smith
-----------------------
<PAGE>
SCHEDULE 10.28 TO EXHIBIT 10.28
Set forth below are the names of the executive officers of Webster
Financial Corporation and Webster Bank who have an Amendment To Employment
Agreement that is substantially identical in all material respects to the
Amendment To Employment Agreement of Mr. Smith:
John V. Brennan
William T. Brommage
Peter K. Mulligan
Ross M. Strickland
CHANGE OF CONTROL
EMPLOYMENT AGREEMENT
AGREEMENT by and between Webster Financial Corporation, a Delaware
corporation (the "Company") and James C. Smith (the "Executive"), dated as of
the 15th day of December, 1997.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the second anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate two years from such Renewal Date, unless at least 60 days prior to
the Renewal Date the Company shall give notice to the Executive that the Change
of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
<PAGE>
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
-2-
<PAGE>
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the second anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
-3-
<PAGE>
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash at least equal to the Executive's highest
bonus under the Company's EVA Incentive Plan, or any comparable bonus under any
predecessor or successor plan, for the last three full fiscal years prior to the
Effective Date (annualized in the event that the Executive was not employed by
the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each
such Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled
to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in
-4-
<PAGE>
accordance with the most favorable plans, practices, programs and policies of
the Company and its affiliated companies in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
-5-
<PAGE>
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by
the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
-6-
<PAGE>
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within
30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the Recent Annual Bonus and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof
which has been earned but deferred (and annualized for any fiscal year
consisting of less than twelve full months or during which the
Executive was employed for less than twelve full months), for the most
recently completed fiscal year during the Employment Period, if any
(such higher amount being referred to as the "Highest Annual Bonus")
and (y) a fraction, the numerator
-7-
<PAGE>
of which is the number of days in the current fiscal year through the
Date of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in
each case to the extent not theretofore paid (the sum of the amounts
described in clauses (1), (2), and (3) shall be hereinafter referred
to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under the Company's qualified defined benefit
retirement plan (the "Retirement Plan") (utilizing actuarial
assumptions no less favorable to the Executive than those in effect
under the Company's Retirement Plan immediately prior to the Effective
Date), and any excess or supplemental retirement plan in which the
Executive participates (together, the "SERP") which the Executive would
receive if the Executive's employment continued for three years after
the Date of Termination assuming for this purpose that all accrued
benefits are fully vested, and, assuming that the Executive's
compensation in each of the three years is that required by Section
4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the
Executive's actual benefit (paid or payable), if any, under the
Retirement Plan and the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan, program,
practice or policy, the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 4(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect generally at any
time thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and to have
retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which shall be
selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits required to
be paid or provided
-8-
<PAGE>
or which the Executive is eligible to receive under any plan, program, policy or
practice or contract or agreement of the Company and its affiliated companies
(such other amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
-9-
<PAGE>
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to the excise tax imposed by Section 4999 of the Code or any interest or
penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any interest or
penalties imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it
shall be determined that the Executive is entitled to a Gross-Up Payment, but
that the Payments do not exceed 110% of the greatest amount (the "Reduced
Amount") that could be paid to the Executive such that the receipt of Payments
would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to
the Executive and the Payments, in the aggregate, shall be reduced to the
Reduced Amount.
-10-
<PAGE>
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by KPMG Peat Marwick
LLP or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim;
-11-
<PAGE>
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this
-12-
<PAGE>
Section 10 constitute a basis for deferring or withholding any amounts otherwise
payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: James C. Smith
33 Birchwood Terrace
Middlebury, CT 06762
If to the Company: Webster Financial Corporation
Webster Plaza
145 Bank Street
Waterbury, Connecticut 06702
Attention: Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
-13-
<PAGE>
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and,
subject to Section 1(a) hereof, prior to the Effective Date, the Executive's
employment and/or this Agreement may be terminated by either the Executive or
the Company at any time prior to the Effective Date, in which case the Executive
shall have no further rights under this Agreement. From and after the Effective
Date this Agreement shall supersede any other agreement between the parties with
respect to the subject matter hereof.
-14-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ James C. Smith
------------------
James C. Smith
WEBSTER FINANCIAL CORPORATION
By /s/ Joel S. Becker
---------------------
Joel S. Becker
-15-
<PAGE>
SCHEDULE 10.29 TO EXHIBIT 10.29
Set forth below are the names of the executive officers of Webster
Financial Corporation and Webster Bank who have a Change of Control Employment
Agreement that is substantially identical in all material respects to the Change
of Control Employment Agreement of Mr. Smith.
John V. Brennan
William T. Brommage
Peter K. Mulligan
Ross M. Strickland
2
DIRECTORS
JAMES C. SMITH, Chairman and Chief Executive Officer
ACHILLE A. APICELLA, President, Apicella, Testa & Company, P.C.
JOEL S. BECKER, Chairman and Chief Executive Officer, Torrington Supply Company
Co., Inc.
O. JOSEPH BIZZOZERO, Jr., M.D., President, Bizzozero Assoc. P.C.
JOHN J. CRAWFORD, President and Chief Executive Officer, South Central
Connecticut Regional Water Authority and Chairman and Chief Executive
Officer, Aristotle Corporation
HARRY P. DIADAMO, Former President, Derby Savings Bank
ROBERT A. FINKENZELLER, President, Eyelet Crafters, Inc.
WALTER R. GRIFFIN, Esq., Griffin, Griffin & O'Brien, P.C.
J. GREGORY HICKEY, Retired Managing Partner of Hartford Office of Ernst & Young,
LLP
C. MICHAEL JACOBI, President and Chief Executive Officer, Timex Corporation
J. ALLEN KOSOWSKY*, J. Allen Kosowsky, CPA, P.C.
Sr. MARGUERITE WAITE, President, Chief Executive Officer and Treasurer, St.
Mary's Hospital
JOSEPH A. WELNA*, M.D., New Britain Obstetrical & Gynecological Group
SENIOR MANAGEMENT GROUP
JAMES C. SMITH, Chairman and Chief Executive Officer
JOHN V. BRENNAN, 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
STEPHEN M. CARTA, President, Webster Trust Company, N.A.
PETER K. MULLIGAN, Executive Vice President, Consumer and Small Business Banking
RENEE P. SEEFRIED*, Executive Vice President, Human Resources
ROSS M. STRICKLAND, Executive Vice President, Mortgage Banking
HARRIET MUNRETT WOLFE, Senior Vice President, Counsel and Secretary
*Webster Bank only
1
<PAGE>
<TABLE>
<CAPTION>
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
At or For the
Year Ended
Dollars in thousands, expect share data 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR:
Net interest income $191,925 $169,037 $135,331
Noninterest income 35,990 32,179 27,902
Merger and acquisition expenses 27,058 500 4,271
Other noninterest expenses 131,489 130,055 108,465
Net income 33,798 38,501 29,321
Operating net income(a) 53,844 41,534 33,016
PER COMMON SHARE:
Diluted earnings $ 2.44 $ 2.66 $ 2.22
Diluted operating earnings(a) 3.89 2.87 2.50
Book value (year-end) 27.99 25.18 24.41
Tangible book value (year-end) 24.41 21.61 23.57
Annual dividend 0.80 0.68 0.64
AT YEAR-END:
Total assets $7,019,621 $5,607,210 $4,883,402
Loans receivable,net 3,824,602 3,642,522 3,005,014
Securities 2,787,240 1,577,702 1,505,919
Intangible assets 48,919 49,448 10,865
Deposits 4,365,756 4,457,561 3,797,712
Shareholders' equity 382,186 336,832 334,580
Diluted weighted average shares 13,828 14,460 13,202
Market price 66.50 36.75 29.50
OPERATING RATIOS:
Net interest margin 3.17% 3.23% 2.96%
Return on average shareholders' equity 9.72 11.20 10.08
Operating return on average shareholders' 15.48 12.08 11.35
equity(a)
Efficiency ratio(a)(b) 54.81 58.93 61.65
Noninterest expense to average assets 2.50 2.38 2.37
Operating noninterest expense to
average assets(c) 1.89 2.22 2.14
</TABLE>
(a) Excludes merger and acquisition expenses including provisions for loan
losses related to mergers and acquisitions of $34.2 million, $500,000, and $4.3
million for the periods ended December 31, 1997, 1996 and 1995, respectively.
Also excludes Savings Association Insurance Fund ("SAIF") assessment of $4.7
million for the period ended December 31, 1996 and name change and subsidiary
merger expense of $2.1 million for the period ended December 31, 1995.
(b) Excludes intangible amortization and foreclosed property expenses.
(c) Excludes the following: merger and acquisition expenses, the SAIF assessment
in 1996, name change and subsidiary merger expense in 1995 and capital
securities and dividends on preferred stock of subsidiary corporation expense in
1997.
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 for Webster Bank:
Leverage Ratio: Tier 1 capital as a percentage of adjusted total assets.
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 (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-weighted 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-weighted 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, interest-rate caps and floors 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.
EVA: Economic Value Added. A measure of financial performance to maximize
long-term growth and profitability.
Foreclosed Properties: Real estate acquired in foreclosure or comparable
proceedings under which possession of the collateral has been taken.
Interest-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 earned on
interest-earning assets and the average rates paid interest-bearing liabilities.
Net Interest Margin: Net interest income as a percentage of average
interest-earning assets.
Nonaccrual Assets: The sum of nonaccrual loans plus foreclosed properties.
Nonaccrual Loans: The sum of loans on nonaccrual status for purposes of interest
income recognition.
Operating Net Income: Net income excluding merger and acquisition expenses,
provisions for loan losses related to mergers and acquisitions, Savings
Association Insurance Fund ("SAIF") assessment and costs associated with
changing the name of and merging together subsidiary banks.
Operating Return on Average Equity: Operating net income as a percentage of
average shareholders' equity.
Operating Noninterest Expenses to Average Assets: Noninterest expenses excluding
merger and acquisition expenses, SAIF assessment and costs associated with
changing the name of and merging together subsidiary banks as a percentage of
average assets.
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. The Bank is organized along four business
lines - consumer, business, mortgage banking, and trust and investment
management services, each supported by centralized administration and
operations. The Corporation has grown significantly in recent years, primarily
through a series of acquisitions which have expanded and strengthened its
franchise.
Assets at December 31, 1997 were $7.0 billion compared to $5.6 billion a year
earlier. Net loans receivable amounted to $3.8 billion at December 31, 1997
compared to $3.6 billion a year ago. Deposits were $4.4 billion at December 31,
1997 compared to $4.5 billion at December 31, 1996.
BUSINESS COMBINATIONS SUBSEQUENT TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
During the second quarter of 1998, Webster expects to acquire by merger Eagle
Financial Corp. ("Eagle") and its subsidiary, Eagle Bank, a $2.1 billion savings
bank with headquarters in Bristol, Connecticut. In connection with the merger
with Eagle, Webster expects to issue 5.1 million shares of its common shares for
all the outstanding shares of Eagle common stock. Under the terms of the
agreement, each outstanding share of Eagle common stock is expected to be
converted into .84 shares of Webster common stock. This acquisition will be
accounted for as a pooling of interests, and as such, future consolidated
financial statements will include Eagle's financial data as if Eagle had been
combined at the beginning of the earliest period presented.
BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
The Sachem Acquisition
On August 1, 1997, Webster acquired Sachem Trust National Association ("Sachem
Trust"), a trust company headquartered in Guilford, Connecticut with $300
million of assets under management, in a tax-free stock-for-stock exchange.
Under the terms of the agreement, Webster issued 83,385 shares of Webster common
stock for all 173,000 outstanding shares of Sachem Trust. This acquisition was
accounted for as a purchase.
The People's Acquisition
On July 31, 1997, Webster acquired People's Savings Financial Corp. ("People's")
and its subsidiary, People's Savings Bank & Trust, based in New Britain,
Connecticut which had $482 million of assets. In connection with the merger with
People's, Webster issued 1,575,996 shares of its common stock for all the
outstanding shares of People's common stock. Under the terms of the merger
agreement each outstanding share of People's common stock was converted into .85
shares of Webster common stock. This acquisition was accounted for as a pooling
of interests, and as such, Consolidated Financial Statements include People's
financial data as if People's had been combined at the beginning of the earliest
period presented.
The Derby Acquisition
On January 31, 1997, Webster acquired DS Bancor, Inc. ("Derby") and its
subsidiary, Derby Savings Bank, based in Derby, Connecticut which had $1.2
billion of assets. 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.
4
<PAGE>
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 in 1996, 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 1997, residential and consumer loans comprised
over 87% of the total loan portfolio. All investments 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 $45.9 million at December
31, 1997 from $54.8 million at December 31, 1996 and declined as a percentage of
total assets to .65% at December 31, 1997 from .98% at December 31, 1996.
Nonaccrual loans decreased $3.9 million in 1997 and foreclosed properties
decreased $5.0 million due to write-downs and sales of foreclosed properties.
The allowance for loan losses at December 31, 1997 was $49.8 million and
represented 132.09% of nonaccrual loans. Total allowances for nonaccrual assets
of $50.3 million represented 108.40% of nonaccrual assets. The following table
details nonaccrual assets for the last five years.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual Assets:
Loans accounted for on a nonaccrual basis:
Residential real estate $ 23,651 $ 25,393 $ 28,522 $27,712 $ 43,652
Commercial 11,563 12,874 20,355 20,935 7,347
Consumer 2,451 3,339 3,455 2,590 3,249
Foreclosed Properties:
Residential and Consumer 5,091 5,305 7,850 11,063 24,766
Commercial 3,098 7,909 13,216 21,909 11,098
- -----------------------------------------------------------------------------------------------------------------
Total $ 45,854 $ 54,820 $ 73,398 $ 84,209 $90,112
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
A summary of the activity in the allowance for loan losses for the last five
years follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $43,185 $50,281 $55,366 $54,370 $65,662
Charge-offs:
Residential real estate (9,302) (14,466) (8,667) (14,512) (10,395)
Consumer (3,098) (3,649) (894) (1,452) (2,433)
Commercial (2,516) (6,750) (4,438) (4,394) (3,447)
- -----------------------------------------------------------------------------------------------------------------
(14,916) (24,865) (13,999) (20,358) (16,275)
Recoveries:
Residential real estate 3,872 670 870 437 413
Consumer 470 332 1,032 1,822 815
Commercial 1,307 1,979 1,286 1,042 246
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs (9,267) (21,884) (10,811) (17,057) (14,801)
Allowances for purchase transactions - 5,000 - 12,819 -
Acquired allowance adjustment - - - - (5,963)
Transfer from allowance for losses
for loans held for sale - - - - 2,390
Provisions charged to operations 15,835 9,788 5,726 5,234 7,082
- -----------------------------------------------------------------------------------------------------------------
Balance at end of period $49,753 $ 43,185 $ 50,281 $55,366 $ 54,370
=================================================================================================================
Ratio of net charge-offs to
average loans outstanding 0.2% 0.6% 0.4% 0.6% 0.6%
=================================================================================================================
</TABLE>
Net charge-offs decreased $12.6 million to $9.3 million in 1997 due primarily to
decreases in the residential and commercial portfolios. 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. The
1997 provisions charged to operations include $7.2 million specifically related
to the Derby and People's acquisitions. 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 at
December 31, 1997 is adequate to cover expected losses in the portfolio.
SEGREGATED ASSETS
- --------------------------------------------------------------------------------
Segregated Assets consist of all commercial real estate, commercial, and
multi-family loans acquired from the Federal Deposit Insurance Corporation
("FDIC") in the First Constitution Bank ("First Constitution") acquisition.
Segregated Assets, before the allowance for losses of $2.6 million, totaled
$43.6 million at December 31, 1997, down from $256.6 million at acquisition in
1992. Segregated Assets are subject to a loss-sharing arrangement with the FDIC.
The FDIC was required to reimburse the 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). During 1998 and 1999,
the Bank 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.
The Bank is entitled to retain 20% of such recoveries during the sixth and
seventh years following the First Constitution acquisition and 100% thereafter.
During the second quarter of 1997, the Bank sold approximately $13.7 million in
multi-family loans that included all multi-family Segregated Asset loans. Any
losses incurred on the sale of these segregated multi-family loans were
reimbursed under the loss-sharing arrangement and the transaction had no impact
on the Consolidated Statements of Income. At December 31, 1997, cumulative net
charge-offs and expenses aggregated $58.9 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
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 1997. During 1997, the Bank received $4.5 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
for charge-offs 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 interest-earning assets. Such reimbursements have no
immediate impact on the Consolidated Statements of Income.
6
<PAGE>
A detail of changes in the allowance for Webster's share of losses for
Segregated Assets follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $2,859 $3,235
Charge-offs (267) (621)
Recoveries 31 245
- ---------------------------------------------------------------------------------------------------
Balance at end of period $2,623 $ 2,859
===================================================================================================
At December 31, 1997 and 1996, nonaccrual Segregated Assets were classified as
follows:
- ---------------------------------------------------------------------------------------------------
December 31,
-------------------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------
Segregated Assets accounted for on a nonaccrual basis:
Commercial real estate loans $2,912 $ 3,337
Commercial loans 500 192
Multi-family real estate loans - 495
Foreclosed Properties:
Commercial real estate 281 269
Multi-family real estate - 138
- ---------------------------------------------------------------------------------------------------
Total $3,693 $ 4,431
===================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations adopted by the Office of Thrift Supervision ("OTS"). This
requirement, which may be varied by the OTS, is based upon a percentage of net
withdrawable deposits and short-term borrowings. The required liquidity ratio as
revised by the OTS is currently 4.00% and the Bank's liquidity ratio at December
31, 1997 exceeded the requirement. Webster Bank is also required by regulation
to maintain sufficient liquidity to ensure safe and sound operations. Adequate
liquidity as assessed by the OTS may vary from institution to institution
depending on such factors as the institution's overall asset/liability
structure, market conditions, competition and the requirements of the
institution's deposit and loan customers. The OTS considers both an
institution's adherence to the liquidity ratio requirement, as well as safety
and soundness issues, in assessing whether an institution has sufficient
liquidity.
The primary sources of liquidity for Webster are net cash flows provided from
operating, investing and financing activities. Net cash flows from operating
activities primarily include net income, the sale of loans originated for sale,
trading account net changes, net changes in other assets and liabilities and
adjustments for noncash items such as depreciation, investment securities net
amortization and accretion and the provisions for loan losses and foreclosed
properties. Net cash flows from investing activities primarily include the
purchase, sale, maturity and paydowns of investment securities and
mortgage-backed securities that are classified as available for sale or held to
maturity, the net change in loans, interest-bearing deposits and Segregated
Assets. Net cash flows from financing activities primarily include proceeds and
repayments related to Federal Home Loan Bank ("FHL Bank") advances and other
borrowings, the net change in deposits, minority interest and net changes in
capital generally related to stock issuances, repurchases and dividend payments.
While scheduled loan amortization, maturing securities, short-term investments
and securities paydowns 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 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 fixed-rate loans and mortgage-backed securities
generally will tend to increase with the level of prepayments also normally
increasing. Lower yields on such loans and mortgage-backed securities may be
offset by a lower cost of funds. Material changes in the level of nonaccrual
assets held also affect liquidity. The utilization of particular sources of
funds depends on comparative costs and availability. The Bank has, from
7
<PAGE>
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 $1.7 billion at
December 31, 1997. At that date, the Bank had FHL Bank advances outstanding of
$1.1 billion compared to $559.9 million at December 31, 1996. See Note 9 to the
Consolidated Financial Statements.
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,
repurchases of Webster's common stock, and the payment of interest to holders of
Webster's 8 3/4% Senior Notes and Webster's 9.36% Capital Trust I Capital
Securities. There are certain restrictions on the payment of dividends by the
Bank to Webster. See Note 15 to the Consolidated Financial Statements. Webster
also maintains a $20 million line of credit with a correspondent bank. On
January 31, 1997, Webster completed the sale of $100 million of Webster Capital
Trust I Capital Securities further increasing its capital resources. The Capital
Trust I Capital Securities are further discussed in Note 19 to the Consolidated
Financial Statements.
On November 19, 1996, Webster completed a previously announced common 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. The
purpose of the announced repurchase plan was 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. At December 31, 1996, shares totaling 255,100 had
been repurchased under the new repurchase plan with the remaining 44,900 shares
under the plan repurchased in January 1997. On September 4, 1997, Webster
completed the repurchase of 85,333 common shares under a repurchase plan
announced in May 1997. The repurchased shares under the plan were reissued in
connection with the purchase of Sachem Trust.
Applicable OTS regulations require the Bank, as a federal savings 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 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, 1997, the Bank was in full compliance with all
applicable capital requirements detailed as follows:
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
Tier 1 Tier 1 Total
Tangible Capital Core Capital Risk-Based Capital 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 $ 380,896 5.54% $ 385,599 5.61% $ 385,599 12.15% $ 425,398 13.41%
Minimum regulatory requirement 103,046 1.50 206,234 3.00 126,915 4.00 253,829 8.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess over requirement $ 277,850 4.04% $ 179,365 2.61% $ 258,684 8.15% $ 171,569 5.41%
============================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Interest-rate risk is the sensitivity of the market value of assets and
liabilities to changes in interest rates over short-term and long-term time
horizons. The market values of certain financial assets and liabilities of
Webster are sensitive to fluctuations in market interest rates. Changes in
interest rates can affect the number of loans originated by the Bank, as well as
the value of its loans and other interest-earning assets. Also, 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 increases at a rate that is greater than the increase in yields on
interest-earning assets, the interest-rate spread would be negatively affected.
Changes in Webster's asset and liability mix also affects interest-rate spread.
Webster is unable to predict fluctuation in interest rates.
8
<PAGE>
The primary goal of interest-rate risk management is to control this risk within
limits approved by the Board of Directors and narrower guidelines established by
the Asset/Liability Committee while managing interest-rate risk so as to
maximize net interest income and net market value over time in changing
interest-rate environments. To this end, Webster's strategies for controlling
interest-rate risk are responsive to changes in the interest-rate environment
and market demands for particular types of deposit and loan products. Management
measures interest-rate risk using simulation, duration, and GAP analyses with
particular emphasis on measuring changes in the market value of portfolio equity
and changes in net interest income in different interest-rate environments.
Market value is measured as the net present value of future cash flows. The
simulation analyses incorporate assumptions about balance sheet changes such as
asset and liability growth, loan and deposit pricing and changes due to the mix
and maturity of such assets and liabilities. The key assumptions relate to the
behavior of interest rates and spreads, the fluctuations in product balances,
and prepayment and decay rates on loans and deposits. From such simulations,
interest-rate risk is quantified and appropriate strategies are formulated. 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 during
1997 to improve the interest-rate sensitive position included, (i) promotion of
adjustable-rate mortgage loans, particularly three-year adjustable rate mortgage
loans which have lower prepayment speeds than one-year adjustable rate mortgage
loans, (ii) emphasis on the origination of variable-rate home equity credit
lines and commercial loans, (iii) emphasis on the purchase of short duration
mortgage-backed securities, (iv) the purchase of prepayment protected
mortgage-backed securities, and (v) emphasis on deposits and borrowed funds that
meet asset/liability management objectives.
Webster also uses as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. Webster utilized interest-rate financial
instruments to hedge mismatches in interest-rate maturities to reduce exposure
to movements in interest rates. These interest-rate financial instruments
involve, to varying degrees, credit risk and market risk. Credit risk is the
possibility that a loss may occur if a counterparty to a transaction fails to
perform according to the terms of the contract. Market risk is the effect of a
change in interest rates or currency rates on the value of the financial
instruments. The notional amount of interest-rate financial instruments is the
amount upon which interest and other payments under the contract are based. For
interest- rate financial instruments, the notional amount is not exchanged and
therefore, the notional amounts should not be taken as a measure of credit or
market risk.
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 Statements of Income in the period for which the change occurred.
The following table summarizes the estimated market value of Webster's
interest-sensitive assets and interest-sensitive liabilities at December 31,
1997, and the projected change to market values if interest rates
instantaneously increase or decrease by 100 basis points.
<TABLE>
<CAPTION>
Estimated Market Value Impact
Book Market ----------------------------
(In thousands) Value Value -100 BP +100BP
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Sensitive Assets:
Trading $84,749 $84,749 $(438) $ (399)
Non-Trading 6,451,488 6,540,286 81,174 (122,591)
Interest-Sensitive Liabilities 6,566,843 6,583,018 (35,540) 36,305
</TABLE>
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $204.9
million (See Note 3 to Consolidated Financial Statements) and nonaccrual loans
of $41.1 million (See "Asset Quality" and "Segregated Assets" within the MD&A).
Values for mortgage servicing rights have been included in the table above as
movement in interest rates affect the valuation of the servicing rights. Equity
securities and nonaccrual assets not included in the above table are however,
subject to fluctuations in market value based on other risks.
9
<PAGE>
Based on Webster's asset/liability mix at December 31, 1997, management's
sensitivity analysis of the effects of changing interest rates estimates that an
instantaneous 100 basis point increase in interest rates would decrease net
interest income over the next twelve months by about 4.1% and an instantaneous
100 basis point decline in interest rates would increase net interest income
over the next twelve months by about 1.8%. The estimated market values in the
above table are subject to factors that could cause actual results to differ
from such projections and estimates.
The following table sets forth the estimated maturity/repricing structure of
Webster's interest-earning assets and interest-bearing liabilities at December
31, 1997. 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. At December 31, 1997, Webster was
primarily liability sensitive in the 0-3 year time horizon and asset sensitive
in the 3-20 year time horizon. In a declining interest-rate environment, a
liability sensitive position would primarily result in a favorable effect on net
interest income and in an increasing interest-rate environment net interest
income would be adversely affected. Management believes that Webster's
interest-rate risk position at December 31, 1997, presents a reasonable level of
risk.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
More than More than More than More than More than
(Dollars in thousands) 6 Months 6 Months 1 Year 3 Years 5 Years 10 Years More than
or less to 1 Year to 3 Years to 5 Years to 10 Years to 20 Years 20 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 1,397,800 $ 633,340 $ 658,338 $ 370,492 $ 376,020 $ 304,279 $ 136,389 $ 3,876,658
Securities 1,173,251 670,698 304,095 142,141 218,904 202,019 106,636 2,817,744
- ------------------------------------------------------------------------------------------------------------------------------------
Total Rate-Sensitive Assets $ 2,571,051 $1,304,038 $ 962,433 $ 512,633 $ 594,924 $ 506,298 $ 243,025 $ 6,694,402
====================================================================================================================================
Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits $ 1,552,479 $ 861,853 $1,222,305 $ 257,865 $ 107,573 $ 582 $ 363,099 $ 4,365,756
Borrowings 1,875,989 109,700 24,820 41,000 - - - 2,051,509
- ------------------------------------------------------------------------------------------------------------------------------------
Total Rate-
Sensitive Liabilities $ 3,428,468 $ 971,553 $1,247,125 $ 298,865 $ 107,573 $ 582 $ 363,099 $ 6,417,265
====================================================================================================================================
Consolidated GAP $ (857,417) $ 332,485 $ (284,692) $ 213,768 $ 487,351 $ 505,716 $ (120,074) N/A
GAP to Total Assets Percent (12.21)% 4.74% (4.06)% 3.05% 6.94% 7.20% (1.71)% N/A
Cumulative GAP $ (857,417) $ (524,932) $ (809,624) $ (595,856) $ (108,505) $ 397,211 $ 277,137 N/A
Cumulative GAP to Total
Assets Percent (12.21)% (7.48)% (11.53)% (8.49)% (1.55)% 5.66% 3.95% N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,019,621 $7,019,621 $7,019,621 $7,019,621 $7,019,621 $7,019,621 $7,019,621
====================================================================================================================================
</TABLE>
COMPARISON OF 1997 AND 1996 YEARS
- --------------------------------------------------------------------------------
GENERAL. For 1997, Webster reported net income of $33.8 million, or $2.44 per
share on a diluted basis. Included in the 1997 results are merger and
acquisition expenses of $27.1 million and provisions for loan losses of $7.2
million specifically related to the Derby and People's acquisitions. Excluding
the effect of merger and acquisition expenses and additional provisions for loan
losses, net income for the 1997 year would have been $53.8 million or $3.89 per
diluted share. Net income for 1996 amounted to $38.5 million, or $2.66 per share
on a diluted basis. Included in the 1996 results are expenses of $4.7 million
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 effects of these expenses,
net income for the 1996 year would have been $41.5 million or $2.87 per diluted
share. Results for the Shawmut Transaction are included in the accompanying
Consolidated Financial Statements from the date of acquisition on February 16,
1996.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $22.9 million in 1997 to $191.9 million from $169.0 million in 1996.
The increase is primarily attributable to an increased volume of average
interest-earning assets and interest-bearing liabilities as a result of balance
sheet growth. The balance sheet growth was due in part to the utilization of the
proceeds of the Capital Trust I Capital Securities offering in January 1997,
which supported increases in interest-earning assets and interest-bearing
liabilities. See Note 19 to Consolidated Financial Statements. The interest-rate
spread for the 1997 year decreased to 3.02% compared to 3.12% in 1996 due
primarily to the change in mix of interest-earning assets and interest-bearing
10
<PAGE>
liabilities. During 1997, the average balance of securities increased $660.6
million and the average balance of borrowings increased $759.7 million from the
year earlier period.
INTEREST INCOME. Total interest income for 1997 amounted to $445.8 million, an
increase of $59.3 million, or 15.3% compared to $386.5 million in 1996. This
improvement was due primarily to an increase in the average volume of loans and
securities offset by a decrease in the average cost of funds on all
interest-earning assets to 7.34% in 1997 from 7.39% in 1996.
INTEREST EXPENSE. Interest expense for 1997 totaled $253.9 million, an increase
of $36.5 million compared to $217.4 million in 1996. The higher interest expense
was due primarily to an increase in the average volume of borrowings and an
increase in the average cost of funds on all interest-bearing liabilities to
4.32% in 1997 from 4.27% in 1996. 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,
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
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) $3,758,448 $293,925(b) 7.82% $ 3,566,695 $ 279,143(b) 7.83% $ 3,014,715 $228,341(b) 7.57%
Segregated Assets, net (a) 59,500 5,133 8.63 93,034 6,470 6.95 123,293 9,592 7.78
Securities 2,187,351 143,267 6.55(c) 1,526,736 98,568 6.46(c) 1,428,377 92,945 6.51(c)
Interest-Bearing Deposits 61,256 3,523 5.75 39,679 2,277 5.64 43,472 2,044 4.64
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 6,066,555 445,848 7.34 5,226,144 386,458 7.39 4,609,857 332,922 7.22
Other Assets 287,599 259,704 149,748
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $6,354,154 $ 5,485,848 $ 4,759,605
================================================================================================================================
Savings and Escrow $992,806 24,721 2.49% $ 966,205 21,813 2.26% $ 805,099 17,785 2.21%
Money Market Savings,
NOW and DDA 841,286 10,952 1.30 904,136 16,101 1.78 753,398 20,480 2.72
Time Deposits 2,539,857 132,917 5.23 2,510,975 136,020 5.42 2,292,391 119,367 5.21
FHL Bank Advances 856,520 49,672 5.72 527,414 31,765 6.02 522,884 33,333 6.37
Repurchase Agreements
and Other Borrowings 575,126 32,001 5.49 144,543 8,062 5.58 49,945 2,966 5.94
Senior Notes 40,000 3,660 9.15 40,000 3,660 9.15 40,000 3,660 9.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-
Bearing Liabilities 5,845,595 253,923 4.32 5,093,273 217,421 4.27 4,463,717 197,591 4.42
Other Liabilities 160,754 48,773 4,953
Shareholders' Equity 347,805 343,802 290,935
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and
Interest-Rate Spread $191,925 3.02% $169,037 3.12% $135,331 2.80%
==================================================================================================================================
Total Liabilities and
Shareholders' Equity $6,354,154 $5,485,848 $ 4,759,605
==================================================================================================================================
Net Interest Margin 3.17% 3.23% 2.96%
==================================================================================================================================
</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 amortization of net deferred expense (income) of: $4.0 million,
$1.6 million and ($869,000) in 1997, 1996 and 1995, respectively.
(c) Yields are adjusted to a fully tax equivalent basis.
11
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31, Years Ended December 31,
1997 v. 1996 1996 v. 1995
- --------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
(In thousands) Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------
Interest on interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans and Segregated Assets $ 1,055 $ 12,390 $ 13,445 $ 7,137 $ 40,543 $ 47,680
Securities 1,430 44,515 45,945 (232) 6,088 5,856
- --------------------------------------------------------------------------------------------------------------
Total 2,485 56,905 59,390 6,905 46,631 53,536
- --------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (5,049) (295) (5,344) (4,572) 20,874 16,302
FHL Bank advances and other
borrowings (2,087) 43,933 41,846 (2,264) 5,792 3,528
- --------------------------------------------------------------------------------------------------------------
Total (7,136) 43,638 36,502 (6,836) 26,666 19,830
- --------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 9,621 $ 13,267 $ 22,888 $ 13,741 $ 19,965 $ 33,706
==============================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for 1997 was $15.8
million compared to $9.8 million in 1996. The increase for 1997 is attributable
to $7.2 million in provisions made at the time of the acquisitions of Derby and
People's. The allowance for losses on loans totaled $49.8 million and
represented 132.1% of nonaccrual loans at December 31, 1997 versus $43.2 million
or 103.8% of nonaccrual loans at December 31, 1996.
NONINTEREST INCOME. Noninterest income for 1997 totaled $36.0 million, compared
to $32.2 million in 1996. Fees and service charges were $27.7 million in 1997,
an increase of $5.4 million, or 24.5% from 1996 due primarily to an increase in
the customer base. Gains on the sale of loans and mortgage loan servicing rights
amounted to $669,000 in 1997 compared to $737,000 in 1996. Gains on the sale of
securities amounted to $3.2 million in 1997 compared to $4.1 million in 1996.
Other noninterest income was $4.5 million for 1997 and $5.1 million for 1996.
NONINTEREST EXPENSES. Noninterest expenses for 1997 were $158.5 million compared
to $130.6 million in 1996. Included in the 1997 results are merger and
acquisition expenses totaling $27.1 million which include: $19.9 million related
to the Derby acquisition and $7.2 million related to the People's acquisition.
Other components of the increase were higher occupancy, furniture and equipment,
intangible amortization, Capital Securities and other operating expenses.
Offsetting such increases were lower salaries and employee benefits due to
decreases in pension and post-retirement benefits and decreased foreclosed
property expenses and provisions due to fewer foreclosed properties. Included in
the 1996 results are expenses of $4.7 million 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, 1997, approximately 81% of the Bank's deposits are assessed
premiums at the BIF rate and 19% at the SAIF rate.
INCOME TAXES. Income tax expense for 1997 decreased to $19.7 million from $22.4
million in 1996. The decrease in income tax expense is due primarily to merger
and acquisition expenses and to lower state income tax rates. Included in the
1997 and 1996 results are $1.1 million and $2.0 million, respectively, 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 1997 and 1996.
12
<PAGE>
COMPARISON OF 1996 AND 1995 YEARS
- --------------------------------------------------------------------------------
GENERAL. For 1996, Webster reported net income of $38.5 million, or $2.66 per
share on a diluted basis. Included in the 1996 results are expenses of $4.7
million related to a special assessment associated with the recapitalization of
the SAIF and $500,000 of acquisition related charges for the Shawmut
Transaction. Excluding the effect of these expenses, net income for the 1996
year would have been $41.5 million or $2.87 per diluted share. Net income for
1995 amounted to $29.3 million, or $2.22 per share on a diluted basis. Included
in the 1995 results are expenses of $3.3 million related to the Shelton
acquisition, $2.1 million related to changing the name of and merging together
Webster's banking subsidiaries, and $1.0 million related to the Shawmut
Transaction. Excluding the effects of these expenses, net income for the 1995
year would have been $33.0 million or $2.50 per 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 $33.7 million in 1996 to $169.0 million from $135.3 million in 1995.
The increase is primarily due to an increased volume of average interest-earning
assets and interest-bearing liabilities related to the Shawmut Transaction.
Interest-rate spread for the 1996 year increased to 3.12% compared to 2.80% in
1995 also due primarily to lower costing liabilities acquired in the Shawmut
Transaction.
INTEREST INCOME. Total interest income for 1996 amounted to $386.5 million, an
increase of $53.6 million, or 16.1% compared to $332.9 million in 1995. The
higher interest income was due primarily to an increase in the average volume of
loans and securities and to a higher average yield on all interest-earning
assets which rose to 7.39% in 1996 from 7.22% in 1995.
INTEREST EXPENSE. Interest expense for 1996 totaled $217.4 million, an increase
of $19.8 million compared to $197.6 million in 1995. The higher interest expense
was due primarily to an increase in the average volume of deposits and
borrowings partially offset by a decrease in the average yield on all
interest-bearing liabilities to 4.27% in 1996 from 4.42% in 1995. The lower
average yield on interest-bearing liabilities is due primarily to the higher
number of noninterest bearing and other deposits acquired in the Shawmut
Transaction.
PROVISION FOR LOAN LOSSES. The provision for loan losses for 1996 was $9.8
million compared to $5.7 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 was $43.2 million and
represented 103.8% of nonaccrual loans at December 31, 1996 versus $50.3 million
or 96.1% of nonaccrual loans at December 31, 1995.
NONINTEREST INCOME. Noninterest income for 1996 was $32.2 million, compared to
$27.9 million in 1995. Fees and service charges totaled $22.2 million in 1996,
an increase of $4.5 million, or 25.1% from 1995 due primarily to the increase in
customers from acquisitions. Gains on the sale of loans and mortgage loan
servicing rights were $737,000 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 were $4.1 million in 1996 compared
to $532,000 in 1995. Other noninterest income was $5.1 million for 1996 and $5.0
million for 1995.
NONINTEREST EXPENSES. Noninterest expenses for 1996 amounted to $130.6 million
compared to $112.7 million in 1995. The increase of $17.9 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 lower foreclosed property expenses and provisions
due to a decrease in the outstanding balance of foreclosed properties. Included
in the 1996 results are expenses of $4.7 million 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
BIF and SAIF related to deposit premium reductions. At December 31, 1996,
approximately 81% of the Bank's deposits were assessed premiums at the BIF rate
and 19% at the SAIF rate. Included in the 1995 results were expenses of $3.3
million related to the Shelton acquisition, $2.1 million related to changing the
name and merging Webster's banking subsidiaries, and $1.0 million related to the
Shawmut Transaction.
13
<PAGE>
INCOME TAXES. Income tax expense for 1996 increased to $22.4 million from $15.5
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, respectively, 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.
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 June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the method in which public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to shareholders. This statement requires that public business
enterprises report quantitative and qualitative information about its reportable
segments, including profit or loss, certain specific revenue and expense items
and segment assets. Webster plans to report segment information along its four
business lines: consumer, business, mortgage banking and trust and investment
management services. This statement also requires reconciliations of total
segment revenues, total segment profit or loss, total segment assets and other
amounts disclosed for segments to corresponding amounts in the Consolidated
Financial Statements. This statement is effective for financial statements for
periods beginning after December 15, 1997 and in the initial year of
application, comparative information for earlier years is required. Comparative
interim information is required in the year subsequent to the adoption.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The objective of this statement is to report a measure of all changes in equity
of an enterprise that result from transactions and other economic events of the
period other than transactions with owners. Comprehensive income is the total of
net income and all other non-owner changes in equity. This statement is
effective for fiscal years beginning after December 15, 1997 and
reclassification of financial statements of earlier periods for comparative
purposes is required.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. This statement is effective for
financial statements issued for periods ending after December 15, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement simplifies the standards for computing and presenting earnings per
share previously found in APB Opinion No. 15 and makes them comparable to
international standards. It replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Webster implemented this statement in the
fourth quarter of 1997. See Notes 1 and 16.
14
<PAGE>
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.
YEAR 2000 IMPACT
- --------------------------------------------------------------------------------
The "Year 2000" issue refers to the potential impact of the failure of computer
programs and equipment to give proper recognition of dates beyond December 31,
1999 and other issues related to the Year 2000 century date change. Webster has
completed its assessment of Year 2000 issues and has developed and began
implementing a plan to modify or replace software and hardware systems to ensure
proper date recognition. The Corporation is utilizing internal and external
resources for this purpose. The total cost of the Year 2000 project is estimated
to be $1.5 million.
Webster has initiated formal communications with all significant vendors to
determine the extent to which vendors will be Year 2000 compliant. Webster
requires compliance as a condition of future business. Contingency plans for
vendor failure to comply are incorporated in Webster's Year 2000 plan. There can
be no guarantee that the systems on which Webster relies will be in compliance.
The estimated cost of the Year 2000 project is based on management's best
estimates which could differ from actual results.
15
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Depository Institutions $ 122,267 $ 105,226
Interest-bearing Deposits 30,504 4,536
Securities: (Note 3)
Trading at Fair Value 84,749 59,331
Available for Sale, at Fair Value 2,290,254 983,699
Held to Maturity, (Market Value: $412,061 in 1997; $528,473 in 1996) 412,237 534,672
Loans Receivable, Net (Note 4) 3,824,602 3,642,522
Segregated Assets, Net (Note 5) 41,038 75,670
Accrued Interest Receivable 40,755 35,430
Premises and Equipment, Net (Note 6) 58,640 58,711
Foreclosed Properties, Net (Note 13) 8,189 13,214
Intangible Assets (Note 2) 48,919 49,448
Prepaid Expenses and Other Assets (Note 7) 57,467 44,751
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,019,621 $ 5,607,210
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Deposits (Note 8) $ 4,365,756 $ 4,457,561
Federal Home Loan Bank Advances (Note 9) 1,071,620 559,880
Reverse Repurchase Agreements and Other Borrowings (Note 10) 956,554 166,127
Advance Payments by Borrowers for Taxes and Insurance 23,335 31,106
Accrued Expenses and Other Liabilities 70,593 55,704
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 6,487,858 5,270,378
- ----------------------------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust (Note 19) 100,000 --
Preferred Stock of Subsidiary Corporation (Note 20) 49,577 --
SHAREHOLDERS' EQUITY: (NOTES 15, 16 AND 17)
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative Convertible Preferred Stock, Series B:
0 shares issued and outstanding at December 31, 1997 and
98,084 shares issued and outstanding at December 31, 1996 -- 1
Common Stock, $.01 par value:
Authorized - 30,000,000 shares;
Issued - 13,676,136 shares at December 31, 1997 and 13,561,540 shares in 1996 137 136
Paid-in Capital 171,659 186,451
Retained Earnings 193,267 169,637
Less Treasury Stock at cost, 22,958 shares at December 31, 1997 and
575,274 shares at December 31, 1996 (1,116) (18,801)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,971) (2,574)
Unrealized Gains on Securities, Net 20,210 1,982
- ----------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 382,186 336,832
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6 and 21)
Total Liabilities and Shareholders' Equity $ 7,019,621 $ 5,607,210
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans and Segregated Assets $299,058 $285,614 $237,933
Securities and Interest-bearing Deposits 146,790 100,844 94,989
- -------------------------------------------------------------------------------------------------
Total Interest Income 445,848 386,458 332,922
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits (Note 8) 168,590 173,934 157,631
Interest on Borrowings 85,333 43,487 39,960
- -------------------------------------------------------------------------------------------------
Total Interest Expense 253,923 217,421 197,591
- -------------------------------------------------------------------------------------------------
Net Interest Income 191,925 169,037 135,331
Provision for Loan Losses (Note 4) 15,835 9,788 5,726
- -------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 176,090 159,249 129,605
- -------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Fees and Service Charges 27,685 22,242 17,775
Gain on Sale of Loans and Loan Servicing, Net (Note 4) 669 737 4,644
Gain on Sale of Securities, Net (Note 3) 3,152 4,133 532
Other Noninterest Income 4,484 5,067 4,951
- -------------------------------------------------------------------------------------------------
Total Noninterest Income 35,990 32,179 27,902
- -------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 57,651 60,702 52,725
Occupancy Expense of Premises 12,807 12,337 9,132
Furniture and Equipment Expenses 12,140 11,176 8,255
Federal Deposit Insurance Premiums 993 1,577 5,888
SAIF Recapitalization Expense -- 4,730 --
Foreclosed Property Expenses
and Provisions, Net (Note 13) 2,150 3,507 6,254
Intangible Amortization 6,262 5,338 1,444
Marketing Expenses 5,730 5,900 4,829
Merger and Acquisition Expenses (Note 18) 27,058 500 4,271
Name Change and Subsidiary Merger Expense -- -- 2,100
Capital Securities Expense (Note 19) 8,845 -- --
Dividends on Preferred Stock of Subsidiary Corporation (Note 20) 85 -- --
Other Operating Expenses 24,826 24,788 17,838
- -------------------------------------------------------------------------------------------------
Total Noninterest Expenses 158,547 130,555 112,736
- -------------------------------------------------------------------------------------------------
Income Before Income Taxes 53,533 60,873 44,771
Income Taxes (Note 14) 19,735 22,372 15,450
- -------------------------------------------------------------------------------------------------
NET INCOME 33,798 38,501 29,321
Preferred Stock Dividends -- 1,149 1,296
- -------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 33,798 $ 37,352 $ 28,025
=================================================================================================
NET INCOME PER COMMON SHARE (NOTE 16):
Basic $ 2.51 $ 2.82 $ 2.35
Diluted 2.44 2.66 2.22
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Employee
Stock
(In thousands, except per share data) Ownership Unrealized
Plan Shares Gains (Losses)
Preferred Common Paid-In Retained Treasury Purchased On Securities,
Stock Stock Capital Earnings Stock With Debt Net Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 2 $ 124 $ 158,251 $ 125,329 $ (3,692) $(3,675) $(11,935) $ 264,404
Net Income for 1995 -- -- -- 29,321 -- -- -- 29,321
Dividends Paid:
$.64 Per Common Share -- -- -- (4,382) -- -- -- (4,382)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (1,718) -- -- -- (1,718)
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 -- -- 1,331 -- 402 -- -- 1,733
Proceeds from Sale
of Common Stock -- 12 32,100 -- -- -- -- 32,112
Stock Dividends Declared by
Pooled Companies Prior
to Mergers -- -- 6,950 (6,960) -- -- -- (10)
Pooling Adjustments, Net -- -- (829) -- -- -- (37) (866)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- 14,830 14,830
Other, Net -- (1) 1 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2 $ 135 $ 197,788 $ 140,294 $ (3,290) $(3,207) $ 2,858 $ 334,580
==================================================================================================================================
Net Income for 1996 -- -- -- 38,501 -- -- -- 38,501
Dividends Paid:
$.68 Per Common Share -- -- -- (5,546) -- -- -- (5,546)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (2,463) -- -- -- (2,463)
Dividends Paid or Accrued:
Preferred Series B -- -- -- (1,149) -- -- -- (1,149)
Allocation of ESOP Shares -- -- 94 -- -- 633 -- 727
Exercise of Stock Options -- 1 614 -- 3,351 -- -- 3,966
Conversion of Preferred
Series B to Common Stock (1) -- (8,724) -- 8,725 -- -- --
Common Stock Repurchased -- -- -- -- (27,611) -- -- (27,611)
Pooling Adjustments, Net -- -- (3,216) -- -- -- (1,365) (4,581)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- 489 489
Other, Net -- -- (105) -- 24 -- -- (81)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1 $ 136 $ 186,451 $ 169,637 $(18,801) $(2,574) $ 1,982 $ 336,832
==================================================================================================================================
Net Income for 1997 -- -- -- 33,798 -- -- -- 33,798
Dividends Paid:
$.80 Per Common Share -- -- -- (9,037) -- -- -- (9,037)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers -- -- -- (1,069) -- -- -- (1,069)
Allocation of ESOP Shares -- -- 166 -- -- 603 -- 769
Exercise of Stock Options -- 3 (590) -- 5,058 -- -- 4,471
Conversion of Preferred
Series B to Common Stock (1) -- (18,499) -- 8,500 -- -- --
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Employee
Stock
(In thousands, except per share data) Ownership Unrealized
Plan Shares Gains (Losses)
Preferred Common Paid-In Retained Treasury Purchased On Securities,
Stock Stock Capital Earnings Stock With Debt Net Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Repurchased -- -- -- -- (6,020) -- -- (6,020)
Common Stock Issued in
Consideration for Sachem Trust -- 1 3,971 -- -- -- -- 3,972
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes -- -- -- -- -- -- 18,576 18,576
Other, Net -- (3) 160 (62) 147 -- (348) (106)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $-- $ 137 $ 171,659 $ 193,267 $ (1,116) $(1,971) $ 20,210 $ 382,186
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 33,798 $ 38,501 $ 29,321
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Provision for Loan Losses 15,835 9,788 5,726
Provision for Foreclosed Property Losses 746 1,866 3,532
Provision for Depreciation and Amortization 9,503 8,598 6,097
(Accretion) Amortization of Securities Premiums, Net (3,148) 4,110 1,513
Amortization and Write-down of Intangibles 6,262 5,338 1,444
Amortization of Hedging Costs 2,985 780 250
Mortgage Servicing Rights Amortization and Provision 1,101 491 715
Gains on Sale of Foreclosed Properties (1,240) (1,354) (735)
Gains on Sale of Loans and Securities (3,592) (4,019) (4,697)
Gains on Sale of Trading Securities (229) (851) (479)
(Increase) Decrease in Trading Securities (40,952) 7,587 (14,211)
Loans Originated for Sale (44,819) (70,955) (105,720)
Sale of Loans, Originated for Sale 56,649 84,838 147,154
(Increase) Decrease in Interest Receivable (5,325) 316 (3,792)
Increase (Decrease) in Interest Payable 17,353 (747) 976
Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 13,200 (17,610) 6,044
(Increase) Decrease in Prepaid Expenses and Other Assets (25,890) (10,651) 543
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 32,237 56,026 73,681
- ---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (1,719,047) (602,853) (298,409)
Purchases of Securities, Held to Maturity (21,347) (100,426) (317,786)
Maturities of Securities 185,038 153,489 115,775
Proceeds from Sales of Securities, Available for Sale 126,223 292,594 216,774
Net (Increase) Decrease in Interest-bearing Deposits (25,968) 45,132 19,026
Purchase of Loans (187,815) (77,440) (99,235)
Net Increase in Loans (36,262) (10,530) (15,420)
Proceeds from Sale of Foreclosed Properties 20,520 21,017 16,269
Net Decrease in Segregated Assets 20,932 29,169 28,941
Sale of Segregated Assets 13,700 -- --
Principal Collected on Mortgage-Backed Securities 279,281 191,064 118,174
Purchase of Premises and Equipment, Net (9,432) (11,454) (9,608)
Net Cash and Cash Equivalents Received from Bank Acquisition -- 113,551 --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (1,354,177) 43,313 (225,499)
- ---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (91,225) (91,561) 16,103
Net Proceeds from Sale of Common Stock -- -- 32,112
Repayment of FHL Bank Advances (3,316,780) (1,676,469) (1,122,986)
Proceeds from FHL Bank Advances 3,828,520 1,737,423 1,106,618
Repayment of Other Borrowings (4,424,506) (1,439,207) (61,193)
Proceeds from Other Borrowings 5,215,701 1,436,048 188,077
Net Proceeds from Issuance of Capital Securities 97,700 -- --
Net Proceeds from Preferred Stock of Subsidiary Corporation 49,577 -- --
Cash Dividends to Common and Preferred Shareholders (10,106) (9,158) (7,396)
Net (Decrease) Increase in Advance Payments for Taxes and Insurance (8,351) 2,987 249
Exercise of Stock Options 4,471 3,966 1,733
Common Stock Repurchased (6,020) (27,611) --
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 1,338,981 (63,582) 153,317
- ---------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 17,041 35,757 1,499
Cash and Cash Equivalents at Beginning of Period 105,226 69,469 67,970
- ---------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 122,267 $ 105,226 $ 69,469
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 24,581 $ 24,749 $ 14,401
Interest Paid 242,467 215,097 196,873
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 26,058 19,788 20,162
Transfer of Securities from Held to Maturity to Available for Sale -- -- 340,613
</TABLE>
Assets acquired and liabilities assumed in 1996 purchase business combinations
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year Ended
(In thousands) 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
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 four business
lines - consumer, business, mortgage banking, and trust and investment services,
each supported by centralized administration and operations. Webster has grown
significantly in recent years, primarily through a series of acquisitions which
have expanded and strengthened its franchise 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 its
subsidiaries. The Consolidated Financial Statements and notes hereto have been
retroactively restated to include the accounts of People's Savings Financial
Corp. ("People's") acquired on July 31, 1997, DS Bancor, Inc. ("Derby") acquired
on January 31, 1997, Shelton Bancorp, Inc. ("Shelton") acquired on November 1,
1995 and Shoreline Bank and Trust 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 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 are 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 Consolidated 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
eceived. 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.
22
<PAGE>
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.
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 using 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, which include collateralized mortgage obligations
("CMOs"), 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
mortgage-backed securities and CMOs 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 affect
earnings.
g) Interest-rate Instruments
Webster uses as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. Webster 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 Statements 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 ("FHL Bank") 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.
23
<PAGE>
j) Segregated Assets
Segregated Assets represent commercial, commercial real estate and multi-family
loans acquired in the October 1992, First Constitution Bank ("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 Federal Deposit
Insurance Corporation ("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) Intangible Assets
Intangible assets consist of core deposit intangibles and goodwill. Core deposit
intangible is the excess of the purchase price over the fair value of the
tangible net assets acquired in bank acquisitions accounted for using the
purchase accounting method and allocated to deposits. The core deposit
intangibles are being amortized on a straight-line basis over a period of ten
years from the acquisition dates. On a periodic basis, management assesses the
recoverability of the core deposit intangibles. Such assessments encompass a
projection of future earnings from the deposit base as compared to the original
expectations, based upon a discounted cash flow analysis. If an assessment of
the core deposit intangibles indicates that they are impaired, a charge to
income for the most recent period is recorded for the amount of the impairment.
Goodwill is the excess of cost over the fair value of tangible net assets
acquired in bank acquisitions accounted for using the purchase accounting method
and not allocated to any specific asset or liability category. Goodwill is being
amortized on a straight-line basis over periods up to fifteen years from the
acquisition date. The Corporation also reviews goodwill on a periodic basis for
events or changes in circumstances that may indicate that the carrying amount of
goodwill may not be recoverable.
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. A valuation allowance has been provided
for a portion of the deferred tax asset that may not be realized. The valuation
allowance is adjusted as facts and circumstances warrant.
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 post-retirement benefits.
n) Net Income Per Share
Basic net income per share is calculated by dividing net income available to
common shareholders by the weighted-average number of shares of common stock
outstanding. Diluted net income per share is calculated by dividing adjusted net
income by the weighted-average 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 common stock
equivalents consist of common stock options and warrants. The weighted-average
number of shares used in the computation of basic earnings per share for the
years ended December 31, 1997, 1996 and 1995 were 13,474,117, 13,252,237 and
11,936,050 respectively, and diluted earnings per share were 13,828,499,
14,459,953 and 13,202,259 for the same periods, respectively.
o) Stock Compensation
SFAS No. 123 "Accounting for Stock-Based Compensation," 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 17.
24
<PAGE>
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.
q) Loan Sales and Servicing Sales
Gains or losses on sales of loans are recognized at the time of the sale. During
the 1995 second quarter, Webster elected early adoption of SFAS No. 122
"Accounting for Mortgage Servicing Rights," that was superseded by SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." 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, interest rate
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 7.
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 1997 Consolidated Financial Statements
presentation.
NOTE 2: BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
POOLING OF INTEREST TRANSACTION PENDING CONSUMMATION IN 1998 (Unaudited)
During the second quarter of 1998, Webster expects to acquire Eagle Financial
Corp. ("Eagle") and its subsidiary, Eagle Bank, a $2.1 billion savings bank,
headquartered in Bristol, Connecticut. In connection with the merger with Eagle,
Webster expects to issue 5.1 million shares of its common shares for all the
outstanding shares of Eagle common stock. Under the terms of the agreement, each
outstanding share of Eagle common stock will be converted into .84 shares of
Webster common stock. This acquisition will be accounted for as a pooling of
interests, and as such, future Consolidated Financial Statements will include
Eagle's financial data as if Eagle had been combined at the beginning of the
earliest period presented.
The pro forma combined amounts in the table below are presented for
informational purposes and are not necessarily indicative of the results of
operations of the combined company that would have actually occurred had the
merger been consummated as of the earliest period presented. The pro forma
combined amounts are not necessarily indicative of future results of the
combined company. In particular, Webster expects to achieve significant
operating cost savings as a result of the merger. No adjustment has been
included in the pro forma combined company financial statements for anticipated
operating cost savings. Webster's fiscal year ends December 31 and Eagle's
fiscal year ends September 30. The unaudited pro forma combined financial data
combines the financial information of Webster at and for the fiscal years ended
December 31, 1997, 1996 and 1995 with the financial information of Eagle for the
fiscal years ended September 30, 1997, 1996 and 1995, respectively.
25
<PAGE>
The following table sets forth unaudited pro forma results of operations of the
combining entities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1997
------------------------------------
(In thousands, except per share data) Webster Eagle Combined
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income $191,925 $ 59,125 $251,050
Provision for Loan Losses 15,835 8,978 24,813
Net Income 33,798 7,315 41,113
Diluted Earnings Per Share $2.44 $1.12 $2.15
==========================================================================================
Year Ended December 31, 1996
-------------------------------------
(In thousands, except per share data) Webster Eagle Combined
- ------------------------------------------------------------------------------------------
Net Interest Income $169,037 $ 53,081 $222,118
Provision for Loan Losses 9,788 3,266 13,054
Net Income 38,501 15,493 53,994
Diluted Earnings Per Share $2.66 $2.42 $2.72
==========================================================================================
Year Ended December 31, 1995
-------------------------------------------
(In thousands, except per share data) Webster Eagle Combined
- -------------------------------------------------------------------------------------------
Net Interest Income $135,331 $ 53,315 $188,646
Provision for Loan Losses 5,726 4,138 9,864
Net Income 29,321 12,046 41,367
Diluted Earnings Per Share $2.22 $1.92 $2.24
==========================================================================================
</TABLE>
POOLING OF INTERESTS TRANSACTIONS
- --------------------------------------------------------------------------------
All acquisitions accounted for under the pooling of interests method include
financial data as if the combination occurred at the beginning of the earliest
period presented.
THE PEOPLE'S ACQUISITION
On July 31, 1997, Webster acquired People's and its subsidiary, People's Savings
Bank & Trust, a $482 million savings bank headquartered in New Britain,
Connecticut. In connection with the merger with People's, Webster issued
1,575,996 shares of its common stock for all the outstanding shares of People's
common stock. Under the terms of the agreement, each outstanding share of
People's common stock was converted into .85 shares of Webster common stock.
THE DERBY ACQUISITION
On January 31, 1997, Webster acquired Derby and its subsidiary, Derby Savings
Bank, a $1.2 billion savings bank headquartered 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.
THE SHELTON ACQUISITION
On November 1, 1995, Webster acquired Shelton and its subsidiary, Shelton
Savings Bank, a $295 million savings bank headquartered 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.
THE SHORELINE ACQUISITION
On December 16, 1994, Webster acquired Shoreline, based in Madison, Connecticut
which had $51 million of assets. 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.
26
<PAGE>
PURCHASE TRANSACTIONS
- --------------------------------------------------------------------------------
The following acquisitions were accounted for as purchase transactions, and as
such, results of operations are included in the Consolidated Financial
Statements subsequent to acquisition.
THE SACHEM ACQUISITION
On August 1, 1997, Webster acquired Sachem Trust National Association ("Sachem
Trust"), a trust company headquartered in Guilford, Connecticut which had
approximately $300 million of trust assets under management, in a tax- free
stock-for-stock exchange. Under the terms of the agreement, Webster issued
83,385 shares of Webster common stock for all 173,000 outstanding shares of
Sachem Trust. As a result of this transaction ,Webster recorded $5.8 million as
goodwill.
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.
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. 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
the Bank in November 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 FDIC. These
acquisitions 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>
NOTE 3: SECURITIES
- --------------------------------------------------------------------------------
A summary of securities follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Estimated Amortized Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trading Securities:
Mortgage-Backed Securities $ 84,749(a) $ -- $ -- $ 84,749 $ 59,331(a) $ -- $ -- $ 59,331
- ----------------------------------------------------------------------------------------------------------------------------
84,749 -- -- 84,749 59,331 -- -- 59,331
- ----------------------------------------------------------------------------------------------------------------------------
Available for Sale Portfolio:
U.S. Treasury Notes 6,507 31 (3) 6,535 2,508 40 (4) 2,544
U.S. Government Agency 42,229 201 (24) 42,406 78,105 277 (381) 78,001
Corporate Bonds and Notes 6,662 4 (201) 6,465 10,299 13 (7) 10,305
Equity Securities 183,560 21,914 (609) 204,865(b) 96,078 4,419 (144) 100,353
Mortgage-Backed Securities 2,001,372 27,339 (6,545) 2,022,166 786,723 8,559 (6,822) 788,460
Purchased Interest-Rate
Contracts 15,079 - (7,262) 7,817 5,460 -- (1,424) 4,036
- ----------------------------------------------------------------------------------------------------------------------------
2,255,409 49,489 (14,644) 2,290,254 979,173 13,308 (8,782) 983,699
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 2,447 28 -- 2,475 944 12 -- 956
U.S. Government Agency 32,274 14 (65) 32,223 39,453 948 (340) 40,061
Municipal Bonds and Notes 12,500 93 (1) 12,592 -- -- -- --
Corporate Bonds and Notes 1,199 3 -- 1,202 1,577 6 (8) 1,575
Money Market Preferred Stock 1,000 -- -- 1,000 8,000 -- -- 8,000
Mortgage-Backed Securities 362,817 2,533 (2,781) 362,569 484,698 2,110 (8,927) 477,881
- ----------------------------------------------------------------------------------------------------------------------------
412,237 2,671 (2,847) 412,061 534,672 3,076 (9,275) 528,473
- ----------------------------------------------------------------------------------------------------------------------------
Total $2,752,395 $52,160 $(17,491) $2,787,064 $1,573,176 $16,384 $(18,057) $1,571,503
============================================================================================================================
</TABLE>
(a) Stated at fair market value.
(b) Equity securities at December 31, 1997, consisted of FHL Bank stock of $64.3
million, mutual funds of $37.5 million, preferred stock of $46.5 million and
common stock of $56.6 million.
28
<PAGE>
A summary of realized gains and losses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------- -------------------------------- ------------------------------
(In thousands) Gains Losses Net Gains Losses Net Gains Losses Net
- ----------------------------------------------------------------- -------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trading Securities:
Mortgage-Backed Securities $ 4,052 $ (2,647) $ 1,405 $ 2,962 $ (2,712) $ 250 $ 1,901 $ (194) $ 1,707
U.S. Treasury Notes -- -- -- -- -- -- 18 (5) 13
U.S. Government Agencies -- -- -- -- -- -- 3 -- 3
Futures and Options Contracts 7,318 (8,494) (1,176) 10,704 (10,434) 270 3,517 (5,333) (1,816)
Equity Securities -- -- -- 366 (35) 331 708 (123) 585
- ----------------------------------------------------------------- -------------------------------- ------------------------------
11,370 (11,141) 229 14,032 (13,181) 851 6,147 (5,655) 492
- ----------------------------------------------------------------- -------------------------------- ------------------------------
Available for Sale:
Mortgage-Backed Securities 532 -- 532 1,211 (590) 621 1,127 (891) 236
U.S. Treasury Notes 6 -- 6 -- (7) (7) 363 -- 363
U.S. Government Agencies 13 -- 13 11 (28) (17) -- (1,886) (1,886)
Corporate Debt -- -- -- -- -- -- 37 (555) (518)
Mutual Funds 1,179 (58) 1,121 227 (174) 53 3 (199) (196)
Other Equity Securities 938 (21) 917 2,773 (197) 2,576 2,042 (1) 2,041
Other 920 (586) 334 56 -- 56 -- -- --
- ----------------------------------------------------------------- -------------------------------- ------------------------------
3,588 (665) 2,923 4,278 (996) 3,282 3,572 (3,532) 40
- ----------------------------------------------------------------- -------------------------------- ------------------------------
Total $ 14,958 $(11,806) $ 3,152 $ 18,310 $ (14,177) $4,133 $ 9,719 $(9,187) 532
================================================================= ================================ ==============================
</TABLE>
There were no sales of securities from the held to maturity portfolio for the
years ended December 31, 1997, 1996 and 1995. During the 1995 fourth quarter,
the Bank elected, under guidelines issued by the Financial Accounting Standards
Board ("FASB"), to transfer certain securities from the held to maturity to the
available for sale portfolio. These securities had an approximate book value of
$340.6 million and fair market value of $339.2 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, 1997,
Webster held 237 short positions in Eurodollar futures contracts ($237.0 million
notional amount) and 385 short positions in 5 and 10 year Treasury note futures
($38.5 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>
The following table sets forth the contractual maturities of the Bank's
securities and mortgage-backed securities at December 31, 1997 and the
weighted-average yields of such securities (based upon the financial statement
carrying amount of such securities).
<TABLE>
<CAPTION>
Due After One, Due After
Due Within But Within Five, But
One Year Five Years Within 10 Years
- ------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
(Dollars in thousands) Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trading Portfolio:
Mortgage-Backed Securities $ -- --% $ -- --% $ -- --%
- ------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
Available For Sale Portfolio:
U.S. Treasury Notes 3,504 6.08 3,031 6.42 -- --
U.S. Government Agency 9,986 5.44 24,664 6.58 5,031 6.95
Corporate Bonds and Notes 4,411 5.96 2,054 6.16 -- --
Equity Securities 204,865 3.86 -- -- -- --
Mortgage-Backed Securities 973 5.50 42,399 5.90 137,128 7.17
Purchased Interest-Rate Contracts -- -- 2,115 -- 5,702 --
- ------------------------------------------------------------------------------------------------------
223,739 4.01 74,263 5.98 147,861 6.89
- ------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 443 5.13 2,004 6.25 -- --
U.S. Government Agencies 24,775 5.55 6,999 5.56 500 6.40
Municipal Bonds and Notes(a) -- -- -- -- 12,500 6.68
Corporate Bonds and Notes 749 5.57 350 6.54 -- --
Money Market Preferred Stock 1,000 5.68 -- -- -- --
Mortgage-Backed Securities 6,307 5.90 48,131 6.09 3,299 7.98
- ------------------------------------------------------------------------------------------------------
33,274 5.61 57,484 6.03 16,299 6.93
- ------------------------------------------------------------------------------------------------------
Totals $257,013 4.22% $131,747 6.01% $164,160 6.89%
======================================================================================================
Due
After 10 Years Total
-------------------------------------- ----------------------------------------
Weighted Weighted
Average Average
(Dollars in thousands) Amount Yield Amount Yield
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Trading Portfolio:
Mortgage-Backed Securities $ 84,749 5.79% $ 84,749 5.79%
-------------------------------------------------------------------------------
84,749 5.79 84,749 5.79
------------------------------------------------------------------------------
Available For Sale Portfolio:
U.S. Treasury Notes -- -- 6,535 6.23
U.S. Government Agency 2,725 7.18 42,406 6.39
Corporate Bonds and Notes -- -- 6,465 6.02
Equity Securities -- -- 204,865 3.86
Mortgage-Backed Securities 1,841,666 6.48 2,022,166 6.52
Purchased Interest-Rate Contracts -- -- 7,817 --
-------------------------------------- ----------------------------------------
1,844,391 6.49 2,290,254 6.25
-------------------------------------- ----------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes -- -- 2,447 6.05
U.S. Government Agencies -- -- 32,274 5.56
Municipal Bonds and Notes(a) -- -- 12,500 6.68
Corporate Bonds and Notes 100 6.29 1,199 5.91
Money Market Preferred Stock -- -- 1,000 5.68
Mortgage-Backed Securities 305,080 7.33 362,817 7.15
- --------------------------------------------------------------------------------
305,180 7.33 412,237 7.00
- --------------------------------------------------------------------------------
Totals $2,234,320 6.57% $2,787,240 6.35%
================================================================================
</TABLE>
(a)Adjusted to a fully tax equivalent basis.
The above table shows contractual maturities of securities. At December 31, 1997
the duration of the trading, available for sale and held to maturity portfolios,
are approximately less than one month, 1.7 years, and 1.6 years, respectively.
30
<PAGE>
NOTE 4: LOANS RECEIVABLE, NET
- --------------------------------------------------------------------------------
A summary of loans receivable, net follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
(Dollars in THOUSANDS) 1997 1996
- -------------------------------------------------------------------------------------------------------------
Amount % Amount %
------ --- ------ ---
<S> <C> <C> <C> <C>
Loans Secured by Mortgages on Real Estate:
Conventional, VA and FHA $ 2,849,827 74.5% $2,689,005 73.8%
Conventional, VA and FHA Loans Held for Sale 1,685 0.1 5,075 0.1
Residential Participation 12,244 0.3 16,394 0.5
Residential Construction 100,524 2.6 94,596 2.6
Commercial Construction 22,203 0.6 23,383 0.6
Other Commercial 249,164 6.5 258,456 7.1
- -------------------------------------------------------------------------------------------------------------
3,235,647 84.6 3,086,909 84.7
- --------------------------------------------------------------------------------------------------------------
Consumer Loans:
Home Equity Loans 381,151 10.0 339,885 9.3
Other Consumer Loans 37,020 1.0 68,651 1.9
Credit Cards 33,112 0.8 14,893 0.4
- --------------------------------------------------------------------------------------------------------------
451,283 11.8 423,429 11.6
- --------------------------------------------------------------------------------------------------------------
Commercial Non-Mortgage Loans 220,450 5.8 195,643 5.4
- --------------------------------------------------------------------------------------------------------------
Gross Loans Receivable 3,907,380 102.2 3,705,981 101.7
Less:
Loans in Process 51,263 1.4 35,924 1.0
Allowance for Losses on Loans 49,753 1.3 43,185 1.2
Premiums on Loans Purchased, Deferred Loan Fees
and Unearned Discounts, Net (18,238) (0.5) (15,650) (0.5)
- --------------------------------------------------------------------------------------------------------------
Loans Receivable, Net $3,824,602 100.0% $3,642,522 100.0%
==============================================================================================================
</TABLE>
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, 1997, Webster had $13.5 million of impaired loans,
of which $7.3 million were measured based upon the fair value of the underlying
collateral and $6.2 million were measured based upon the expected future cash
flows of the impaired loans. In 1997, 1996 and 1995, the average balance of
impaired loans was $20.0 million, $26.3 million and $27.6 million, respectively.
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, interest income is recorded on a cash basis or is applied 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, 1997, 1996
and 1995 amounted to $355,986, $120,746 and $50,362, respectively.
A detail of the changes in the allowances for loan losses for the three years
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------
Impaired Total Total Total
(In thousands) Loans Loans Allowance Allowance Allowance
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $ 42,629 $556 $ 43,185 $ 50,281 $ 55,366
Provisions Charged to Operations 15,535 300 15,835 9,788 5,726
Acquired Allowance for Purchased Loans -- -- -- 5,000 --
Charge-offs (14,916) -- (14,916) (24,865) (13,999)
Recoveries 5,649 -- 5,649 2,981 3,188
- -------------------------------------------------------------------------------------------
Balance at End of Period $ 48,897 $856 $ 49,753 $ 43,185 $ 50,281
===========================================================================================
</TABLE>
31
<PAGE>
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, 1997 and 1996. 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, 1997 and 1996, residential mortgage commitments outstanding
totaled $74.1 million and $51.9 million, respectively. Residential commitments
outstanding at December 31, 1997 consisted of adjustable-rate and fixed-rate
mortgages of $29.8 million and $44.3 million, respectively, at rates ranging
from 4.9% to 8.3%. Commitments to originate loans generally expire within 60
days. In addition, at December 31, 1997 and 1996, there were unused portions of
home equity credit lines extended of $273.4 million and $257.9 million,
respectively. Unused commercial lines of credit, letters of credit, standby
letters of credit and outstanding commercial new loan commitments totaled $114.9
million and $104.5 million at December 31, 1997 and 1996, respectively.
Additionally, unused credit card lines were $102.3 million and $36.5 million at
December 31, 1997 and 1996, respectively.
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, 1997 and 1996, Webster had forward commitments to sell loans
totaling $1.7 million and $4.8 million, respectively, at rates between 5.75% and
8.0% and 5.75% and 9.0%, respectively. The estimated fair value of commitments
to sell loans is considered insignificant at December 31, 1997 and 1996.
At December 31, 1997, 1996 and 1995, Webster serviced, for the benefit of
others, mortgage loans aggregating approximately $1.1 billion, $1.2 billion and
$967.0 million, respectively.
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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------
Amount % Amount %
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Real Estate Loans $ 39,063 89.5% $58,745 74.8%
Commercial Loans 4,317 9.9 6,606 8.4
Multi-Family Real Estate Loans -- -- 12,772 16.3
Foreclosed Properties 281 0.6 406 0.5
- ------------------------------------------------------------------------------------
43,661 100.0% 78,529 100.0%
Allowance for Segregated Asset Losses (2,623) (2,859)
- -------------------------------------------------------------------------------------
Segregated Assets, Net $ 41,038 $75,670
=====================================================================================
</TABLE>
The FDIC was required to reimburse the Bank quarterly through December 31, 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, the Bank 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. The Bank is entitled to retain 20% of such recoveries
during the sixth and seventh years following the First Constitution acquisition
and 100% thereafter.
32
<PAGE>
Upon termination of the seven-year period after the First Constitution
acquisition (December 1999), if the sum of the Bank'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
the Bank an additional 15% of any such excess over $49.2 million at the end of
the seventh year. At December 31, 1997, cumulative net charge-offs and expenses
aggregated $58.9 million. During the first quarter of 1996, the Bank began
recording the additional 15% reimbursement as a receivable from the FDIC (See
Note 7). As of December 31, 1997, the Bank had received a total of $46.7 million
in reimbursements for net charge-offs and permitted expenses from the FDIC and
the amount due from the FDIC totals $1.7 million. At December 31, 1997 and 1996,
the Bank had allowances for losses of $2.6 million and $2.9 million,
respectively, to cover its portion of Segregated Assets losses.
During the second quarter of 1997, the Bank sold approximately $13.7 million in
multi-family loans including all multi-family Segregated Asset Loans. Any losses
incurred on the sale of these segregated multi-family loans was covered under
the loss-sharing arrangement with the FDIC and the transaction had no impact on
the Consolidated Statements of Income.
A detail of changes in the allowance for Webster's share of losses for
Segregated Assets follows:
<TABLE>
<CAPTION>
December 31,
----------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $ 2,859 $ 3,235
Charge-offs (267) (621)
Recoveries 31 245
- --------------------------------------------------------------------------------------------------------
Balance at End of Period $ 2,623 $ 2,859
========================================================================================================
</TABLE>
At December 31, 1997 and 1996, nonperforming Segregated Assets are classified as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial Real Estate Loans $ 2,912 $ 3,337
Commercial Loans 500 192
Multi-Family Real Estate Loans -- 495
Foreclosed Property:
Commercial Real Estate 281 269
Multi-Family Real Estate -- 138
- --------------------------------------------------------------------------------------------------------
Total $ 3,693 $ 4,431
========================================================================================================
</TABLE>
NOTE 6: PREMISES AND EQUIPMENT, NET
- --------------------------------------------------------------------------------
A summary of premises and equipment, net follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31,
----------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 9,294 $ 8,138
Buildings and Improvements 43,447 44,685
Leasehold Improvements 4,425 4,801
Furniture, Fixtures and Equipment 46,069 41,966
- --------------------------------------------------------------------------------------------------------
Total Premises and Equipment 103,235 99,590
Accumulated Depreciation and Amortization 44,595 40,879
- --------------------------------------------------------------------------------------------------------
Premises and Equipment, Net $ 58,640 $ 58,711
========================================================================================================
</TABLE>
At December 31, 1997, 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 $3.5 million, $3.4 million and $2.0
million in 1997, 1996 and 1995, respectively. Webster is also entitled to rental
income under various non-cancelable operating leases for properties owned.
Rental income under these leases was $2.0 million, $1.9 million and $1.7 million
in 1997, 1996 and 1995, respectively.
33
<PAGE>
The following is a schedule of future minimum rental payments and receipts
required under these leases as of December 31, 1997:
- ---------------------------------------------------------------------------
(In thousands) Payments Receipts
- ---------------------------------------------------------------------------
Years ending December 31:
1998 $ 3,957 $ 843
1999 3,251 645
2000 2,621 551
2001 2,171 373
2002 1,963 235
Later years 7,555 1,034
- ---------------------------------------------------------------------------
Total $21,518 $ 3,681
===========================================================================
NOTE 7: PREPAID EXPENSES AND OTHER ASSETS
- ---------------------------------------------------------------------------
A summary of prepaid expenses and other assets follows:
December 31,
--------------------
(In thousands) 1997 1996
- ---------------------------------------------------------------------------
Due from FDIC $ 1,660 $ 1,420
Income Taxes Receivable 4,641 6,913
Deferred Tax Asset, Net (Note 14) 16,318 20,411
Mortgage Servicing Rights, Net 5,342 5,607
Bank Owned Life Insurance 12,750 --
Other Assets 16,756 10,400
- ---------------------------------------------------------------------------
Prepaid Expenses and Other Assets $ 57,467 $44,751
===========================================================================
Of the $1.7 million due from FDIC at December 31, 1997, $387,000 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 1998. The
remaining $1.3 million represents the additional 15% reimbursement for
charge-offs and expenses which Webster will receive at the end of 1999 (See Note
5). Other Assets are primarily comprised of prepaid expenses and various
miscellaneous assets.
During the 1995 second quarter, Webster adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights," superseded by SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." 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 $797,000, $491,000 and $715,000 for the years ended December 31, 1997, 1996
and 1995, respectively. During 1997 and 1996, Webster capitalized mortgage
servicing assets of $895,000 and $508,000, 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. In 1996, Webster
established an allowance to provide for the decrease in value of mortgage
servicing rights due to declining interest rates and an increased rate of
prepayments. At December 31, 1997 and 1996, the allowance totaled $458,000 and
$95,000, respectively. During 1997 and 1996, provisions to this allowance
totaled $363,000 and $95,000, respectively.
34
<PAGE>
NOTE 8: DEPOSITS
- --------------------------------------------------------------------------------
Deposits categories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------
% of % of
(Dollars in thousands) Balance Total Balance Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand Deposits and NOW Accounts $ 784,850 18.0% $ 711,498 16.0%
Regular Savings and Money Market Deposit Accounts 1,060,050 24.3 1,144,244 25.6
Time Deposits 2,520,856 57.7 2,601,819 58.4
- -------------------------------------------------------------------------------------------------
Total Deposits $4,365,756 100.0% $4,457,561 100.0%
==================================================================================================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW Accounts $ 8,332 $ 6,123 $ 3,933
Regular Savings and Money Market Deposit Accounts 27,341 31,719 34,274
Time Deposits 132,917 136,092 119,424
- ----------------------------------------------------------------------------------
Total $168,590 $173,934 $157,631
==================================================================================
</TABLE>
Time deposits of $100,000 or more amounted to $345.7 million and represented
7.92% of total deposits at December 31, 1997. The following table presents the
amount of these deposits maturing during the periods indicated:
(In thousands)
- ----------------------------------------------------------
Maturing Amount
- ----------------------------------------------------------
January 1, 1998 to March 31, 1998 $ 98,141
April 1, 1998 to June 30, 1998 68,689
July 1, 1998 to December 31, 1998 90,403
January 1, 1999 and beyond 88,433
- ----------------------------------------------------------
Total $345,666
==========================================================
NOTE 9: FEDERAL HOME LOAN BANK ADVANCES
- --------------------------------------------------------------------------------
Advances payable to the Federal Home Loan Bank are summarized as follows:
December 31,
------------------------
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------------
Fixed Rate:
4.82% to 9.80% Due 1997 $ -- $414,590
5.20% to 6.40% Due 1998 1,050,800 76,800
5.54% to 8.86% Due 1999 6,400 6,400
6.31% to 9.16% Due 2000 13,420 13,420
6.69% Due in 2001 1,000 1,000
4.00% Due in 2008 -- 150
- -----------------------------------------------------------------------------
1,071,620 512,360
- -----------------------------------------------------------------------------
Variable Rate:
- -----------------------------------------------------------------------------
7.32% Due in 1997 -- 47,520
- -----------------------------------------------------------------------------
Total Federal Home Loan Bank Advances $1,071,620 $559,880
=============================================================================
35
<PAGE>
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>
December 31,
-----------------------------------------
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding during the period $ 788,928 $379,969 $ 374,910
Amount outstanding at end of period 1,050,800 462,110 392,366
Highest month end balance 1,050,800 475,693 493,340
Weighted-average interest rate at end of period 5.76% 5.71% 5.94%
Weighted-average interest rate during the period 5.66% 5.61% 6.01%
===========================================================================================
</TABLE>
At December 31, 1997, the Bank had additional borrowing capacity of over $1.7
billion from the FHL Bank, including a line of credit of approximately $41.3
million. Advances are secured by the Bank's investment in FHL Bank 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, 1997 and 1996, the Bank was in compliance with the FHL Bank
collateral requirements.
NOTE 10: REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
- --------------------------------------------------------------------------------
The following table summarizes reverse repurchase agreements and other
borrowings:
December 31,
---------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------
Reverse Repurchase Agreements $ 904,576 $ 99,085
Senior Notes 40,000 40,000
Bank Line of Credit 10,000 18,000
ESOP Borrowings 1,978 2,546
Other Borrowings - 6,496
- -----------------------------------------------------------------------
Total $ 956,554 $ 166,127
=======================================================================
The weighted-average rates for other borrowed funds for the 1997 and 1996 year
periods were 5.73% and 6.26%, respectively.
During 1997, reverse repurchase agreement transactions inclusive of dollar roll
transactions were the primary source of borrowed funds with the exception of FHL
Bank advance borrowings (See Note 9). The average balance and weighted- average
rate for reverse repurchase agreements for the 1997 year period were $556.6
million and 5.65% as compared to $132.7 million and 5.53% for the 1996 year
period. Securities underlying the reverse repurchase transactions held as
collateral are primarily U.S. government agency securities consisting of FNMA,
GNMA and FHLMC securities. Securities for reverse repurchase agreements related
to Webster's funding operations are delivered to broker-dealers who arrange the
transactions. Webster also enters into reverse repurchase agreement transactions
directly with certain customers through its money desk operations.
36
<PAGE>
Information concerning short-term and long-term borrowings under reverse
repurchase agreements as of the end of the current period is summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------
Balance at Weighted Average Weighted Average Book Value Market Valuee
December 31, 1997 Rate Maturity Date of Collateral of Collateral
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$904,576 5.80% 3.1 months $895,965 $906,340
</TABLE>
While the Bank used several types of short-term borrowings as part of funding
its daily operations, only reverse repurchase agreement transactions had an
average balance that was 30% or more of the Bank's total equity at the end of
the 1997 and 1996 periods. 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>
December 31,
-------------------
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average amount outstanding during the period $556,364 $132,666
Amount outstanding at end of period 899,577 99,085
Highest month end balance 899,577 202,204
Weighted-average interest rate at end of period 5.80% 5.52%
Weighted-average interest rate during the period 5.65% 5.53%
=======================================================================================================
</TABLE>
During 1997, Webster at times also used a variable-rate $20 million line of
credit through a correspondent bank and purchased federal funds. 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 Employee Stock Ownership Plan ("ESOP") borrowings are from a correspondent
bank at a floating rate based on the correspondent bank's base (prime) rate and
the weighted rates at December 31, 1997 and 1996 were 8.26% and 7.90%,
respectively. The terms of the loan agreements call for the ESOP to make annual
scheduled principal repayments through the year 2004. Interest is paid quarterly
and the borrowings are guaranteed and secured by unallocated shares of Webster
common stock under the ESOP Plan.
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.
37
<PAGE>
NOTE 11: INTEREST-RATE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Webster employs as part of its asset/liability management strategy various
interest-rate contracts including short futures positions, interest-rate swaps
and interest-rate caps and floors. See Note 3 for disclosures on futures
positions. Webster used 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, interest-rate caps and floors at December
31, 1997 is not considered to be significant due to counterparty ratings. 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 Amortized Cost
------------------------------------------------------------------------------------------------
December 31, December 31, December 31,
------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-rate swap agreements $ 50,000 $ 50,000 $ (18) $ (15) $ - $ -
Interest-rate floor agreements 100,000 100,000 954 1,602 1,138 1,482
Interest-rate cap agreements 460,000 225,000 6,881 2,449 13,941 3,978
- -------------------------------------------------------------------------------------------------------------------------------
Total (Classified in available for
sale securities) 610,000 375,000 7,817 4,036 15,079 5,460
- -------------------------------------------------------------------------------------------------------------------------------
Interest rate swap agreements
(Classified in time reports) 25,000 - 309 - - -
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 635,000 $ 375,000 $ 8,126 $ 4,036 $ 15,079 $ 5,460
===============================================================================================================================
</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, 1997, Webster had two interest-rate swap agreements, one hedging
available for sale securities and the other hedging $25 million of brokered
certificates of deposit. The swap, classified as a hedge of available for sale
securities, has Webster paying a fixed rate of 6.04% while receiving a variable
rate based on LIBOR. The swap, classified as a hedge of brokered certificates of
deposit, has Webster receiving a fixed rate of 6.65% while paying a variable
rate based on LIBOR. For the year ended December 31, 1997, net expense recorded
on the available for sale swap was $25,000 and net revenue recorded on the
brokered certificates of deposit swap was $18,000.
Interest-rate cap agreements will result in cash payments to be received by
Webster only if current interest rates rise above a predetermined interest rate.
At December 31, 1997, Webster had six outstanding cap agreements with
interest-rate caps ranging from 6.00% to 9.00%. 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, 1997, Webster had $13.9 million of unamortized interest-rate cap
balances and during the 1997 period amortized $2.6 million as a reduction of
available for sale interest income. Similarly, interest-rate floor agreements
will result in cash payments to be received by Webster only if current interest
rates fall below a predetermined interest rate. At December 31, 1997, Webster
had one outstanding interest-rate floor agreement with a 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, 1997, Webster had $1.1
million of unamortized floor costs and during the 1997 period amortized $344,000
as a reduction of available for sale interest income.
38
<PAGE>
NOTE 12: SUMMARY OF ESTIMATED FAIR VALUES
- --------------------------------------------------------------------------------
A summary of estimated fair values consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Cash and Due from Depository Institutions $ 122,267 $ 122,267 $ 105,226 $ 105,226
Interest-bearing Deposits 30,504 30,504 4,536 4,536
Securities 2,779,423 2,779,247 1,573,666 1,567,467
Residential Loans 2,925,591 3,001,667 2,785,592 2,852,213
Consumer Loans 70,680 71,168 141,291 141,478
Home Equity Loans 384,274 398,352 285,912 293,104
Commercial Loans 493,810 490,920 472,912 469,098
Less Allowance for Loan Losses 49,753 - 43,185 -
Segregated Assets, Net 41,038 42,417 75,670 75,670
Interest-rate Contracts 7,817 7,817 4,036 4,036
Mortgage Servicing Rights, Net 5,342 7,808 5,607 6,433
Other Assets 208,628 208,628 195,947 195,947
Liabilities:
Deposits Other than Certificates $1,844,900 $ 1,844,900 $1,855,742 $1,855,742
Time Deposits:
Maturing in Less than One Year 1,872,462 1,877,962 1,628,618 1,631,181
Maturing in One Year and Beyond 648,394 650,671 973,201 974,182
Federal Home Loan Bank Advances 1,071,620 1,071,863 559,880 560,421
Other Borrowings 956,554 956,903 166,127 166,175
Other Liabilities 93,928 93,928 86,810 86,810
Capital Securities and Preferred Stock of
Subsidiary Corp. 149,577 157,384 -- --
===================================================================================================================
</TABLE>
In December 1991, the FASB issued SFAS 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 (See 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. FHL Bank stock
has no active market and is required to be held by member banks. The estimated
fair value of FHL 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 15 and 30 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.
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 time deposits, FHL 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 FHL Bank 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 discount rates used for the capital securities and
minority interest liabilities were calculated using market rates for current
instruments with similar terms.
39
<PAGE>
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) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Gain) on Sale of Foreclosed Properties
Acquired in Settlement of Loans, Net $ (1,240) $ (1,354) $ (735)
Provision for Losses on Foreclosed Properties 746 1,866 3,532
Rental Income (86) (262) (782)
Foreclosed Property Expenses 2,730 3,257 4,239
- ----------------------------------------------------------------------------------------------------------------------
Total $ 2,150 $ 3,507 $ 6,254
======================================================================================================================
</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) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 740 $ 1,233 $ 2,943
Provisions 746 1,866 3,532
Losses Charged to Allowance (1,033) (2,503) (5,524)
Recoveries Credited to Allowance 121 144 282
- -----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 574 $ 740 $ 1,233
=======================================================================================================================
NOTE 14: INCOME TAXES
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Charges for income taxes in the Consolidated Statements of Income are comprised
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
(In thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 25,233 $ 18,774 $ 16,034
State 3,615 4,025 5,156
- ----------------------------------------------------------------------------------------------------------------------
28,848 22,799 21,190
- ----------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (7,758) (1,781) (4,526)
State (1,355) 1,354 (1,214)
- ----------------------------------------------------------------------------------------------------------------------
(9,113) (427) (5,740)
- ----------------------------------------------------------------------------------------------------------------------
Total:
Federal 17,475 16,993 11,508
State 2,260 5,379 3,942
- ----------------------------------------------------------------------------------------------------------------------
$ 19,735 $ 22,372 $ 15,450
======================================================================================================================
</TABLE>
40
<PAGE>
Income tax expense of $19.7 million, $22.4 million and $15.5 million for the
years ended December 31, 1997, 1996 and 1995, respectively, differed from the
amounts computed by applying the Federal income tax rate of 35% in 1997, 1996
and 1995 to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "Expected" Tax Expense $ 18,737 $ 21,246 $ 15,615
Reduction in Income Taxes Resulting From:
Dividends Received Deduction (364) (603) (324)
State Income Taxes, Net of Federal Income Tax Benefit,
Including Change in Valuation Allowance and Rate 1,469 3,822 2,581
Adjustment to Deferred Tax Assets and Liabilities:
Change in Valuation Allowance (Federal) (1,100) (2,000) (2,294)
Merger Related Costs 1,225 -- --
Other, Net (232) (93) (128)
- ----------------------------------------------------------------------------------------------------------------------
Income Taxes $ 19,735 $ 22,372 $ 15,450
=====================================================================================================================
</TABLE>
At December 31, 1997, Webster had a net deferred tax asset of $16.3 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 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.
The 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 1997, 1996 and 1995 were due to
favorable reassessments of known risks and resulted in reductions of income tax
expense in these years.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below.
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Loan Loss Allowances & Other Allowances, Net $ 26,224 $ 21,657
Accrued Compensation and Pensions 3,256 3,620
Deferred Expenses 3,671 -
Intangibles 4,598 3,743
Other 2,106 3,362
- ------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 39,855 32,382
Less Valuation Allowance (5,107) (6,207)
- ------------------------------------------------------------------------------------------------------
Deferred Tax Asset after Valuation Allowance 34,748 26,175
- ------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Loan Discount 2,665 2,826
Unrealized Gain on Securities 14,635 1,427
Other 1,130 1,511
- ------------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 18,430 5,764
- ------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 16,318 $ 20,411
======================================================================================================
</TABLE>
41
<PAGE>
NOTE 15: SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity increased $45.4 million to $382.2 million at December 31,
1997 from $336.8 million at December 31, 1996 due primarily to net income of
$33.8 million and the tax-effected unrealized gain on securities available for
sale of $18.6 million.
On July 31, 1997, Webster acquired People's (see Note 2). In connection with the
acquisition, Webster issued 1,575,996 shares of its common stock for all the
outstanding shares of People's common stock. Under the terms of the agreement,
People's shareholders received .85 shares of Webster common stock in a tax-free
exchange for each of their shares of People's common stock
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
Retained earnings at December 31, 1997 included $27.2 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 Office of Thrift Supervision ("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, the Bank is also subject to a minimum
tangible capital requirement (expressed as a ratio of tangible capital to
adjusted total assets). At December 31, 1997, 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 judgments by
the OTS about components, risk weightings, and other factors.
42
<PAGE>
At December 31, 1997, 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
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) $ 425,398 13.41% $253,829 8.00% $317,286 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 385,599 12.15 126,915 4.00 190,372 6.00
Tier 1 Capital (to Adjusted Total Assets) 385,599 5.61 206,234 3.00 343,723 5.00
Tangible Capital (to Adjusted Total Assets) 380,896 5.54 103,046 1.50 No Requirement
At December 31, 1996
- --------------------
Total Capital (to Risk-Weighted Assets) $ 364,951 12.40% $235,423 8.00% $294,278 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 330,306 11.22 117,711 4.00 176,557 6.00
Tier 1 Capital (to Adjusted Total Assets) 330,306 6.00 165,096 3.00 275,160 5.00
Tangible Capital (to Adjusted Total Assets) 325,905 5.92 82,547 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 Bank 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.
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, 1997, 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, 1997, the Bank had $128.2 million available for the payment of
dividends under the OTS capital distribution regulations. The Bank has paid
dividends to Webster amounting to $42.7 million and $21.5 million for 1997 and
1996, 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 17. Since Webster has secured and guaranteed the ESOP debt, the
outstanding ESOP loan balance which is considered unearned compensation expense,
is recorded as a reduction of shareholders' equity. Both the loan obligation and
the unearned compensation expense are reduced by the amount of any loan
repayments made by the ESOP. Principal repayments totaled $568,025, $583,000 and
$545,000 during the years ended December 31, 1997, 1996 and 1995, respectively.
In February 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.
43
<PAGE>
NOTE 16: EARNINGS PER SHARE
- --------------------------------------------------------------------------------
On February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement simplifies the standards for computing and presenting earnings per
share previously found in APB Opinion No. 15 and makes them comparable to
international standards. It replaces the presentation of primary earnings per
share with basic earnings per share and replaces fully diluted earnings per
share with diluted earnings per share. SFAS No. 128 requires dual presentation
of basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures.
The following tables reconcile the components of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EPS:
Net income $ 33,798 $ 38,501 $ 29,321
Preferred stock dividends -- 1,149 1,296
- ------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders $ 33,798 $ 37,352 $ 28,025
========================================================================================================================
Weighted-average common shares outstanding 13,474,117 13,252,237 11,936,050
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $2.51 $2.82 $2.35
========================================================================================================================
DILUTED EPS:
Net income $ 33,798 $ 38,501 $ 29,321
========================================================================================================================
Weighted-average common shares outstanding 13,474,117 13,252,237 11,936,050
Dilutive common stock equivalents:
Effect of conversion of preferred stock series B 17,053 888,086 986,403
Common stock equivalents due to dilutive effect
of options 240,285 284,936 279,806
Common stock equivalents due to dilutive effect
of warrant 97,044 34,694 --
- ------------------------------------------------------------------------------------------------------------------------
Total weighted-average diluted shares 13,828,499 14,459,953 13,202,259
========================================================================================================================
Diluted earnings per share $2.44 $2.66 $2.22
========================================================================================================================
</TABLE>
At December 31, 1997, options to purchase 119,700 shares of common stock at
exercise prices between $49.63 and $64.50 were not included in the computation
of diluted earnings per share since the options' exercise price was greater than
the average market price of Webster common shares for 1997.
NOTE 17: 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 $1.0 million, $909,000 and $593,000 for the years
ended December 31, 1997, 1996 and 1995, 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 participation service under
the ESOP. Operations were charged with $870,000, $847,000 and $848,000 for the
44
<PAGE>
years ended December 31, 1997, 1996 and 1995, respectively, for costs related to
the ESOP. The 1997 ESOP charge includes $568,025 for principal payments, $55,513
of interest payments (net of $31,387 of dividends on unallocated ESOP shares)
and $46,178 of administrative costs. As required under the Accounting Standards
Executive Committee's Statement of Position 93-6, "Employers Accounting for
Stock Ownership Plans," additional compensation expense of approximately
$200,284 was recorded for the 1997 period.
The following table sets forth the funded status of the Bank's pension plan and
amounts recognized in Webster's Consolidated Statements of Condition at December
31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
---------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 13,484 $ 15,266
Nonvested benefit obligation 1,369 1,380
- ------------------------------------------------------------------------------------------
Accumulated benefit obligation 14,853 16,646
Effect of projected future compensation levels 4,094 4,155
- ------------------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date 18,947 20,801
Plan assets at fair value, primarily listed
stocks and U.S. bonds 22,179 18,694
- ------------------------------------------------------------------------------------------
Excess (Deficiency) of plan assets over
benefit obligation 3,232 (2,107)
Items not yet recognized in earnings:
Unrecognized prior service cost (1,403) (2,221)
Unrecognized net gain (loss) (3,531) 1,878
Unrecognized net asset at January 1, 1987
being recognized over 20.9 years (121) (313)
- -------------------------------------------------------------------------------------------
Unfunded Accrued Pension Liability $ (1,823) $ (2,763)
===========================================================================================
</TABLE>
The reduction in the unfunded accrued pension liability balance at December 31,
1997, as compared to the December 31, 1996 balance, as shown in the above table
is due primarily to favorable curtailment adjustments realized in 1997 that were
directly related to the Derby and People's acquisitions. The following table
summarizes the components of the net change in the unfunded accrued pension
liability balance.
(In thousands)
- -----------------------------------------------------------------
Balance at December 31, 1996 $(2,763)
Acquisition-Related Net Curtailments 1,577
Contributions 702
Net Periodic Cost (1,339)
- -----------------------------------------------------------------
Balance at December 31, 1997 $(1,823)
=================================================================
The discount rate, the 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 7.0%, 4.75% and 9.0% for
1997 and 7.25%, 5.0% and 9.0% for 1996.
Net pension expense for 1997, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the period $ 1,759 $ 1,961 $ 1,286
Interest cost on projected benefit obligations 1,320 1,394 1,225
Return on plan assets (5,381) (2,038) (3,153)
Amortization and deferral 3,641 338 1,704
- -----------------------------------------------------------------------------------------------------------------
Total $ 1,339 $ 1,655 $ 1,062
=================================================================================================================
</TABLE>
45
<PAGE>
The following table sets forth the status of Webster's accumulated
post-retirement benefit obligation:
<TABLE>
<CAPTION>
December 31,
------------------------------------
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $(1,912) $(3,818)
Unrecognized transition obligation - 1,748
Unrecognized net (loss) gain 273 (998)
- ----------------------------------------------------------------------------------------------------------------------
Unfunded Accrued Post-Retirement Liability $(1,639) $(3,068)
======================================================================================================================
</TABLE>
The reduction in the unfunded accrued post-retirement liability balance at
December 31, 1997, as compared to the December 31, 1996 balance, as shown in the
above table is due primarily to favorable curtailment adjustments realized in
1997 that were directly related to the Derby and People's acquisitions. The
following table summarizes the components of the net change in the unfunded
accrued post-retirement liability position:
(In thousands)
- --------------------------------------------------------------------------------
Balance at December 31, 1996 $(3,068)
Acquisition-Related Net Curtailments 1,495
Contributions 126
Net Periodic Costs (192)
- --------------------------------------------------------------------------------
Balance at December 31, 1997 $(1,639)
================================================================================
The discount rate used in determining the accumulated post-retirement benefit
obligation was 7.0% and the assumed healthcare cost-trend rate was 5.0% for
1997. An increase of 1% in the assumed healthcare cost-trend rate would result
in an increase in the accumulated benefit obligation by $133,400. The discount
rate and healthcare cost-trend rate for 1996 were 7.25% and 4.25%, respectively.
The components of post-retirement benefits cost were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 40 $ 258 $ 238
Interest cost 140 256 250
Amortization 12 78 68
- --------------------------------------------------------------------------------------------------------------------
Net Periodic Post-Retirement Benefit Cost $ 192 $ 592 $ 556
====================================================================================================================
</TABLE>
Webster maintains stock option plans (the "Option Plans") for the benefit of its
directors and officers. In October 1995, the FASB issued SFAS No. 123
"Accounting for Stock-Based Compensation." This statement establishes financial
accounting and reporting standards for stock-based employee and non-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.
46
<PAGE>
At December 31, 1997, 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 and
recorded to the Consolidated Statements of Income, Webster's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year December 31,
----------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income:
As Reported $ 33,798 $ 38,501 $ 29,321
Pro Forma 33,151 37,740 27,592
Basic Earnings Per Share:
As Reported $ 2.51 $ 2.82 $ 2.35
Pro Forma 2.46 2.76 2.20
Diluted Earnings Per Share:
As Reported $ 2.44 $ 2.66 $ 2.22
Pro Forma 2.40 2.61 2.09
============================================================================================================================
</TABLE>
Webster's five fixed stock option plans were established in 1995, 1994, 1992,
1986 and 1985. The 1995, 1994 and 1985 plans were acquired through bank
acquisitions. Under these plans, the number of shares that may be granted are
212,500, 286,650, 780,500, 385,085 and 312,069, respectively, after having been
adjusted for a 10% stock dividend that occurred in 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") were granted in tandem with stock options by Derby under the 1985
option plan. In accordance with generally accepted accounting principles,
compensation expense is recorded when the market value of Webster's common stock
exceeds the SARS' strike price. Compensation expense recorded for 1997, 1996 and
1995 was $229,000, $18,800 and $177,900. During the years ended December 31,
1997, 1996 and 1995, the number of SARS exercised for each respective period
were: 525, 1,102 and 19,634, respectively. Under the terms of the plans, the
exercise price of each option granted equals the approximate market price of
Webster's stock on the date of grant and each option has a maximum contractual
life of ten years. The tables that follow provide disclosures and information
required under SFAS No. 123 and summarize stock compensation activity for the
years 1997, 1996 and 1995 for which Consolidated Statements of Income are
presented.
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes Option-Pricing Model with the following weighted-average
assumptions used for grants issued during 1997: expected option term 8.6 years,
expected dividend yield 1.85%, expected volatility 25.14%, expected forfeiture
rate 2.33%, and risk-free interest rate of 5.83% and the following
weighted-average assumptions were used for grants issued during 1996: 10 years,
1.91%, 21.0%, 1.14% and 6.42%, respectively.
47
<PAGE>
A summary of the status of Webster's fixed stock option plans at December 31,
1997, 1996, and 1995 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
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 812,029 $ 21.75 1,196,024 $ 17.37 889,297 $ 14.50
Granted 156,153 56.18 194,729 31.19 394,361 22.89
Exercised (154,326) 19.03 (569,199) 15.75 (80,734) 12.48
Forfeited/Canceled (14,100) 33.71 (9,525) 22.41 (6,900) 18.75
- --------------------------------------------------------------------------------------------------------------------------
Options Outstanding at End of Year 799,756 $ 28.78 812,029 $ 21.75 1,196,024 $ 17.37
==========================================================================================================================
Options Exercisable at Year End 483,906 498,929 973,474
Weighted Average Per Share Fair Value
of Options Granted During the Year $ 21.58 $ 11.91 $ 9.77
==========================================================================================================================
</TABLE>
The following table summarizes information about Webster's fixed stock option
plans by price range for options that are outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Prices Outstanding (In years) Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.55 - $6.45 12,980 2.9 $4.55 12,980 $4.55
$6.46 - $12.90 69,350 2.9 9.87 69,350 9.87
$12.91 - $19.35 156,107 5.5 17.97 156,107 17.97
$19.36 - $25.80 220,325 6.5 21.29 171,275 21.29
$25.81 - $32.25 96,973 7.9 27.86 48,123 27.65
$32.26 - $38.70 121,821 9.0 37.80 26,071 37.64
$38.71 - $45.15 2,500 9.1 39.38 - -
$45.16 - $51.60 15,000 9.6 49.75 - -
$51.61 - $58.05 2,000 9.6 51.75 - -
$58.06 - $64.50 102,700 10.0 63.52 - -
- ---------------------------------------------------------------------------------------------------------------------
799,756 7.0 $28.78 483,906 $19.63
=====================================================================================================================
</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 4,260 shares were issued to twelve directors in 1997 with
each receiving 355 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. There were no shares granted in 1997,
1996 and 1995 under the Restricted Stock Plan. 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>
<TABLE>
<CAPTION>
NOTE 18: MERGER AND ACQUISITION EXPENSES
- -------------------------------------------------------------------------------------------------------------
A summary of merger and acquisition expenses follows:
Years Ended December 31,
--------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shawmut Transaction $ - $ 500 $ 1,000
Shelton - - 3,271
Derby 19,858 - -
People's 7,200 - -
- -------------------------------------------------------------------------------------------------------------
Total $27,058 $ 500 $ 4,271
=============================================================================================================
</TABLE>
In connection with the acquisitions of Derby and People's, that were completed
on January 31, 1997 and July 31, 1997, Webster recorded approximately $27.1
million of merger-related charges. The following table presents a summary of the
merger-related accrued liabilities:
<TABLE>
<CAPTION>
(In thousands) Derby People's
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance of merger-related accrued liabilities at December 31, 1996 $ -- $ --
Additions 19,900 7,200
Compensation (severance and related costs) (6,700) (2,400)
Data processing contract termination (1,600) --
Write-down of fixed assets (1,200) --
Transaction costs (including investment bankers, attorneys and accountants) (2,200) (1,300)
Merger-related and miscellaneous expenses (2,800) (1,100)
- --------------------------------------------------------------------------------------------------------------
Balance of merger-related accrued liabilities at December 31, 1997 $ 5,400 $ 2,400
==============================================================================================================
</TABLE>
The remaining accrued liability of $7.8 million represents, for the most part,
an accrual for data processing contract termination costs payable over a future
period, the estimated loss on sale of excess fixed assets due to consolidation
of overlapping branch locations and compensation costs related to severance.
NOTE 19: CAPITAL SECURITIES OF SUBSIDIARY TRUST
- --------------------------------------------------------------------------------
During 1997, Webster formed a statutory business trust, Webster Capital Trust I
("Trust I"), of which Webster owns all of the common stock. Trust I exists for
the sole purpose of issuing trust securities and investing the proceeds in an
equivalent amount of subordinated debentures of the Corporation. On January 31,
1997, Trust I completed a $100 million underwritten public offering of 9.36%
Corporation-Obligated Manditorily Redeemable Capital Securities of Webster
Capital Trust I ("capital securities"). The sole asset of Trust I is the $100
million of Webster's 9.36% junior subordinated deferrable interest debentures
due in 2027 ("subordinated debt securities"), purchased by Trust I on January
30, 1997. The subordinated debt securities are unsecured obligations of Webster
and are subordinate and junior in right of payment to all present and future
senior indebtedness of Webster.
Webster has entered into a guarantee, which together with Webster's obligations
under the subordinated debt securities and the declaration of trust governing
Trust I, including its obligations to pay costs, expenses, debts and liabilities
(other than trust securities), provides a full and unconditional guarantee of
amounts on the capital securities.
NOTE 20: PREFERRED STOCK OF SUBSIDIARY CORPORATION
- --------------------------------------------------------------------------------
The Bank formed and incorporated Webster Preferred Capital Corporation ("WPCC")
in March 1997. WPCC was formed to provide a cost-effective means of raising
funds, including capital, on a consolidated basis for the Bank. WPCC's strategy
is to acquire, hold and manage real estate mortgage assets.
49
<PAGE>
In December 1997, WPCC raised $50 million in a public offering in which $40
million was issued as Series A 7.375% cumulative redeemable preferred stock and
$10 million was issued as Series B 8.625% cumulative redeemable preferred stock
that is quoted under NASDAQ listing (WBSTP). All of WPCC's common stock is owned
by the Bank. The preferred shares are not exchangeable into common stock or any
other securities of the Bank or Webster, and will not constitute regulatory
capital of either the Bank or Webster .
NOTE 21: 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 22: PARENT COMPANY CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Statements of Condition for 1997 and 1996 and the Statements of Income and
Cash Flows for the three-year period ended December 31, 1997 (parent only) are
presented below.
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
----------------------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Depository Institutions $ 1,830 $ 2,248
Securities Available for Sale 85,819 17,072
Investment in Subsidiaries 439,308 374,747
Due from Subsidiaries - 2,138
Other Assets 5,317 2,482
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $ 532,274 $ 398,687
========================================================================================================================
Liabilities and Shareholders' Equity
Senior Notes due 2000 $ 40,000 $ 40,000
Line of Credit - 18,400
ESOP Borrowings 1,978 2,546
Due to Subsidiaries 2,691 -
Other Liabilities 5,419 909
Corporation-Obligated Mandatorily Redeemable Capital Securities
of Subsidiary Trust 100,000 -
Shareholders' Equity 382,186 336,832
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 532,274 $ 398,687
========================================================================================================================
</TABLE>
50
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from Subsidiary $ 42,671 $ 21,526 $ 18,072
Interest on Securities 1,821 984 1,148
Gain on Sale of Securities 937 1,520 503
Other Noninterest Income 11 139 70
Interest Expense on Borrowings 3,812 3,780 3,660
Capital Securities Expense 8,845 - -
Other Noninterest Expenses 5,936 3,124 3,752
- ------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and
Equity in Undistributed Earnings of Subsidiaries 26,847 17,265 12,381
Income Tax Benefit 5,984 1,597 2,504
- ------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed
Earnings of Subsidiaries 32,831 18,862 14,885
Equity in Undistributed Earnings of Subsidiaries 967 19,639 14,436
- ------------------------------------------------------------------------------------------------------------------------
Net Income 33,798 38,501 29,321
Preferred Stock Dividends - 1,149 1,296
- ------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ 33,798 $ 37,352 $ 28,025
========================================================================================================================
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 33,798 $ 38,501 $ 29,321
(Increase) Decrease in Interest Receivable (186) 42 (16)
(Increase) Decrease in Other Assets (2,570) 117 2,048
Gains on Sale of Securities (937) (1,520) (503)
Equity in Undistributed Earnings of Subsidiaries (967) (19,639) (14,436)
Other, Net 10,453 (6,281) (1,722)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 39,591 11,220 14,692
- ------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of Securities Available for Sale (119,640) (35,076) (45,168)
Sales of Securities Available for Sale 61,986 76,465 4,445
- ------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (57,654) 41,389 (40,723)
- ------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of Borrowings (28,400) (7,584) (545)
Proceeds from Borrowings 10,000 25,400 -
Net Proceeds from Issuance of Capital Securities 97,700 - -
Net Proceeds from Sale of Common Stock - - 32,112
Exercise of Stock Options 4,471 12,929 1,733
Cash Dividends to Shareholders (10,106) (9,158) (7,396)
Common Stock Repurchases (6,020) (29,200) (721)
Investment in Subsidiary (50,000) (44,000) (50)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 17,645 (51,613) 25,133
- ------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (418) 996 (898)
Cash and Cash Equivalents at Beginning of Year 2,248 1,252 2,150
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,830 $ 2,248 $ 1,252
==================================================================================================================
</TABLE>
51
<PAGE>
NOTE 23: SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(UNAUDITED)
Selected quarterly data for 1997 and 1996 follows:
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Interest Income $ 100,542 $109,799 $ 116,088 $ 119,419
Interest Expense 55,309 61,068 66,482 71,064
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 45,233 48,731 49,606 48,355
Provision for Loan Losses 7,265 2,645 3,550 2,375
Gain on Sale of Loans and Securities, Net 542 425 1,412 1,442
Other Noninterest Income 7,504 7,542 8,305 8,818
Noninterest Expenses 53,471 32,824 39,795 32,457
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Taxes (7,457) 21,229 15,978 23,783
Income Taxes (3,573) 8,042 6,288 8,978
- -----------------------------------------------------------------------------------------------------------------------------
Net Income (3,884) 13,187 9,690 14,805
Preferred Stock Dividends - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ (3,884) $ 13,187 $ 9,690 $ 14,805
=============================================================================================================================
Net Income Per Share:
Basic $ (0.29) $ 0.98 $ 0.72 $ 1.09
=============================================================================================================================
Diluted $ (0.28) $ 0.94 $ 0.70 $ 1.06
=============================================================================================================================
1996:
Interest Income $ 91,238 $ 96,487 $ 98,839 $ 99,894
Interest Expense 53,074 53,386 55,079 55,882
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 38,164 43,101 43,760 44,012
Provision for Loan Losses 1,714 2,145 2,345 3,584
Gain on Sale of Loans and Securities, Net 608 904 871 2,487
Other Noninterest Income 5,692 7,221 7,372 7,024
Noninterest Expenses 29,047 31,999 36,824 32,685
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 13,703 17,082 12,834 17,254
Income Taxes 5,127 6,007 4,613 6,625
- -----------------------------------------------------------------------------------------------------------------------------
Net Income 8,576 11,075 8,221 10,629
Preferred Stock Dividends 323 321 283 222
- -----------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ 8,253 $ 10,754 $ 7,938 $ 10,407
=============================================================================================================================
Net Income Per Share:
Basic $ 0.62 $ 0.81 $ 0.60 $ 0.79
=============================================================================================================================
Diluted $ 0.59 $ 0.76 $ 0.56 $ 0.75
=============================================================================================================================
</TABLE>
All periods presented have been retroactively restated to reflect the inclusion
of the results of People's and Derby, which were acquired on July 31, 1997 and
January 31, 1997, respectively, and were accounted for using the pooling of
interests method.
52
<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 judgments 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 auditors.
/s/ James C. Smith /s/ John V. Brennan
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 audited the accompanying consolidated statements of condition of Webster
Financial Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Corporation'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Webster Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
January 20, 1998
53
<PAGE>
Annual Meeting
The annual meeting of shareholders of Webster Financial Corporation will be held
on April 23, 1998 at 4:00 P.M. at the Four Points Sheraton, 3580 East Main
Street, Waterbury, Connecticut. As of February 28, 1998, there were 13,672,899
shares of common stock outstanding and approximately 4,792 shareholders of
record.
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." Investor Relations Contact: James M.
Sitro, Vice President, Investor Relations (203) 578-2399
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 James M. Sitro, Vice President, Investor Relations, Webster
Plaza, Waterbury, CT 06702.
54
<PAGE>
Common Stock Dividends and Market Prices
The following table shows dividends declared and the market price per share by
quarter for 1997 and 1996.
- --------------------------------------------------------------------------------
Common Stock (Per Share)
- --------------------------------------------------------------------------------
Market Price
- --------------------------------------------------------------------------------
Cash
Dividends End of
1997 Declared Low High Period
- --------------------------------------------------------------------------------
Fourth $ .20 $57 $67 3/4 $ 66 1/2
Third .20 43 3/8 59 3/4 58 3/4
Second .20 34 5/8 45 3/4 45 1/2
First .20 35 1/8 41 3/8 35 1/8
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
- --------------------------------------------------------------------------------
MARKET MAKERS:
Advest, Inc.
Bear, Sterns & Co. Inc.
First Albany Corporation
Fox-Pitt, Kelton, Inc.
Friedman Billings Ramsey & Co.
Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc.
Legg Mason Wood Walker Inc.
Lehman Brothers Inc.
M.A. Schapiro & Co., Inc.
MacAllister Pitfield MacKay
Mayer & Schweitzer Inc.
Merrill Lynch, Pierce & Fenner
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
ELECTRONIC COMMUNICATIONS NETWORK:
Inc Trading Corporation
Island Systems
B-Trade Services
Spear, Leeds & Kellogg
Webster Bank Information
For more information on Webster Bank products and services, call 1-800-325-2424,
or write:
55
<PAGE>
Webster Bank
Telebanking Center
P.O. Box 191
CH420
Waterbury, Connecticut 06720-0191
Worldwide Web Site
www.websterbank.com
56
Exhibit 21
- ----------
Subsidiaries
------------
The Registrant operates one subsidiary, Webster Bank, a federally chartered
savings Bank. Webster is the sponsor of Webster Capital Trust I, a Delaware
business trust. Webster Bank has five wholly owned subsidiaries, Webster
Investment Services, Inc., Webster Trust Company, National Association, FCB
Properties, Inc., Bristol Financial Services, Inc. ("BFSI"), and Omni Financial
Services, Inc. Webster Bank also owns all of the outstanding common stock of
Webster Preferred Capital Corporation. In addition, BFSI has one wholly owned
subsidiary, Pequabuck Capital Corporation.
KPMG PEAT MARWICK LLP
City Place 11
Hartford, CT 06103-4103
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) on Forms S-8, (No. 333-47269) on Form S-3 and (No.
333-46073) on Form S-4 of Webster Financial Corporation of our report dated
January 20, 1998, relating to the consolidated statements of condition of
Webster Financial Corporation and subsidiaries as of December 31, 1997 and 1996
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, 1997,
which report appears in the December 31, 1997 annual report on Form 10-K of
Webster Financial Corporation.
/s/ KPMG Peat Marwick LLP
- ----------------------
Hartford, Connecticut
March, 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000801337
<NAME> Webster Financial Corporation
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 122,207
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 84,749
<INVESTMENTS-HELD-FOR-SALE> 2,290,254
<INVESTMENTS-CARRYING> 412,237
<INVESTMENTS-MARKET> 412,061
<LOANS> 3,874,355
<ALLOWANCE> 49,753
<TOTAL-ASSETS> 7,019,621
<DEPOSITS> 4,365,756
<SHORT-TERM> 1,988,174
<LIABILITIES-OTHER> 93,928
<LONG-TERM> 40,000
0
0
<COMMON> 137
<OTHER-SE> 382,049
<TOTAL-LIABILITIES-AND-EQUITY> 7,019,621
<INTEREST-LOAN> 326,743
<INTEREST-INVEST> 146,790
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 168,590
<INTEREST-EXPENSE> 253,923
<INTEREST-INCOME-NET> 191,925
<LOAN-LOSSES> 15,835
<SECURITIES-GAINS> 3,152
<EXPENSE-OTHER> 158,547
<INCOME-PRETAX> 53,533
<INCOME-PRE-EXTRAORDINARY> 53,533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,798
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 3.17
<LOANS-NON> 37,665
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 43,185
<CHARGE-OFFS> 14,916
<RECOVERIES> 5,649
<ALLOWANCE-CLOSE> 49,753
<ALLOWANCE-DOMESTIC> 49,753
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000801337
<NAME> Webster Financial Corporation
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 105,226
<INT-BEARING-DEPOSITS> 4,536
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 983,699
<INVESTMENTS-CARRYING> 534,672
<INVESTMENTS-MARKET> 528,473
<LOANS> 3,685,707
<ALLOWANCE> 43,185
<TOTAL-ASSETS> 5,607,210
<DEPOSITS> 4,457,561
<SHORT-TERM> 686,007
<LIABILITIES-OTHER> 86,810
<LONG-TERM> 40,000
1
0
<COMMON> 136
<OTHER-SE> 336,695
<TOTAL-LIABILITIES-AND-EQUITY> 5,607,210
<INTEREST-LOAN> 285,614
<INTEREST-INVEST> 100,844
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 173,934
<INTEREST-EXPENSE> 217,421
<INTEREST-INCOME-NET> 169,037
<LOAN-LOSSES> 9,788
<SECURITIES-GAINS> 4,133
<EXPENSE-OTHER> 130,555
<INCOME-PRETAX> 60,873
<INCOME-PRE-EXTRAORDINARY> 60,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,501
<EPS-PRIMARY> 2.82
<EPS-DILUTED> 2.66
<YIELD-ACTUAL> 3.17
<LOANS-NON> 41,606
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 50,281
<CHARGE-OFFS> 24,865
<RECOVERIES> 2,981
<ALLOWANCE-CLOSE> 43,185
<ALLOWANCE-DOMESTIC> 43,185
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000801337
<NAME> Webster Financial Corporation
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 69,469
<INT-BEARING-DEPOSITS> 49,668
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 841,854
<INVESTMENTS-CARRYING> 618,290
<INVESTMENTS-MARKET> 621,428
<LOANS> 3,055,295
<ALLOWANCE> 50,281
<TOTAL-ASSETS> 4,883,402
<DEPOSITS> 3,798,712
<SHORT-TERM> 628,940
<LIABILITIES-OTHER> 82,170
<LONG-TERM> 40,000
2
0
<COMMON> 135
<OTHER-SE> 334,443
<TOTAL-LIABILITIES-AND-EQUITY> 4,883,402
<INTEREST-LOAN> 237,933
<INTEREST-INVEST> 94,989
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 157,631
<INTEREST-EXPENSE> 197,591
<INTEREST-INCOME-NET> 135,331
<LOAN-LOSSES> 5,726
<SECURITIES-GAINS> 532
<EXPENSE-OTHER> 112,736
<INCOME-PRETAX> 44,771
<INCOME-PRE-EXTRAORDINARY> 44,771
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,321
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.22
<YIELD-ACTUAL> 3.23
<LOANS-NON> 52,332
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 55,366
<CHARGE-OFFS> 13,999
<RECOVERIES> 3,188
<ALLOWANCE-CLOSE> 50,281
<ALLOWANCE-DOMESTIC> 50,281
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
