SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): July 23, 1998
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-15213 06-1187536
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
WEBSTER PLAZA, WATERBURY, CONNECTICUT 06702
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 753-2921
NOT APPLICABLE
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
Filed as Exhibit 99.1 are Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Consolidated Financial Statements and other Annual Report
data of Webster Financial Corporation restated to reflect the
acquisition by merger of Eagle Financial Corp. which was accounted for
as a pooling of interests. The consolidated financial statements of
Webster Financial Corporation are restated for periods prior to the date
of the acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c) Exhibits.
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Webster Financial Corporation Restated Selected Financial
Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Financial Statements and
other Annual Report data.
27 Financial Data Schedules
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
(Registrant)
/s/ John V. Brennan
-------------------------------------
John V. Brennan
Executive Vice President,
Chief Financial Officer, Treasurer,
Principal Financial Officer,
Principal Accounting Officer
Date: July 23, 1998
<PAGE>
EXHIBIT INDEX
23.1 Consent of KPMG Peat Marwick LLP.
27 Restated Financial Data Schedules
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
99.1 Webster Financial Corporation Restated Selected Financial
Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Financial Statements and
other Annual Report data.
EXHIBIT 23.1
KPMG PEAT MARWICK LLP
CITY PLACE II
HARTFORD, CT 06103-4103
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Webster Financial Corporation
We consent to the incorporation by reference in the registration statement (Nos.
33-13244 and 33-38286) on Forms S-8 and (No. 333-47269) on Form S-3 of Webster
Financial Corporation of our report dated June 17, 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, comprehensive 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 July 23,1998 current report on Form 8-K of Webster
Financial Corporation.
/s/ KPMG Peat Marwick LLP
- --------------------------
Hartford, Connecticut
July 21, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000801337
<NAME> WEBSTER FINANCIAL CORPORATION
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 151,322
<INT-BEARING-DEPOSITS> 77,104
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 84,749
<INVESTMENTS-HELD-FOR-SALE> 3,092,287
<INVESTMENTS-CARRYING> 412,237
<INVESTMENTS-MARKET> 412,061
<LOANS> 5,014,331
<ALLOWANCE> 59,518
<TOTAL-ASSETS> 9,095,887
<DEPOSITS> 5,719,030
<SHORT-TERM> 2,183,184
<LIABILITIES-OTHER> 115,421
<LONG-TERM> 366,413
0
0
<COMMON> 376
<OTHER-SE> 516,886
<TOTAL-LIABILITIES-AND-EQUITY> 9,095,887
<INTEREST-LOAN> 386,416
<INTEREST-INVEST> 192,438
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 578,854
<INTEREST-DEPOSIT> 223,479
<INTEREST-EXPENSE> 327,804
<INTEREST-INCOME-NET> 251,050
<LOAN-LOSSES> 24,813
<SECURITIES-GAINS> 3,142
<EXPENSE-OTHER> 201,663
<INCOME-PRETAX> 66,838
<INCOME-PRE-EXTRAORDINARY> 66,838
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,113
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 3.19
<LOANS-NON> 42,143
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 53,692
<CHARGE-OFFS> 24,794
<RECOVERIES> 5,807
<ALLOWANCE-CLOSE> 59,518
<ALLOWANCE-DOMESTIC> 59,518
<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> 131,567
<INT-BEARING-DEPOSITS> 36,059
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 59,331
<INVESTMENTS-HELD-FOR-SALE> 1,395,336
<INVESTMENTS-CARRYING> 650,506
<INVESTMENTS-MARKET> 644,153
<LOANS> 4,791,575
<ALLOWANCE> 53,692
<TOTAL-ASSETS> 7,368,941
<DEPOSITS> 5,826,264
<SHORT-TERM> 700,292
<LIABILITIES-OTHER> 112,018
<LONG-TERM> 257,543
1
0
<COMMON> 375
<OTHER-SE> 472,448
<TOTAL-LIABILITIES-AND-EQUITY> 7,368,941
<INTEREST-LOAN> 367,004
<INTEREST-INVEST> 140,022
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 507,026
<INTEREST-DEPOSIT> 229,223
<INTEREST-EXPENSE> 284,908
<INTEREST-INCOME-NET> 222,118
<LOAN-LOSSES> 13,054
<SECURITIES-GAINS> 3,670
<EXPENSE-OTHER> 174,477
<INCOME-PRETAX> 86,596
<INCOME-PRE-EXTRAORDINARY> 86,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,994
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.24
<LOANS-NON> 53,476
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 59,892
<CHARGE-OFFS> 29,205
<RECOVERIES> 9,951
<ALLOWANCE-CLOSE> 53,692
<ALLOWANCE-DOMESTIC> 53,692
<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> 98,190
<INT-BEARING-DEPOSITS> 93,572
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 45,775
<INVESTMENTS-HELD-FOR-SALE> 1,168,073
<INVESTMENTS-CARRYING> 786,337
<INVESTMENTS-MARKET> 791,002
<LOANS> 4,037,617
<ALLOWANCE> 59,892
<TOTAL-ASSETS> 6,479,567
<DEPOSITS> 5,060,822
<SHORT-TERM> 794,557
<LIABILITIES-OTHER> 123,397
<LONG-TERM> 40,000
2
0
<COMMON> 374
<OTHER-SE> 460,415
<TOTAL-LIABILITIES-AND-EQUITY> 6,479,567
<INTEREST-LOAN> 320,645
<INTEREST-INVEST> 119,007
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 439,652
<INTEREST-DEPOSIT> 203,964
<INTEREST-EXPENSE> 251,006
<INTEREST-INCOME-NET> 188,646
<LOAN-LOSSES> 9,864
<SECURITIES-GAINS> 502
<EXPENSE-OTHER> 146,863
<INCOME-PRETAX> 65,235
<INCOME-PRE-EXTRAORDINARY> 65,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,367
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.14
<LOANS-NON> 65,863
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 65,671
<CHARGE-OFFS> 18,960
<RECOVERIES> 3,317
<ALLOWANCE-CLOSE> 59,892
<ALLOWANCE-DOMESTIC> 59,892
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
SELECTED FINANCIAL DATA
STATEMENT OF CONDITION DATA (DOLLARS IN THOUSANDS EXCEPT SHARE DATA)*
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT OR FOR THE YEAR ENDED: 1997 1996 1995 1994 1993
------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $9,095,887 $7,368,941 $6,479,567 $6,114,613 $5,054,572
Loans receivable, net 4,954,813 4,737,883 3,977,725 4,007,710 3,281,388
Securities 3,589,273 2,105,173 2,000,185 1,558,401 1,289,107
Intangible assets 78,493 81,936 26,720 31,093 17,944
Deposits 5,719,030 5,826,264 5,060,822 5,044,336 4,163,757
Shareholders' equity 517,262 472,824 460,791 364,112 327,676
<CAPTION>
OPERATING DATA YEARS ENDED DECEMBER 31,
- -------------- --------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $251,050 $ 222,118 $ 188,646 $ 182,100 $ 153,428
Provision for loan losses 24,813 13,054 9,864 7,149 9,886
Noninterest income 42,264 52,009 33,316 21,378 24,052
Noninterest expenses:
Merger and acquisition expenses (a) 29,792 500 4,271 700 --
Other noninterest expenses 171,871 173,977 142,592 140,260 112,502
--------------------------------------------------------------------
Total noninterest expenses 201,663 174,477 146,863 140,960 112,502
--------------------------------------------------------------------
Income before taxes 66,838 86,596 65,235 55,369 55,092
Income taxes 25,725 32,602 23,868 17,958 23,672
--------------------------------------------------------------------
Net income before cumulative change 41,113 53,994 41,367 37,411 31,420
Cumulative effect of change in method
of accounting for income taxes -- -- -- 97 6,408
--------------------------------------------------------------------
NET INCOME 41,113 53,994 41,367 37,508 37,828
Preferred stock dividends -- 1,149 1,296 1,716 2,653
--------------------------------------------------------------------
Income available to common shareholders $ 41,113 $ 52,845 $ 40,071 $ 35,792 $ 35,175
====================================================================
SIGNIFICANT STATISTICAL DATA
Interest-rate spread 3.00% 3.12% 2.98% 3.23% 3.11%
Net interest margin 3.19% 3.24% 3.14% 3.36% 3.25%
Return on average shareholders' equity 8.44% 11.32% 10.05% 10.52% 11.66%
Net income per common share (b)
Basic $ 1.10 $ 1.44 $ 1.18 $ 1.16 $ 1.02
Diluted $ 1.07 $ 1.36 $ 1.12 $ 1.09 $ 0 95
Dividends declared per common share $ 0.40 $ 0.34 $ 0.32 $ 0.26 $ 0.25
Noninterest expenses to average assets 2.45% 2.42% 2.34% 2.45% 2.28%
Noninterest expenses (excluding foreclosed
property expenses and provisions, net)
to average assets 2.40% 2.35% 2.22% 2.24% 2.01%
Diluted weighted average shares 38,473 39,560 36,797 34,533 32,161
Book value per common share $13.78 $12.73 $12.24 $10.96 $10.58
Tangible book value per common share $11.69 $10.48 $11.50 $9.98 $9.95
Shareholders' equity to total assets 5.69% 6.42% 7.11% 5.95% 6.48%
</TABLE>
* Information for all periods presented has been restated to reflect the
inclusion of the results of Eagle Financial Corp, People's Savings Financial
Corp., MidConn Bank, DS Bancor, Inc., Shelton Bancorp, Inc. and Shoreline Bank
and Trust Company which were acquired on April 15, 1998, July 31, 1997, May 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.
(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 $1.25 and diluted net income per share was $1.15.
All per share data and the number of outstanding shares of common stock have
been adjusted retroactively to give effect to a stock dividend and a stock split
effected in the form of a stock dividend.
1
<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 on 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.
Reserve Coverage: Allowance for loan losses divided by nonaccrual loans.
Return on Average Equity: Net income as a percentage of average shareholders'
equity.
2
<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 $9.1 billion compared to $7.4 billion a year
earlier. Net loans receivable amounted to $5.0 billion at December 31, 1997
compared to $4.7 billion a year ago. Deposits were $5.7 billion at December 31,
1997 compared to $5.8 billion at December 31, 1996.
BUSINESS COMBINATIONS SUBSEQUENT TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
On April 15, 1998, Webster acquired 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 issued
10,615,156 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 was converted into 1.68 shares of Webster common stock after giving
effect to the April 6, 1998 stock split effected in form of a stock dividend.
This acquisition was accounted for as a pooling of interests, and as such, the
Consolidated Financial Statements include Eagle's financial data as if Eagle had
been combined at the beginning of the earliest period presented. Prior to the
acquisition, Eagle's fiscal year ended on September 30. In recording the pooling
of interest combination, Eagle's financial statements as of and for the twelve
months ended September 30, 1997, 1996 and 1995 were combined with Webster's
financial statements as of and for the twelve months ended December 31, 1997,
1996 and 1995, respectively.
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 166,770 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 3,151,992 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 Consolidated Financial Statements include
People's financial data as if People's had been combined at the beginning of the
earliest period presented.
The MidConn Acquisition
On May 31, 1997, Webster acquired MidConn Bank ("MidConn") as a result of its
acquisition of Eagle Financial Corp. ("Eagle"). In connection with the merger,
Webster effectively issued 2,869,440 shares of its common stock for all the
outstanding shares of MidConn common stock after adjusting for the conversion
factor related to the Eagle Acquisition and common stock split of 1998. The
acquisition was accounted for as a pooling of interests, and as such, the
Consolidated Financial Statements include MidConn's financial data as if MidConn
had been combined at the beginning of the earliest period presented.
3
<PAGE>
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
7,002,740 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
Consolidated Financial Statements include Derby's financial data as if Derby had
been combined at the beginning of the earliest period presented.
The Shawmut Transaction
During 1996, Webster Bank acquired 25 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 $1.1 billion
in deposits and $622 million in loans. As a result of this transaction, Webster
recorded $64.1 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 2,499,200 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.
Webster completed five acquisitions during 1995 and 1994 as follows:
<TABLE>
<CAPTION>
Date Assets Acquired Accounting Treatment
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 Shelton Bancorp $295 million Pooling of Interests
1994 Shoreline Bank & Trust $ 51 million Pooling of Interests
1994 Bank of Hartford, Inc. $276 million Purchase
1994 The Federal Savings Bank $150 million Purchase
1994 Bristol Savings Bank $486 million Purchase
- --------------------------------------------------------------------------------------------------------
</TABLE>
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 88% 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 $54.1 million at December
31, 1997 from $72.1 million at December 31, 1996 and declined as a percentage of
total assets to .59% at December 31, 1997 from .98% at December 31, 1996.
Nonaccrual loans decreased $11.3 million in 1997 and foreclosed properties
decreased $6.7 million due to write-downs and sales of foreclosed properties.
The allowance for loan losses at December 31, 1997 was $59.5 million and
represented 141.23% of nonaccrual loans. Total allowances for nonaccrual assets
of $60.7 million represented 109.82% of nonaccrual assets. The following table
details nonaccrual assets for the last five years.
4
<PAGE>
<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 $ 26,640 $ 33,901 $ 39,495 $ 37,257 50,510
Commercial 12,229 15,004 21,583 22,431 7,545
Consumer 3,274 4,571 4,785 4,094 4,229
Foreclosed Properties:
Residential and Consumer 7,711 9,191 12,171 17,353 33,388
Commercial 4,232 9,407 15,000 25,635 12,156
- --------------------------------------------------------------------------------------------------
Total $ 54,086 $ 72,074 $ 93,034 $106,770 $107,828
==================================================================================================
</TABLE>
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 $ 53,692 $ 59,892 $ 65,671 $ 60,513 $ 70,801
Charge-offs:
Residential real estate (15,309) (17,645) (11,914) (15,989) (10,747)
Consumer (4,175) (3,944) (1,260) (1,528) (2,601)
Commercial (5,310) (7,616) (5,786) (5,164) (3,973)
- --------------------------------------------------------------------------------------------------
(24,794) (29,205) (18,960) (22,681) (17,321)
Recoveries:
Residential real estate 4,008 761 964 546 637
Consumer 491 335 1,033 1,827 829
Commercial 1,308 1,984 1,320 1,045 254
- --------------------------------------------------------------------------------------------------
Net charge-offs (18,987) (26,125) (15,643) (19,263) (15,601)
Allowances for purchase transactions -- 6,871 -- 17,647 --
Acquired allowance adjustment -- -- -- -- (5,963)
Transfer from allowance for losses for loans
held for sale -- -- -- -- 2,390
Provisions charged to operations 24,813 13,054 9,864 6,774 8,886
- --------------------------------------------------------------------------------------------------
Balance at end of period $ 59,518 $ 53,692 $ 59,892 $ 65,671 $ 60,513
==================================================================================================
Ratio of net charge-offs to average loans out 0.4% 0.6% 0.4% 0.5% 0.5%
==================================================================================================
</TABLE>
Net charge-offs decreased $7.1 million to $19.0 million in 1997 due primarily to
decreases in the residential and commercial portfolios. Included in the 1997
charge-offs were writedowns of $5.8 million related to the bulk sale of $17.7
million of primarily non-performing and delinquent loans. 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 $9.9 million specifically related
to the Derby, MidConn and People's acquisitions and $3.4 million related to the
sale of non-performing and delinquent loans. 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.
5
<PAGE>
The following table presents an allocation of Webster's allowance for loan
losses at the dates indicated and the related percentage of loans in each
category to Webster's loan receivable portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at End of Period
Applicable to:
Residential mortgage loans $27,349 77.47% $19,909 77.01% $31,310 81.47% $38,770 83.40% $46,236 85.43%
Commercial mortgage loans 13,159 6.83 13,860 7.63 13,570 6.29 12,436 5.44 4,422 3.67
Commercial non-mortgage loans 9,076 4.75 11,117 4.43 4,298 1.77 4,350 1.66 2,022 1.23
Consumer loans 9,934 10.95 8,806 10.93 10,714 10.47 10,115 9.50 7,833 9.67
------- ------- ------- -------- ------- ------- ------ ------ ------- -------
Total 59,518 100.00% $53,692 100.00 $59,892 100.00% $65,671 100.00 $60,513 100.00%
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
</TABLE>
6
<PAGE>
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.
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
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, nonaccrual Segregated Assets were classified as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
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.
7
<PAGE>
<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>
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 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.
8
<PAGE>
The Bank had additional borrowing capacity from the FHL Bank of $2.6 billion at
December 31, 1997. At that date, the Bank had FHL Bank advances outstanding of
$1.5 billion compared to $776.9 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, Webster's 9.36% Capital Trust I Capital
Securities and Eagle's Financial Capital Trust I 10.00% 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 and April 1, 1997, the sale of $100 million and $50 million of Webster
Capital Trust I Capital Securities and Eagle Financial Capital Trust I Capital
Securities, respectively, was completed further increasing Webster's 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 1,099,600 shares and
also announced its intention to repurchase up to 600,000 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 510,200 had
been repurchased under the new repurchase plan with the remaining 89,800 shares
under the plan repurchased in January 1997. On September 4, 1997, Webster
completed the repurchase of 170,666 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 $ 537,446 6.02% $ 542,149 6.07% $ 542,149 13.22% $ 591,066 14.42%
Minimum regulatory requirement 133,987 1.50 268,115 3.00 164,007 4.00 328,015 8.00
- ------------------------------------------------------------------------------------------------------------------------------------
Excess over requirement $ 403,459 4.52% $ 274,034 3.07% $ 378,142 9.22% $ 263,051 6.42%
====================================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
- --------------------------------------------------------------------------------
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 fluctuations in interest rates.
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
9
<PAGE>
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>
Book Market Estimated Market Value Impact
(In thousands) Value Value -100 BP +100BP
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Sensitive Assets:
Trading $ 84,749 $ 84,749 $ (438) $ (399)
Non-Trading 8,398,573 8,485,329 105,605 (159,488)
Interest-Sensitive Liabilities 8,492,402 8,512,618 (45,929) 46,918
</TABLE>
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $224.0
million (See Note 3 to Consolidated Financial Statements) and nonaccrual loans
of $42.1 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.
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 3.2% and an instantaneous
100 basis point decline in interest rates would decrease net interest income
over the next twelve months by less than 1.0%. The estimated market values in
the above table are subject to factors that could cause actual results to differ
from such projections and estimates.
10
<PAGE>
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 to 3 year time horizon and primarily
asset sensitive in the over 3 through over 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
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $ 1,698,441 $ 872,663 $ 915,000 $ 510,265 $ 478,268 $ 361,970 $ 175,548
Securities 1,507,321 736,488 445,002 223,496 346,591 253,818 153,661
- -----------------------------------------------------------------------------------------------------------------------------------
Total Rate-Sensitive Assets $ 3,205,762 $ 1,609,151 $ 1,360,002 $ 733,761 $ 824,859 $ 615,788 $ 329,209
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits $ 2,021,100 $ 1,087,277 $ 1,547,228 $ 331,986 $ 192,568 $ 49,642 $ 489,229
Borrowings 2,270,056 152,423 99,741 52,189 4,770 988 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Rate-Sensitive Liabilities 4,291,156 $ 1,239,700 $ 1,646,969 $ 384,175 $ 197,338 $ 50,630 $ 489,229
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated GAP $ (1,085,394) $ 369,451 $ (286,967) $ 349,586 $ 627,521 $ 565,158 $ (160,020)
GAP to Total Assets Percent (11.93)% 4.06% (3.15)% 3.84% 6.90% 6.21% (1.76)%
Cumulative GAP $ (1,085,394) $ (715,943) $(1,002,910) $ (653,324) $ (25,803) $ 539,355 $ 379,335
Cumulative GAP to Total
Assets Percent (11.93)% (7.87)% (11.03)% (7.18)% (0.28)% 5.93% 4.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 9,095,887 $ 9,095,887 $ 9,095,887 $ 9,095,887 $ 9,095,887 $ 9,095,887 $ 9,095,887
===================================================================================================================================
<CAPTION>
- ------------------------------------------------
(Dollars in thousands)
Total
- ------------------------------------------------
Assets
- ------------------------------------------------
<S> <C>
Loans $ 5,012,155
Securities 3,666,377
- ------------------------------------------------
Total Rate-Sensitive Assets $ 8,678,532
- ------------------------------------------------
Liabilities
- ------------------------------------------------
Deposits $ 5,719,030
Borrowings 2,580,167
- ------------------------------------------------
Total Rate-Sensitive Liabilities $ 8,299,197
- ------------------------------------------------
Consolidated GAP N/A
GAP to Total Assets Percent N/A
Cumulative GAP N/A
Cumulative GAP to Total
Assets Percent N/A
- ------------------------------------------------
Total Assets
=================================================
</TABLE>
<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 $100,419 $ 146 $ 17,054 $117,619
Commercial mortgage 5,572 25,182 4,220 34,974
Commercial non-mortgage loans 103,569 91,900 44,357 239,826
-------- -------- -------- --------
Total $209,560 $117,228 $ 65,631 $392,419
-------- -------- -------- --------
Interest-Rate Sensitivity:
Fixed rates $ 28,060 $ 28,669 $ 9,430 $ 66,159
Variable rates 181,500 88,559 56,201 326,260
-------- -------- -------- --------
Total $209,560 $117,228 $ 65,631 $392,419
-------- -------- -------- --------
</TABLE>
11
<PAGE>
COMPARISON OF 1997 AND 1996 YEARS
- --------------------------------------------------------------------------------
GENERAL. For 1997, Webster reported net income of $41.1 million, or $1.07 per
share on a diluted basis. Included in the 1997 results are merger and
acquisition expenses of $29.8 million and provisions for loan losses of $9.9
million specifically related to the Derby, People's and MidConn acquisitions.
Excluding the effect of merger and acquisition expenses and additional
provisions for loan losses, net income for the 1997 year would have been $64.5
million or $1.68 per diluted share. Net income for 1996 amounted to $54.0
million, or $1.36 per share on a diluted basis. Included in the 1996 results are
expenses of $10.1 million related to a special assessment associated with the
recapitalization of the Savings Association Insurance Fund ("SAIF"), $500,000 of
acquisition related charges for the Shawmut Transaction and a $15.9 million gain
on the sale of deposits resulting from the sale of seven Danbury, CT region
branch offices. Excluding the effects of these items, net income for the 1996
year would have been $50.9 million or $1.29 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 $28.9 million in 1997 to $251.0 million from $222.1 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 offerings in 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 2.99% compared to 3.12% in 1996 due primarily to the
change in mix of interest-earning assets and interest-bearing liabilities.
During 1997, the average balance of securities increased $771.9 million and the
average balance of borrowings increased $882.3 million from the year earlier
period.
INTEREST INCOME. Total interest income for 1997 amounted to $578.9 million, an
increase of $71.8 million, or 14.2% compared to $507.0 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 yield on all interest-earning
assets to 7.35% in 1997 from 7.40% in 1996.
INTEREST EXPENSE. Interest expense for 1997 totaled $327.8 million, an increase
of $42.9 million compared to $284.9 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
4.36% in 1997 from 4.28% in 1996.
12
<PAGE>
The following table shows the major categories of average assets and average
liabilities together with their respective interest income or expense and the
rates earned and paid by Webster.
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------ ---------------------------------------------------------------------------------------------------
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) $4,889,866 $381,283(b) 7.80% $ 4,613,258 $360,533(b) 7.82% $ 4,102,638 $311,053(b) 7.58%
Segregated Assets, net (a) 59,500 5,133 8.63 93,034 6,470 6.95 123,293 9,592 7.78
Securities 2,824,051 186,956 6.62(c) 2,052,158 134,579 6.56(c) 1,751,953 115,570 6.60(c)
Interest-Bearing Deposits 96,252 5,482 5.62 96,612 5,444 5.54 65,782 3,437 5.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 7,869,669 578,854 7.35 6,855,062 507,026 7.40 6,043,666 439,652 7.27
Other Assets 372,883 357,571 230,310
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $8,242,552 $ 7,212,633 $ 6,273,976
====================================================================================================================================
Savings and Escrow $1,238,203 29,615 2.39% $ 1,222,830 26,975 2.21% $ 1,074,779 23,130 2.15%
Money Market Savings,
NOW and DDA 1,100,750 14,572 1.32 1,175,046 20,245 1.72 1,028,888 25,142 2.44
Time Deposits 3,398,843 179,292 5.28 3,343,197 182,003 5.44 3,003,348 155,693 5.18
FHL Bank Advances 1,171,612 67,904 5.80 685,268 40,808 5.96 593,143 37,556 6.33
Repurchase Agreements
and Other Borrowings 593,029 32,761 5.52 197,083 11,217 5.69 94,650 5,825 6.15
Senior Notes 40,000 3,660 9.15 40,000 3,660 9.15 40,000 3,660 9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 7,542,437 327,804 4.35 6,663,424 284,908 4.28 5,834,808 251,006 4.29
Other Liabilities 212,953 72,087 27,535
Shareholders' Equity 487,162 477,122 411,633
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income and
Interest-Rate Spread $251,050 3.00% $222,118 3.12% $188,646 2.98%
====================================================================================================================================
Total Liabilities and
Shareholders' Equity $8,242,552 $ 7,212,633 $ 6,273,976
====================================================================================================================================
Net Interest Margin 3.19% 3.24% 3.14%
====================================================================================================================================
</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: $3.9 million,
$939,000 and ($1.4 million) in 1997, 1996 and 1995, respectively.
(c) Yields are adjusted to a fully tax equivalent basis.
13
<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
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest on interest-earning assets:
Loans and Segregated Assets $ 436 $ 18,977 $ 19,413 $ 9,097 $ 37,261 $ 46,358
Securities 1,591 50,824 52,415 (553) 21,569 21,016
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,027 69,801 71,828 8,544 58,830 67,374
- ---------------------------------------------------------------------------------------------------------------------------
Interest on interest-bearing liabilities:
Deposits (7,884) 2,140 (5,744) (54) 25,312 25,258
FHL Bank advances and other
borrowings (2,259) 50,899 48,640 (2,830) 11,474 8,644
- ---------------------------------------------------------------------------------------------------------------------------
Total (10,143) 53,039 42,896 (2,884) 36,786 33,902
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 12,170 $ 16,762 $ 28,932 $ 11,428 $ 22,044 $33,472
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses for 1997 was $24.8
million compared to $13.1 million in 1996. The increase for 1997 is attributable
to $9.9 million in provisions made at the time of the acquisitions of Derby,
MidConn and People's and $3.4 million related to the sale of non-performing and
delinquent loans. The allowance for losses on loans totaled $59.5 million and
represented 141.2% of nonaccrual loans at December 31, 1997 versus $53.7 million
or 100.4% of nonaccrual loans at December 31, 1996.
NONINTEREST INCOME. Noninterest income for 1997 totaled $42.3 million, compared
to $52.0 million in 1996. Included in the 1996 results is a $15.9 million gain
on the sale of deposits resulting from the sale of seven Danbury, CT region
branch offices. Fees and service charges were $32.0 million in 1997, an increase
of $5.9 million, or 22.8% from 1996 due primarily to an increase in the customer
base. Gains on the sale of loans and mortgage loan servicing rights amounted to
$793,000 in 1997 compared to a loss of $705,000 in 1996. Gains on the sale of
securities amounted to $3.1 million in 1997 compared to $3.7 million in 1996.
Other noninterest income was $6.7 million for 1997 and $7.1 million for 1996.
Also included as a charge to noninterest income in the 1997 period was a loss on
disposal of premises and equipment of $915,000.
NONINTEREST EXPENSES. Noninterest expenses for 1997 were $201.7 million compared
to $174.5 million in 1996. Included in the 1997 results are merger and
acquisition expenses totaling $29.8 million which include: $19.9 million related
to the Derby acquisition, $7.2 million related to the People's acquisition and
$2.7 million related to the MidConn acquisition. Other components of the
increase were higher occupancy, furniture and equipment, intangible amortization
and Capital Securities 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 $10.1
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.
INCOME TAXES. Income tax expense for 1997 decreased to $25.7 million from $32.6
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.
14
<PAGE>
COMPARISON OF 1996 AND 1995 YEARS
- --------------------------------------------------------------------------------
GENERAL. For 1996, Webster reported net income of $54.0 million, or $1.36 per
share on a diluted basis. Included in the 1996 results are expenses of $10.1
million related to a special assessment associated with the recapitalization of
the SAIF, $500,000 of acquisition related charges for the Shawmut Transaction
and a $15.9 million gain on the sale of deposits resulting from the sale of
seven Danbury region branch offices. Excluding the effect of these items, net
income for the 1996 year would have been $50.9 million or $1.29 per diluted
share. Net income for 1995 amounted to $41.4 million, or $1.12 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 $45.1 million or $1.22 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 $33.5 million in 1996 to $222.1 million from $188.6 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 2.98% in
1995 also due primarily to lower costing liabilities acquired in the Shawmut
Transaction.
INTEREST INCOME. Total interest income for 1996 amounted to $507.0 million, an
increase of $67.4 million, or 15.3% compared to $439.7 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 7.40% in 1996 from 7.27% in 1995.
INTEREST EXPENSE. Interest expense for 1996 totaled $284.9 million, an increase
of $33.9 million compared to $251.0 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 4.28% in 1996 from 4.29% in 1995. The lower
average yields 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 $13.1
million compared to $9.9 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 $53.7 million and
represented 100.4% of nonaccrual loans at December 31, 1996 versus $59.9 million
or 90.9% of nonaccrual loans at December 31, 1995.
NONINTEREST INCOME. Noninterest income for 1996 was $52.0 million, compared to
$33.3 million in 1995. Included in the 1996 results is a $15.9 million gain on
the sale of deposits resulting from the sale of seven Danbury, CT region branch
offices. Fees and service charges totaled $26.1 million in 1996, an increase of
$4.8 million, or 22.8% from 1995 due primarily to the increase in customers from
acquisitions. Losses on the sale of loans and mortgage loan servicing rights
were $705,000 in 1996 compared to $4.9 million of gains 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 $3.7 million in 1996 compared to
$502,000 in 1995. Other noninterest income was $7.1 million for 1996 and $6.7
million for 1995.
NONINTEREST EXPENSES. Noninterest expenses for 1996 amounted to $174.5 million
compared to $146.9 million in 1995. The increase of $27.6 million is due
primarily to increased salaries and employee benefits, occupancy, furniture and
equipment, intangible assets 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 $10.1 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. INCOME TAXES. Income tax expense for 1996
increased to $32.6 million from $23.9 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
15
<PAGE>
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 was adopted
January 1, 1998. See Note 1.
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.
16
<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 has begun
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.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
December 31,
-----------------
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Depository Institutions $ 151,322 $131,567
Interest-bearing Deposits 77,104 36,059
Securities: (Note 3)
Trading at Fair Value 84,749 59,331
Available for Sale, at Fair Value 3,092,287 1,395,336
Held to Maturity, (Market Value: $412,061 in 1997; $644,153 in 1996) 412,237 650,506
Loans Receivable, Net (Note 4) 4,954,813 4,737,883
Segregated Assets, Net (Note 5) 41,038 75,670
Accrued Interest Receivable 52,658 46,639
Premises and Equipment, Net (Note 6) 71,887 72,608
Foreclosed Properties, Net (Note 13) 11,943 18,598
Intangible Assets (Note 2) 78,493 81,936
Prepaid Expenses and Other Assets (Note 7) 67,356 62,808
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets. $9,095,887 $7,368,941
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Deposits (Note 8) $5,719,030 $5,826,264
Federal Home Loan Bank Advances (Note 9) 1,516,634 776,888
Reverse Repurchase Agreements and Other Borrowings (Note 10) 1,032,963 180,947
Advance Payments by Borrowers for Taxes and Insurance 30,570 37,737
Accrued Expenses and Other Liabilities 84,851 74,281
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities 8,384,048 6,896,117
- ---------------------------------------------------------------------------------------------------------------------------
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust (Note 19) 145,000 --
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 - 50,000,000 shares;
Issued - 37,574,177 shares at December 31, 1997 and 37,537,451 shares in 1996 376 375
Paid-in Capital 241,552 263,727
Retained Earnings 257,954 229,876
Less Treasury Stock at cost, 45,916 shares at December 31, 1997 and
1,150,548 shares at December 31, 1996 (1,116) (18,801)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,971) (2,574)
Accumulated Other Comprehensive Income 20,467 220
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 517,262 472,824
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 4, 6 and 21)
Total Liabilities and Shareholders' Equity $9,095,887 $7,368,941
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans and Segregated Assets $ 386,416 $ 367,004 $ 320,645
Securities and Interest-bearing Deposits 192,438 140,022 119,007
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 578,854 507,026 439,652
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on Deposits (Note 8) 223,479 229,223 203,964
Interest on Borrowings 104,325 55,685 47,042
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 327,804 284,908 251,006
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 251,050 222,118 188,646
Provision for Loan Losses (Note 4) 24,813 13,054 9,864
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 226,237 209,064 178,782
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Fees and Service Charges 32,013 26,060 21,223
Gain (Loss) on Sale of Loans and Loan Servicing, Net 793 (705) 4,891
Gain on Sale of Securities, Net (Note 3) 3,142 3,670 502
Gain on Sale of Deposits 546 15,904 --
Loss on Disposal of Premises & Equipment (915) -- --
Other Noninterest Income 6,685 7,080 6,700
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 42,264 52,009 33,316
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 74,369 77,676 68,292
Occupancy Expense of Premises 16,408 15,393 11,636
Furniture and Equipment Expenses 14,030 12,995 9,861
Federal Deposit Insurance Premiums 1,657 3,366 8,655
SAIF Recapitalization Expense -- 10,128 --
Foreclosed Property Expenses
and Provisions, Net (Note 13) 4,184 5,158 7,635
Intangible Amortization 9,249 8,102 3,740
Marketing Expenses 7,576 7,740 6,000
Merger and Acquisition Expenses (Note 18) 29,792 500 4,271
Name Change and Subsidiary Merger Expense -- -- 2,100
Capital Securities Expense (Note 19) 11,368 -- --
Dividends on Preferred Stock of Subsidiary Corporation (Note 20) 85 -- --
Other Operating Expenses 32,945 33,419 24,673
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 201,663 174,477 146,863
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 66,838 86,596 65,235
Income Taxes (Note 14) 25,725 32,602 23,868
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME 41,113 53,994 41,367
Preferred Stock Dividends -- 1,149 1,296
- ---------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 41,113 $ 52,845 $ 40,071
===========================================================================================================================
NET INCOME PER COMMON SHARE (NOTE 16):
Basic $ 1.10 $ 1.44 $ 1.18
Diluted 1.07 1.36 1.12
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 41,113 $ 53,994 $ 41,367
Other Comprehensive Income (Loss) Net of Tax
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gain (Loss) Arising During Year
(net of income tax expense (benefit) of $13,516, ($981) and
$9,135 for 1997, 1996 and 1995, respectively) 21,591 (1,626) 15,833
Less: Reclassification Adjustment for Gains
Included in Net Income (net of income tax expense
of ($841), ($778) and ($5) for 1997, 1996 and 1995, respectively) 1,344 1,288 10
- -------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 20,247 (2,914) 15,823
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 61,360 51,080 57,190
Less: Dividends on Preferred Stock - 1,149 1,296
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income Applicable to
Common Stock $ 61,360 $ 49,931 $ 55,894
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Employee
Stock
(In thousands, except per share data) Ownership Accumulated
Plan Shares Other
Preferred Common Paid-In Retained Treasury Purchased Comprehensive
Stock Stock Capital Earnings Stock With Debt Income(Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 2 $ 326 $209,013 $ 175,373 $ (3,692) $(4,221) $(12,689) $ 364,112
Net Income for 1995 - - - 41,367 - - - 41,367
Dividends Paid:
$.32 Per Common Share - - - (4,382) - - - (4,382)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers - - - (6,368) - - - (6,368)
Dividends Paid or Accrued:
Preferred Series B - - - (1,296) - - - (1,296)
Allocation of ESOP Shares - - (3) - - 920 - 917
Fractional Shares Paid - - (13) - - - - (13)
Exercise of Stock Options - - 1,809 - 402 - - 2,211
Proceeds from Sale
of Common Stock - 42 48,748 (21) - - - 48,769
Stock Dividends Declared by
Pooled Companies Prior
to Mergers - 8 14,330 (14,356) - - - (18)
Pooling Adjustments, Net - - (829) - - - (37) (866)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes - - - - - - 15,860 15,860
Other, Net - (2) 499 1 - - - 498
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 2 $ 374 $273,554 $ 190,318 $ (3,290) $(3,301) $ 3,134 $ 460,791
====================================================================================================================================
Net Income for 1996 - - - 53,994 - - - 53,994
Dividends Paid:
$.34 Per Common Share - - - (5,546) - - - (5,546)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers - - - (7,741) - - - (7,741)
Dividends Paid or Accrued:
Preferred Series B - - - (1,149) - - - (1,149)
Allocation of ESOP Shares - - 94 - - 727 - 821
Exercise of Stock Options - 4 1,468 (2) 3,351 - - 4,821
Conversion of Preferred
Series B to Common Stock (1) - (8,724) - 8,725 - - -
Common Stock Repurchased - - - - (27,611) - - (27,611)
Pooling Adjustments, Net - (3) (3,215) 2 - - (1,365) (4,581)
Net Unrealized Loss on
Securities Available for
Sale, Net of Taxes - - - - - - (1,549) (1,549)
Other, Net - - 550 - 24 - - 574
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 1 $ 375 $263,727 $ 229,876 $ (18,801) $(2,574) $ 220 $ 472,824
====================================================================================================================================
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income for 1997 - - - 41,113 - - - 41,113
Dividends Paid:
$.40 Per Common Share - - - (9,037) - - - (9,037)
Cash Dividends Declared by
Pooled Companies Prior
to Mergers - - - (6,846) - - - (6,846)
Allocation of ESOP Shares - - 166 - - 603 - 769
Exercise of Stock Options - 8 264 (4) 5,058 - - 5,326
Conversion of Preferred
Series B to Common Stock (1) - (18,499) - 18,500 - - -
Common Stock Repurchased - - - - (6,020) - - (6,020)
Common Stock Issued in
Consideration for Sachem Trust - 2 3,971 (1) - - - 3,972
Pooling Adjustments, Net - (5) (8,833) 2,913 - - (4,020) (9,945)
Net Unrealized Gain on
Securities Available for
Sale, Net of Taxes - - - - - - 24,615 24,615
Other, Net - (4) 756 (60) 147 - (348) 491
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ - $ 376 $241,552 $257,954 $ (1,116) $(1,971) $20,467 $517,262
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
22
<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 $41,113 $ 53,994 $ 41,367
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 24,813 13,054 9,864
Provision for Foreclosed Property Losses 1,637 2,523 4,865
Provision for Depreciation and Amortization 11,298 9,441 6,962
(Accretion) Amortization of Securities Premiums, Net (1,700) 5,067 897
Amortization and Write-down of Intangibles 9,249 8,102 3,358
Amortization of Hedging Costs 2,985 780 250
Mortgage Servicing Rights Amortization and Provision 1,215 615 838
Gains on Sale of Deposits (546) (15,904) --
Gains on Sale of Foreclosed Properties (1,274) (1,650) (1,716)
Gains on Sale of Loans and Securities (3,706) (2,050) (4,914)
Gains on Sale of Trading Securities (229) (915) (479)
Loss on Disposal of Premises and Equipment 915 -- --
(Increase) Decrease in Trading Securities (40,952) 24,539 69,698
Loans Originated for Sale (59,543) (136,814) (108,679)
Sale of Loans, Originated for Sale 70,372 112,370 147,154
(Increase) Decrease in Interest Receivable (6,019) 194 (6,390)
(Increase) Decrease in Prepaid Expenses and Other Assets (19,487) (15,242) 9,132
Increase (Decrease) in Interest Payable 18,389 (866) 1,747
Increase (Decrease) in Accrued Expenses and Other Liabilities, Net 9,310 (12,736) 7,389
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 57,840 44,502 181,343
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (2,139,050) (945,317) (469,150)
Purchases of Securities, Held to Maturity (24,213) (162,564) (390,660)
Maturities of Securities 210,682 207,689 155,175
Proceeds from Sales of Securities, Available for Sale 156,203 473,753 235,077
Proceeds from Sales of Securities, Held to Maturity -- -- 4,032
Net (Increase) Decrease in Interest-bearing Deposits (41,045) 57,513 (14,428)
Purchase of Loans (191,078) (113,582) (107,297)
Net Increase in Loans (79,051) (49,848) (64,752)
Proceeds from Sale of Foreclosed Properties 24,787 26,694 23,569
Net Decrease in Segregated Assets 20,932 29,169 28,941
Sale of Segregated Assets 13,700 -- --
Principal Collected on Mortgage-Backed Securities 368,000 302,037 154,870
Purchase of Premises and Equipment, Net (11,436) (14,041) (11,582)
Proceeds from Sales of Premises and Equipment -- 735 443
Net Cash and Cash Equivalents Received from Bank Acquisition -- 310,336 --
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (1,691,569) 122,574 (455,762)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (96,929) (55,141) 16,270
Net Proceeds from Sale of Common Stock -- -- 48,769
Sale of Deposits (9,179) (168,506) --
Repayment of FHL Bank Advances (5,167,029) (2,093,849) (1,302,486)
Proceeds from FHL Bank Advances 5,906,775 2,288,661 1,322,493
Repayment of Other Borrowings (4,448,386) (1,631,765) (194,341)
Proceeds from Other Borrowings 5,301,170 1,561,053 396,098
Net Proceeds from Issuance of Capital Securities 141,327 -- --
Net Proceeds from Preferred Stock of Subsidiary Corporation 49,577 -- --
Cash Dividends to Common and Preferred Shareholders (15,883) (14,436) (12,054)
Net (Decrease) Increase in Advance Payments for Taxes and Insurance (7,747) 2,429 (138)
Exercise of Stock Options 5,808 5,476 2,709
Common Stock Repurchased (6,020) (27,611) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 1,653,484 (133,689) 277,320
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Increase in Cash and Cash Equivalents 19,755 33,387 2,901
Cash and Cash Equivalents at Beginning of Period 131,567 98,180 95,279
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 151,322 $ 131,567 $ 98,180
===========================================================================================================================
Years Ended December 31,
----------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 27,662 $ 40,202 $ 24,303
Interest Paid 315,293 282,699 249,527
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 29,552 25,015 23,903
Transfer of Securities from Held to Maturity to Available for Sale 109,329 90,858 412,266
Securitization of Loans into Mortgage-Backed Securities Available for Sale -- 83 69,455
Securitization of Loans into Trading Mortgage-Backed Securities -- 16,888 83,909
</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 $ 621,955
Premises and Equipment 8,008
Other Assets 3,059
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets Acquired 633,022
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES ASSUMED:
Deposits 1,099,551
Less Deposits Exchanged (95,163)
- ---------------------------------------------------------------------------------------------------------------------------
Net Deposits Assumed 1,004,388
Other Liabilities 1,883
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities Assumed 1,006,271
- ---------------------------------------------------------------------------------------------------------------------------
Net Liabilities Assumed 373,249
Net Premium Paid for Deposits (62,913)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash and Cash Equivalents Received from Bank Acquisition $ 310,336
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
24
<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 Eagle Financial Corp.
("Eagle") acquired on April 15, 1998, People's Savings Financial Corp.
("People's") acquired on July 31, 1997, MidConn Bank ("MidConn") acquired on May
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 number of common shares have been retroactively restated for a stock
dividend and stock split. 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
25
<PAGE>
ultimately collected, if any, is credited to income in the period received. Loan
origination fees, net of certain direct origination costs and premiums and
discounts on loans purchased, are recognized in interest income over the lives
of the loans using a method approximating the interest method. Loans held for
sale are carried at the lower of cost or market value in aggregate. Net
unrealized losses on loans held for sale, if any, are recognized in a valuation
allowance by charges to income.
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.
26
<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. The core
deposit intangibles are 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 37,445,418, 36,810,846 and
34,004,953 respectively, and diluted earnings per share were 38,473,196,
39,559,530 and 36,797,410 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.
(p) Statements of Cash Flows
27
<PAGE>
For the purposes of the Statements of Cash Flows, Webster considers cash on hand
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 required, and SFAS No. 125 continues to require
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
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) Comprehensive Income
The provisions of SFAS No. 130, "Reporting Comprehensive Income" were adopted as
of January 1, 1998. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components (such as changes in net
unrealized investment gains and losses). Comprehensive income includes net
income and any changes in equity from non-owner sources that bypass the income
statement. The purpose of reporting comprehensive income is to report a measure
of all changes in equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Application of SFAS No. 130 will not
impact amounts previously reported for net income or affect the comparability of
previously issued financial statements. The adoption of SFAS No. 130, resulted
in a change in financial statement disclosures only and had no effect on
Webster's financial position or results.
s) 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 CONSUMMATED IN 1998
- ---------------------------------------------------
On April 15, 1998, Webster acquired Eagle and its subsidiary, Eagle Bank, a $2.1
billion savings bank, headquartered in Bristol, Connecticut. In connection with
the merger with Eagle, Webster issued 10,615,156 shares of its common shares of
all the outstanding shares of Eagle common stock. Under the terms of the
agreement, each outstanding share of Eagle common stock was converted into 1.68
shares of Webster common stock. This acquisition was accounted for as a pooling
of interests, and as such, the Consolidated Financial Statements include Eagle's
financial data as if Eagle had been combined at the beginning of the earliest
period presented. Prior to the acquisition, Eagle's fiscal year ended on
September 30. In recording the pooling of interest combination, Eagle's
financial statements as of and for the twelve months ended September 30, 1997,
1996 and 1995 were combined with Webster's financial statements as of and for
the twelve months ended December 31, 1997, 1996 and 1995, respectively.
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.
28
<PAGE>
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
3,151,992 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 MIDCONN ACQUISITION
On May 31, 1997, Webster acquired MidConn as a result of its acquisition of
Eagle Financial Corp. ("Eagle"). In connection with the merger, Webster
effectively issued 2,869,440 shares of its common stock for all the outstanding
shares of MidConn common stock after adjusting for the conversion factor related
to the Eagle Acquisition and subsequent common stock split. The acquisition was
accounted for as a pooling of interests, and as such, the Consolidated Financial
Statements include MidConn's financial data as if MidConn 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, a $1.2 billion savings bank headquartered in Derby, Connecticut. In
connection with the merger with Derby, Webster issued 7,002,740 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 2,585,098 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 533,000 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.
29
<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
166,770 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 25 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 $1.1
billion in deposits and $622 million in loans. As a result of this transaction,
Webster recorded $64.1 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 2,499,200 shares of its common stock in an underwritten
public offering in December 1995.
THE BANK OF HARTFORD ACQUISITION
On June 10, 1994, Webster acquired certain assets and assumed all insured
deposits of The Bank of Hartford from the FDIC. The acquisition was accounted
for as a purchase and, accordingly, the assets and liabilities assumed were
recorded based on estimated fair values at the date of acquisition. In
connection with the Bank of Hartford acquisition, Webster raised net proceeds of
$16.7 million through the sale of 1,448,681 shares of its common stock.
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 2,300,000 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.
30
<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 19,522 37 (8) 19,551 12,016 59 (60) 12,015
U.S. Government Agency 50,229 220 (24) 50,425 85,105 294 (386) 85,013
Municipal Bonds and Notes 14,685 -- (126) 14,559 -- -- -- --
Corporate Bonds and Notes 10,045 33 (227) 9,851 11,743 50 (7) 11,786
Equity Securities 210,041 14,983 (1,049) 223,975 (b) 117,738 4,419 (149) 122,008
Mortgage-Backed Securities 2,737,522 36,307 (7,720) 2,766,109 1,161,733 9,946 (11,201) 1,160,478
Purchased Interest-Rate
Contracts 15,079 - (7,262) 7,817 5,460 -- (1,424) 4,036
- --------------------------------------------------------------------------------------------------------------------------------
3,057,123 51,580 (16,416) 3,092,287 1,393,795 14,768 (13,227) 1,395,336
- --------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 2,447 28 -- 2,475 3,486 29 -- 3,515
U.S. Government Agency 32,274 14 (65) 32,223 57,397 948 (558) 57,787
Municipal Bonds and Notes 12,500 93 (1) 12,592 -- -- -- --
Corporate Bonds and Notes 1,199 3 -- 1,202 6,635 106 (9) 6,732
Money Market Preferred Stock 1,000 -- -- 1,000 8,000 -- -- 8,000
Mortgage-Backed Securities 362,817 2,533 (2,781) 362,569 574,988 3,000 (9,869) 568,119
- --------------------------------------------------------------------------------------------------------------------------------
412,237 2,671 (2,847) 412,061 650,506 4,083 (10,436) 644,153
- --------------------------------------------------------------------------------------------------------------------------------
Total $3,554,109 $54,251 $(19,263) $3,589,097 $2,103,632 $18,851 $(23,663) $2,098,820
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Stated at fair market value.
(b) Equity securities at December 31, 1997, consisted of FHL Bank stock of
$87.1 million, mutual funds of $37.5 million, preferred stock of $55.6
million and common stock of $43.8 million.
31
<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> <C>
Trading Securities:
Mortgage-Backed Securities $ 4,052 $ (2,647) $ 1,405 $ 3,033 $(2,719) $ 314 $ 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 14,103 (13,188) 915 6,147 (5,655) 492
- -----------------------------------------------------------------------------------------------------------------------------
Available for Sale:
Mortgage-Backed Securities 566 (119) 447 2,401 (1,652) 749 1,352 (1,043) 309
U.S. Treasury Notes 6 -- 6 5 (7) (2) 375 -- 375
U.S. Government Agencies 18 (45) (27) 11 (39) (28) -- (1,886) (1,886)
Corporate Debt 77 -- 77 4 (364) (360) 126 (749) (623)
Mutual Funds 1,210 (58) 1,152 227 (463) (236) 3 (199) (196)
Other Equity Securities 945 (21) 924 2,773 (197) 2,576 2,042 (1) 2,041
Other 920 (586) 334 56 -- 56 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
3,742 (829) 2,913 5,477 (2,722) 2,755 3,898 (3,878) 20
Held to Maturity: -- -- -- -- -- -- -- -- --
Mortgage-Backed Securities -- -- -- -- -- -- -- (10) (10)
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 15,112 $ (11,970) $ 3,142 $19,580 $(15,910) $3,670 $10,045 $(9,543) 502
=============================================================================================================================
</TABLE>
There were no sales of securities from the held to maturity portfolio for the
years ended December 31, 1997 and 1996. During 1995, a mortgage-backed security
classified as a held to maturity in Eagle's portfolio was sold resulting in
proceeds of $4.0 million and a realized loss of $10,000. The security was sold
due to the discovery of a broker error in identifying the security's repricing
characteristics when purchased. The security's actual repricing characteristics
did not match the internal asset/liability parameters and, as a result, the
security was repurchased by the broker.
During 1995, 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 $435.0 million and fair market value of $434.9
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.
On June 30, 1997 Eagle transferred securities with a book value of $109.3
million from held to maturity to available for sale. The transfer resulted in an
unrealized gain of approximately $299,000 which is net of income tax expense of
approximately $200,000, being recorded as an increase to shareholder's equity.
The securities were transferred due a change in intent with respect to holding
the securities to maturity precipitated by changes in the balance sheet
following the merger with MidConn.
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.
32
<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 Due
One Year Five Years Within 10 Years After 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <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 11,012 6.11 8,539 6.09 -- -- -- -- 19,551 6.10
U.S. Government Agency 9,986 5.44 26,683 6.64 11,031 7.20 2,725 7.18 50,425 6.55
Municipal Bonds and Notes (a) -- -- -- -- -- -- 14,559 5.30 14,559 5.30
Corporate Bonds and Notes 5,289 6.01 4,369 6.38 52 8.80 141 6.34 9,851 6.19
Equity Securities 223,975 4.57 -- -- -- -- -- -- 223,975 4.57
Mortgage-Backed Securities 1,296 5.87 62,596 6.17 144,401 7.15 2,557,816 6.73 2,766,109 6.74
Purchased Interest-Rate Contracts -- -- 2,115 -- 5,702 -- -- -- 7,817 --
- ------------------------------------------------------------------------------------------------------------------------------------
251,558 4.71 104,302 6.17 161,186 6.90 2,575,241 6.69 3,092,287 6.52
- ------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity Portfolio:
U.S. Treasury Notes 443 5.13 2,004 6.25 -- -- -- -- 2,447 6.05
U.S. Government Agency 24,775 5.55 6,999 5.56 500 6.40 -- -- 32,274 5.57
Municipal Bonds and Notes(a) -- -- -- -- 12,500 6.68 -- -- 12,500 6.68
Corporate Bonds and Notes 749 5.57 350 6.54 -- -- 100 6.29 1,199 5.91
Money Market Preferred Stock 1,000 5.68 -- -- -- -- -- -- 1,000 5.68
Mortgage-Backed Securities 6,307 5.90 48,131 6.09 3,299 7.98 305,080 7.33 362,817 7.15
- ------------------------------------------------------------------------------------------------------------------------------------
33,274 5.62 57,484 6.03 16,299 6.93 305,180 7.33 412,237 6.79
- ------------------------------------------------------------------------------------------------------------------------------------
Totals $284,832 4.81% $161,786 6.12% $177,485 6.90% $2,965,170 6.73% $3,589,273 6.54%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
33
<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 $3,778,422 76.3% $3,611,481 76.2%
Conventional, VA and FHA Loans Held for Sale 3,515 0.1 5,780 0.1
Residential Participation 12,244 0.2 16,394 0.4
Residential Construction 117,619 2.4 110,546 2.3
Commercial Construction 34,974 0.7 34,084 0.7
Other Commercial 309,966 6.2 310,588 6.6
- ------------------------------------------------------------------------------------------------------------------------------------
4,256,740 85.9 4,088,873 86.3
====================================================================================================================================
Consumer Loans:
Home Equity Loans 471,872 9.5 428,266 9.0
Other Consumer Loans 47,479 1.0 77,095 1.7
Credit Cards 33,112 0.7 14,893 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
552,463 11.2 520,254 11.0
====================================================================================================================================
Commercial Non-Mortgage Loans 239,826 4.8 205,065 4.3
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Loans Receivable 5,049,029 101.9 4,814,192 101.6
Less:
Loans in Process 51,263 1.0 35,924 0.8
Allowance for Losses on Loans 59,518 1.2 53,692 1.1
Premiums on Loans Purchased, Deferred Loan Fees
and Unearned Discounts, Net (16,565) (0.3) (13,307) (0.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net $4,954,813 100.0% $4,737,883 100.0%
====================================================================================================================================
</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 $16.9 million of impaired loans,
of which $7.6 million were measured based upon the fair value of the underlying
collateral and $9.3 million were measured based upon the expected future cash
flows of the impaired loans. At December 31, 1997, there were $7.3 million of
impaired loans with an allowance of $1.1 million and $9.6 million of impaired
loans for which there was no related allowance for loan losses determined in
accordance with SFAS No. 114. In 1997, 1996 and 1995, the average balance of
impaired loans was $29.0 million, $35.0 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 $723,686, $520,446 and $50,362, respectively.
A detail of the changes in the allowances for loan losses for the three years
follows:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 53,692 $ 59,892 $ 65,671
Provisions Charged to Operations 24,813 13,054 9,864
Acquired Allowance for Purchased Loans -- 6,871 --
Charge-offs (24,794) (29,205) (18,960)
Recoveries 5,807 3,080 3,317
- -----------------------------------------------------------------------------------------------------
Balance at End of Period $ 59,518 $ 53,692 $ 59,892
=====================================================================================================
</TABLE>
34
<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 $91.6 million and $68.9 million, respectively. Residential commitments
outstanding at December 31, 1997 consisted of adjustable-rate and fixed-rate
mortgages of $32.3 million and $59.3 million, respectively, at rates ranging
from 4.9% to 10.0%. 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 $312.9 million and $296.6 million,
respectively. Unused commercial lines of credit, letters of credit, standby
letters of credit and outstanding commercial new loan commitments totaled $129.2
million and $109.7 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 $5.5 million and $6.6 million, respectively, at rates between 5.75% and
8.3% 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 $1.3 billion, $1.5 billion and
$1.2 billion, 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.
35
<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 $ 10,431 $ 9,275
Buildings and Improvements 52,149 53,883
Leasehold Improvements 6,273 7,055
- ------------------------------------------------------------------------------------------------------------------------------------
Furniture, Fixtures and Equipment 55,774 51,502
- ------------------------------------------------------------------------------------------------------------------------------------
Total Premises and Equipment 124,627 121,715
Accumulated Depreciation and Amortization 52,740 49,107
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and Equipment, Net $ 71,887 $ 72,608
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 $4.6 million, $4.3 million and $2.7
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.
36
<PAGE>
The following is a schedule of future minimum rental payments and receipts
required under these leases as of December 31, 1997:
<TABLE>
<CAPTION>
(In thousands) Payments Receipts
=============================================================================================================================
<S> <C> <C>
Years ending December 31:
1998 $ 4,931 $ 843
1999 4,018 645
2000 3,204 551
2001 2,719 373
2002 2,447 235
Later years 9,880 1,034
- -----------------------------------------------------------------------------------------------------------------------------
Total $27,199 $ 3,681
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7: PREPAID EXPENSES AND OTHER ASSETS
- --------------------------------------------------------------------------------
A summary of prepaid expenses and other assets follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
(In thousands) 1997 1996
=============================================================================================================================
<S> <C> <C>
Due from FDIC $ 1,660 $ 1,420
Income Taxes Receivable 4,866 15,001
Deferred Tax Asset, Net (Note 14) 19,462 24,573
Mortgage Servicing Rights, Net 5,906 6,199
Bank Owned Life Insurance 12,750 --
Other Assets 22,712 15,615
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid Expenses and Other Assets $ 67,356 $ 62,808
=============================================================================================================================
</TABLE>
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 $911,000, $615,000 and $838,000 for the years ended December 31, 1997, 1996
and 1995, respectively. During 1997 and 1996, Webster capitalized mortgage
servicing assets of $981,000 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.
37
<PAGE>
NOTE 8: DEPOSITS
- --------------------------------------------------------------------------------
Deposits categories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average % of Average % of
(Dollars in thousands) Rate Balance Total Rate Balance Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits and NOW Accounts 1.19% $ 948,589 16.6% 1.49% $ 865,631 14.9%
Regular Savings and Money Market Deposit Accounts 2.47 1,400,325 24.5 2.47 1,505,718 25.8
Time Deposits 5.35 3,370,116 58.9 5.40 3,454,915 59.3
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 3.86% $ 5,719,030 100.0% 3.97 $5,826,264 100.0%
========================================================================================================================
</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 $ 9,385 $ 7,132 $ 4,860
Regular Savings and Money Market Deposit Accounts 34,802 40,016 43,354
Time Deposits 179,292 182,075 155,750
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 223,479 $229,223 $ 203,964
==============================================================================================================================
</TABLE>
Time deposits of $100,000 or more amounted to $415.0 million and represented
7.26% of total deposits at December 31, 1997. The following table presents the
amount of these deposits maturing during the periods indicated:
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Maturing Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
January 1, 1998 to March 31, 1998 $ 111,806
April 1, 1998 to June 30, 1998 90,753
July 1, 1998 to December 31, 1998 100,924
January 1, 1999 and beyond 111,512
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 414,995
====================================================================================================================================
</TABLE>
<PAGE>
NOTE 9: FEDERAL HOME LOAN BANK ADVANCES
- --------------------------------------------------------------------------------
Advances payable to the Federal Home Loan Bank are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
--------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed Rate:
4.82% to 9.80% Due 1997 $ -- $436,090
4.99% to 8.19% Due 1998 1,099,700 128,000
5.54% to 8.86% Due 1999 62,862 28,827
5.98% to 9.16% Due 2000 31,570 21,920
6.66% to 6.76% Due in 2001 7,845 5,550
6.87% Due in 2002 2,000 --
6.14% Due in 2003 4,157 4,762
6.01% Due in 2004 80,000 --
6.31% Due in 2006 3,577 3,881
6.98% Due in 2007 2,675 --
4.00% Due in 2008 -- 150
6.60% Due in 2011 2,828 2,953
- ------------------------------------------------------------------------------------------------------------------------------------
1,297,214 632,133
- ------------------------------------------------------------------------------------------------------------------------------------
Variable Rate:
- ------------------------------------------------------------------------------------------------------------------------------------
5.54 % to 7.32% Due in 1997 -- 144,755
5.65% Due in 1998 219,420 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Federal Home Loan Bank Advances $1,516,634 $ 776,888
====================================================================================================================================
</TABLE>
38
<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 $ 954,306 $452,018 $410,253
Amount outstanding at end of period 1,270,220 559,345 439,016
Highest month end balance 1,319,020 573,948 557,005
Weighted-average interest rate at end of period 5.74% 5.68% 5.94%
Weighted-average interest rate during the period 5.65% 5.61% 5.99%
</TABLE>
At December 31, 1997, the Bank had additional borrowing capacity of over $2.2
billion from the FHL Bank, including a line of credit of approximately $83.1
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:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996
<S> <C> <C>
Reverse Repurchase Agreements $ 980,835 $ 113,755
Senior Notes 40,000 40,000
Bank Line of Credit 10,000 18,000
ESOP Borrowings 1,978 2,546
Other Borrowings 150 6,646
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,032,963 $ 180,947
====================================================================================================================================
</TABLE>
The weighted-average rates for other borrowed funds for the 1997 and 1996 year
periods were 5.75% and 6.17 %, 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 $557.2
million and 5.65% as compared to $185.0 million and 5.63% 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.
39
<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 Value
December 31, 1997 Rate Maturity Date of Collateral of Collateral
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$980,835 5.70% 5.6 months $976,498 $987,047
</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 $557,199 $184,966
Amount outstanding at end of period 900,836 113,755
Highest month end balance 901,156 287,404
Weighted-average interest rate at end of period 5.70% 5.48%
Weighted-average interest rate during the period 5.65% 5.63%
</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.
40
<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
- --------------------------------------------------------------------------------------------------
Classified in available for
sale securities 610,000 375,000 7,817 4,036 15,079 5,460
- --------------------------------------------------------------------------------------------------
Interest rate swap agreements 25,000 -- 309 -- -- --
Interest rate cap agreements 41,000 -- 345 -- 689 --
- --------------------------------------------------------------------------------------------------
Total $676,000 $375,000 $ 8,471 $ 4,036 $ 15,768 $ 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 in the
available for sale securities portfolio 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, this
portfolio 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, this portfolio 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. During 1997, Webster used interest rate
financial instruments in its borrowings portfolios. Webster entered into a
collared floating rate advance with the FHLB of Boston, which incorporates both
an interest rate cap and an
41
<PAGE>
interest rate floor. The collared advance has an $80 million notional amount, a
maximum interest rate of 8.01%, a minimum interest rate of 5.76% and a maturity
of June 18, 2004. In August 1997, Webster purchased a separate interest rate cap
contract with a notional amount of $41 million, a cap rate of 7.00% and a
termination date of August 19, 2002. The cost of the interest rate cap contract
was $713,400. The interest rate cap contract is matched against two fixed rate
borrowings with maturities of one and two years, respectively, and a five year
fixed rate borrowing that is callable after three years.
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and Due from Depository Institutions $ 151,322 $ 151,322 $131,567 $ 131,567
Interest-bearing Deposits 77,104 77,104 36,059 36,059
Securities 3,581,456 3,581,280 2,101,137 2,094,784
Residential Loans 3,855,489 3,927,674 3,704,274 3,764,071
Consumer Loans 81,139 81,774 149,735 149,810
Home Equity Loans 474,995 490,352 374,293 380,317
Commercial Loans 602,708 599,716 563,273 558,753
Less Allowance for Loan Losses 59,518 - 53,692 --
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 5,906 8,379 6,199 7,025
Other Assets 276,431 276,431 276,390 276,390
Liabilities:
Deposits Other than Certificates $ 2,348,914 $2,348,914 $ 2,371,349 $ 2,371,349
Time Deposits:
Maturing in Less than One Year 2,483,946 2,490,362 2,241,262 2,245,688
Maturing in One Year and Beyond 886,170 888,803 1,213,653 1,215,366
Federal Home Loan Bank Advances 1,516,634 1,517,263 776,888 778,421
Other Borrowings 1,032,963 1,033,503 180,947 181,775
Other Liabilities 116,794 116,794 112,018 112,018
Capital Securities and Preferred Stock of Subsidiary Corp. 193,204 201,001 -- --
</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.
42
<PAGE>
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.
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 $ (1,274) $ (1,650) $ (1,716)
Provision for Losses on Foreclosed Properties 1,637 2,523 4,865
Rental Income (202) (369) (926)
Foreclosed Property Expenses 4,023 4,654 5,412
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,184 $ 5,158 $ 7,635
====================================================================================================================================
</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 $ 819 $ 1,511 $ 3,488
Provisions 1,637 2,523 4,865
Losses Charged to Allowance (1,355) (3,359) (7,124)
Recoveries Credited to Allowance 121 144 282
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,222 $ 819 $ 1,511
====================================================================================================================================
</TABLE>
43
<PAGE>
NOTE 14: INCOME TAXES
- --------------------------------------------------------------------------------
Charges for income taxes in the Consolidated Statements of Income are comprised
of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 30,080 $ 24,974 $ 22,189
State 5,112 5,777 7,161
- ------------------------------------------------------------------------------------------------------------------
35,192 30,751 29,350
==================================================================================================================
Deferred:
Federal (7,994) 63 (4,366)
State (1,473) 1,788 (1,116)
- ------------------------------------------------------------------------------------------------------------------
(9,467) 1,851 (5,482)
- ------------------------------------------------------------------------------------------------------------------
Total:
Federal 22,086 25,037 17,823
State 3,639 7,565 6,045
- ------------------------------------------------------------------------------------------------------------------
$ 25,725 $ 32,602 $ 23,868
==================================================================================================================
</TABLE>
Income tax expense of $25.7 million, $32.6 million and $23.9 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 $ 23,394 $ 30,309 $ 22,832
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 2,365 5,243 3,950
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 205 (347) (296)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Taxes $ 25,725 $ 32,602 $ 23,868
====================================================================================================================================
</TABLE>
At December 31, 1997, Webster had a net deferred tax asset of $19.5 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.
44
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 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 $ 30,363 $ 24,820
Accrued Compensation and Pensions 4,632 5,696
Deferred Expenses 3,671 --
Intangibles 5,231 4,149
Other 2,480 4,034
- -----------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 46,377 38,699
Less Valuation Allowance (5,107) (6,207)
- -----------------------------------------------------------------------------------------------------
Deferred Tax Asset after Valuation Allowance 41,270 32,492
- -----------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Loan Discount 4,062 4,524
Premises and Equipment 1,309 1,510
Unrealized Gain on Securities 14,697 117
Other 1,740 1,768
- -----------------------------------------------------------------------------------------------------
Total Gross Deferred Tax Liabilities 21,808 7,919
- -----------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 19,462 $ 24,573
=====================================================================================================
</TABLE>
NOTE 15: SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Shareholders' equity increased $44.5 million to $517.3 million at December 31,
1997 from $472.8 million at December 31, 1996 due primarily to net income of
$41.1 million and the tax-effected unrealized gain on securities available for
sale of $24.6 million, before charges primarily for common stock dividend
payments and common stock repurchases.
On April 6, 1998, Webster's common stock split two-for-one; the stock split was
effected in the form of a stock dividend. Basic and diluted common shares have
been restated for all periods presented as if the stock split took place from
the earliest period shown. Also, shareholders' equity accounts for all periods
presented have been restated to give retroactive recognition of the stock split.
On April 15, 1998, Webster acquired Eagle (see Note 2). In connection with the
acquisition, Webster issued 10,615,156 shares of its common stock for all the
outstanding shares of Eagle's common stock. Under the terms of the agreement,
Eagle's shareholders received 1.68 shares of Webster common stock after giving
effect to a two for one stock split in a tax free exchange for each of their
shares of Eagle's common stock. Included in the 1997 Consolidated Statement of
Shareholder's Equity is $9.9 million of pooling adjustments related primarily to
the elimination of Webster's investment in Eagle common stock.
On July 31, 1997, Webster acquired People's (see Note 2). In connection with the
acquisition, Webster issued 3,151,992 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 May 31, 1997, Webster acquired MidConn (see Note 2) as a result of the Eagle
acquisition. In connection with the acquisition, Webster effectively issued
2,869,440 shares of its common stock for all the outstanding common shares of
MidConn.
On January 31, 1997, Webster acquired Derby (see Note 2). In connection with the
acquisition, Webster issued 7,002,740 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.
45
<PAGE>
In December 1995, Webster completed the sale of 2,499,200 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 2,585,098 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 $41.0 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.
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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997
- --------------------
Total Capital (to Risk-Weighted Assets) $ 591,066 14.42% $ 328,015 8.00% $ 410,019 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 542,149 13.22 164,007 4.00 246,011 6.00
Tier 1 Capital (to Adjusted Total Assets) 542,149 6.07 268,115 3.00 446,858 5.00
Tangible Capital (to Adjusted Total Assets) 537,446 6.02 133,987 1.50 No Requirement
At December 31, 1996
- --------------------
Total Capital (to Risk-Weighted Assets) $ 478,158 12.86% $ 297,372 8.00% $ 371,715 10.00%
Tier 1 Capital (to Risk-Weighted Assets) 434,208 11.68 148,686 4.00 223,029 6.00
Tier 1 Capital (to Adjusted Total Assets) 434,208 6.00 216,980 3.00 361,633 5.00
Tangible Capital (to Adjusted Total Assets) 429,807 5.94 108,490 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
46
<PAGE>
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 $182.8 million available for the payment of
dividends under the OTS capital distribution regulations. The Bank has paid
dividends to Webster amounting to $45.6 million and $24.7 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, $677,000 and
$997,000 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.
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.
47
<PAGE>
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
- ------------------------------------------------------------------------------------------
BASIC EPS:
<S> <C> <C> <C>
Net income $ 41,113 $ 53,994 $ 41,367
Preferred stock dividends -- 1,149 1,296
- ------------------------------------------------------------------------------------------
Income available to common stockholders $ 41,113 $ 52,845 $ 40,071
- ------------------------------------------------------------------------------------------
Weighted-average common shares outstanding 37,445,418 36,810,846 34,004,953
- ------------------------------------------------------------------------------------------
Basic earnings per share $1.10 $1.44 $1.18
==========================================================================================
DILUTED EPS:
Net income $ 41,113 $ 53,994 $ 41,367
==========================================================================================
Weighted-average common shares outstanding 37,445,418 36,810,846 34,004,953
Dilutive common stock equivalents:
Effect of conversion of preferred stock series B 34,106 1,776,172 1,972,806
Common stock equivalents due to dilutive effect
of options 799,584 903,124 819,651
Common stock equivalents due to dilutive effect
of warrant 194,088 69,388 --
- ------------------------------------------------------------------------------------------
Total weighted-average diluted shares 38,473,196 39,559,530 36,797,410
==========================================================================================
Diluted earnings per share $1.07 $1.36 $1.12
==========================================================================================
</TABLE>
At December 31, 1997, options to purchase 239,400 shares of common stock at
exercise prices between $24.82 and $32.25 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 $1.2 million, $1.1 million and $634,400 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 $1.3 million for the years ended December
31, 1997, 1996 and 1995 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.
48
<PAGE>
The following table sets forth the funded status of the Bank's pension plan and
amounts recognized in Webster's Consolidated Statements of Condition 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 $ 15,042 $ 17,135
Nonvested benefit obligation 1,391 1,445
- --------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 16,433 18,580
Effect of projected future compensation levels 4,396 5,443
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date 20,829 24,023
Plan assets at fair value, primarily listed
stocks and U.S. bonds 24,351 21,118
- ---------------------------------------------------------------------------------------------------------------
Excess (Deficiency) of plan assets over
benefit obligation 3,522 (2,905)
Items not yet recognized in earnings:
Unrecognized prior service cost (1,403) (2,217)
Unrecognized net gain (loss) (3,531) 2,181
Unrecognized net asset at January 1, 1987
being recognized over 20.9 years (121) (325)
- ---------------------------------------------------------------------------------------------------------------
Unfunded Accrued Pension Liability $ (1,533) $ (3,266)
================================================================================================================
</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, MidConn and People's acquisitions. The following
table summarizes the components of the net change in the unfunded accrued
pension liability balance.
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 $ (3,266)
Acquisition-Related Net Curtailments 2,342
Contributions 1,012
Net Periodic Cost (1,621)
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ (1,533)
===============================================================================================================
</TABLE>
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 $ 2,027 $ 2,260 $ 1,540
Interest cost on projected benefit obligations 1,554 1,623 1,428
Return on plan assets (6,222) (2,229) (3,312)
Amortization and deferral 4,262 384 1,724
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 1,621 $ 2,038 $ 1,380
=============================================================================================================================
</TABLE>
49
<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 $(3,655) $(5,836)
Unrecognized transition obligation (331) 1,374
Unrecognized net loss (184) (1,486)
- --------------------------------------------------------------------------------------------------------
Post-Retirement Liability $(4,170) $(5,948)
========================================================================================================
</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:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1996 $(5,948)
Acquisition-Related Net Curtailments 1,876
Contributions 160
Net Periodic Costs (258)
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $(4,170)
- ---------------------------------------------------------------------------------------------------
</TABLE>
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 $290,300. The discount
rate and healthcare cost-trend rate for 1997 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 $ 58 $ 329 $ 302
Interest cost 249 425 411
Amortization (49) 33 20
- ---------------------------------------------------------------------------------------------------------
Net Periodic Post-Retirement Benefit Cost $ 258 $ 787 $ 733
- ---------------------------------------------------------------------------------------------------------
</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.
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 as
follows:
50
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $ 41,113 $ 53,994 $ 41,367
Pro Forma 39,518 53,057 39,128
Basic Earnings Per Share:
As Reported $ 1.10 $ 1.44 $ 1.18
Pro Forma 1.06 1.40 1.11
Diluted Earnings Per Share:
As Reported $ 1.07 $ 1.36 $ 1.12
Pro Forma 1.03 1.34 1.06
</TABLE>
Webster's six fixed stock option plans were established in 1995, 1994, 1992,
1991, 1986 and 1985. The 1995, 1994, 1991 and 1985 plans were acquired through
bank acquisitions. Under these plans, the number of shares that may be granted
are 425,000, 573,300, 1,561,000, 932,385, 770,170 and 624,138, 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 470,000 and 750,000 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: 1,050, 2,204 and 39,268, 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.
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 2,487,791 $ 10.02 3,316,310 $ 8.38 2,430,073 $ 6.94
Granted 548,358 24.86 467,780 15.33 1,128,477 11.20
Exercised (532,043) 8.25 (1,269,303) 7.71 (228,440) 5.93
Forfeited/Canceled (32,358) 16.08 (26,996) 9.63 (13,800) 9.38
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding at End of Year 2,471,748 $ 13.61 2,487,791 $ 10.02 3,316,310 $ 8.38
===================================================================================================================================
Options Exercisable at Year End 1,763,608 1,793,383 2,869,043
Weighted Average Per Share Fair Value
of Options Granted During the Year $ 8.73 $ 5.60 $ 5.17
</TABLE>
51
<PAGE>
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>
$2.28 - $ 3.22 25,960 2.9 $ 2.28 25,960 $2.28
$3.23 - $ 6.45 352,868 2.4 4.79 352,868 4.79
$6.46 - $ 9.67 349,819 5.2 8.91 349,819 8.91
$9.68 - $12.90 776,185 7.0 10.69 678,085 10.69
$12.91 - $16.10 305,834 8.2 14.61 208,134 14.88
$16.11 - $19.35 243,642 8.9 18.90 52,142 18.82
$19.36 - $22.60 178,040 10.0 22.60 96,600 21.92
$22.61 - $25.80 30,000 9.6 24.88 -- --
$25.81 - $29.02 4,000 9.6 25.88 -- --
$29.03- $32.25 205,400 10.0 31.76 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
2,471,748 6.9 $ 13.61 1,763,608 $10.38
====================================================================================================================================
</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 8,520 shares were issued to twelve directors in 1997 with
each receiving 710 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.
NOTE 18: MERGER AND ACQUISITION EXPENSES
- --------------------------------------------------------------------------------
A summary of merger and acquisition expenses follows:
<TABLE>
<CAPTION>
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 -- --
MidConn 2,734 -- --
- -------------------------------------------------------------------------------------------------------------
Total $29,792 $ 500 $ 4,271
=============================================================================================================
</TABLE>
52
<PAGE>
In connection with the acquisitions of Derby, MidConn and People's, that were
completed on January 31, 1997, May 31, 1997 and July 31, 1997, Webster recorded
approximately $29.8 million of merger-related charges. The following table
presents a summary of the merger-related accrued liabilities. Most of the
expenses related to the acquisition of MidConn were paid in 1997.
<TABLE>
<CAPTION>
(In thousands) Derby People's MidConn
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance of merger-related accrued liabilities at December 31, 1996 $ -- $ -- $ --
Additions 19,900 7,200 2,700
Compensation (severance and related costs) (6,700) (2,400) (800)
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) (1,700)
Merger-related and miscellaneous expenses (2,800) (1,100) (200)
- ----------------------------------------------------------------------------------------------------------------
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.
On April 1, 1997, Eagle Financial Capital Trust I completed a $50 million
private placement of 10.00% capital securities. Proceeds from the issue were
invested by Eagle Financial Capital Trust I in 10.00% junior subordinated
debentures issued by Eagle and due 2007 ("Eagle subordinated debt securities").
These debentures represent the sole assets of Eagle Financial Capital Trust I.
Eagle Financial Capital Trust I is a subsidiary of Webster as a result of the
Eagle acquisition.
The subordinated debt securities and the Eagle subordinated debt securties 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.
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.
53
<PAGE>
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
Interest-Bearing Deposits 2,893 805
Securities Available for Sale 68,641 17,072
Securities Held to Maturity -- 85
Investment in Subsidiaries 631,164 509,311
Due from Subsidiaries -- 1,847
Other Assets 10,064 3,560
- -------------------------------------------------------------------------------------------------------------
Total Assets $714,592 $534,928
=============================================================================================================
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 2,578 --
Other Liabilities 7,620 1,158
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust 145,154 --
Shareholders' Equity 517,262 472,824
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $714,592 $534,928
=============================================================================================================
</TABLE>
54
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from Subsidiary $ 45,571 $ 24,726 $ 20,072
Interest on Securities 2,067 1,012 1,219
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 11,353 -- --
Other Noninterest Expenses 6,735 3,996 4,661
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and
Equity in Undistributed Earnings of Subsidiaries 26,686 19,621 13,543
Income Tax Benefit 7,227 1,950 2,868
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed
Earnings of Subsidiaries 33,913 21,571 16,411
Equity in Undistributed Earnings of Subsidiaries 7,200 32,423 24,956
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 41,113 53,994 41,367
Preferred Stock Dividends -- 1,149 1,296
- ---------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ 41,113 $ 52,845 $ 40,071
===========================================================================================================================
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 41,113 $ 53,994 $ 41,367
(Increase) Decrease in Interest Receivable (186) 42 (16)
(Increase) Decrease in Other Assets (3,483) (828) 2,048
Gains on Sale of Securities (937) (1,520) (503)
Equity in Undistributed Earnings of Subsidiaries (7,200) (32,423) (24,956)
Other, Net 11,978 2,861 (941)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 41,285 22,126 16,999
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of Securities Available for Sale (114,640) (35,076) (45,168)
(Increase) Decrease in Interest-Bearing Deposits (2,088) 149 (579)
Sales of Securities Available for Sale 61,986 76,465 4,445
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (54,742) 41,538 (41,302)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of Borrowings (28,400) (7,584) (545)
Proceeds from Borrowings 10,000 25,400 --
Net Proceeds from Issuance of Capital Securities 141,327 -- --
Net Proceeds from Sale of Common Stock -- -- 48,769
Exercise of Stock Options 5,808 5,476 2,709
Cash Dividends to Shareholders (15,883) (14,436) (12,054)
Common Stock Repurchases (6,020) (27,611) (721)
Investment in Subsidiary (93,793) (44,000) (14,750)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 13,039 (62,755) 23,408
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash and Cash Equivalents (418) 909 (895)
Cash and Cash Equivalents at Beginning of Year 2,248 1,339 2,234
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,830 $ 2,248 $ 1,339
===========================================================================================================================
</TABLE>
55
<PAGE>
NOTE 23: SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
- --------------------------------------------------------------------------------
Selected quarterly data for 1997 and 1996 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Interest Income $ 131,807 $ 141,355 $ 150,508 $ 155,184
Interest Expense 72,631 78,552 85,444 91,177
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 59,176 62,803 65,064 64,007
Provision for Loan Losses 7,990 3,320 10,828 2,675
Gain on Sale of Loans and Securities, Net 562 471 1,363 1,539
Other Noninterest Income 8,932 9,217 9,532 10,648
Noninterest Expenses 62,059 41,898 55,370 42,336
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes (1,379) 27,273 9,761 31,183
Income Taxes (1,076) 10,504 4,386 11,911
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (303) 16,769 5,375 19,272
Preferred Stock Dividends -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ (303) $ 16,769 $ 5,375 $ 19,272
====================================================================================================================================
Net Income Per Share:
Basic $ (0.01) $ 0.45 $ 0.14 $ 0.52
====================================================================================================================================
Diluted $ (0.01) $ 0.43 $ 0.14 $ 0.50
====================================================================================================================================
Comprehensive Income $ 58 $ 17,859 $ 18,547 $ 24,876
1996:
Interest Income $ 119,650 $ 126,841 $ 129,846 $ 130,689
Interest Expense 68,800 70,891 72,230 72,987
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 50,850 55,950 57,616 57,702
Provision for Loan Losses 2,064 3,677 3,004 4,309
Gain on Sale of Loans and Securities, Net 1,245 13,947 1,190 2,487
Other Noninterest Income 7,164 8,612 8,882 8,482
Noninterest Expenses 37,366 43,339 46,211 47,561
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 19,829 31,493 18,473 16,801
Income Taxes 7,721 11,728 6,686 6,467
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 12,108 19,765 11,787 10,334
Preferred Stock Dividends 323 321 283 222
- ------------------------------------------------------------------------------------------------------------------------------------
Income Available to Common Shareholders $ 11,785 $ 19,444 $ 11,504 $ 10,112
====================================================================================================================================
Net Income Per Share:
Basic $ 0.32 $ 0.53 $ 0.31 $ 0.28
====================================================================================================================================
Diluted $ 0.30 $ 0.50 $ 0.30 $ 0.27
====================================================================================================================================
Comprehensive Income $ 10,137 $ 16,017 $ 11,467 $ 13,459
</TABLE>
All periods presented have been retroactively restated to reflect the inclusion
of the results of Eagle, People's, MidConn and Derby, which were acquired on
April 15, 1998, July 31, 1997, May 31, 1997, and January 31, 1997, respectively,
and were accounted for using the pooling of interests method.
56
<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.
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, comprehensive 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.
KPMG Peat Marwick LLP
Hartford, Connecticut
June 17, 1998
57
<PAGE>
Corporate Headquarters
Webster Financial Corporation and Webster Bank
Webster Plaza
Waterbury, CT 06702
(203) 753-2921
Transfer Agent and Registrar
American Stock Transfer & Trust Co.
Shareholder Services
40 Wall Street
New York, NY 10005
1-800-937-5449
Dividend Reinvestment and Stock Purchase Plan
Stockholders wishing to receive a prospectus for the Dividend Reinvestment and
Stock Purchase Plan are invited to write to American Stock Transfer & Trust Co.
at the address listed above, or call 1-800-278-4353.
Stock Listing Information
The common stock of Webster is traded over-the-counter on the NASDAQ National
Market System under the symbol "WBST."
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.
58
<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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Common Stock (Per Share)
- --------------------------------------------------------------------------------
Market Price
- --------------------------------------------------------------------------------
Cash
Dividends End of
1997 Declared Low High Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fourth $ .10 $28 1/2 $33 7/8 $ 33 1/4
Third .10 21 11/16 29 7/8 29 3/8
Second .10 17 5/16 22 7/8 22 3/4
First .10 17 9/16 20 11/16 17 9/16
<CAPTION>
Cash
Dividends End of
1996 Declared Low High Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fourth $ .09 $16 3/4 $19 1/8 $ 18 3/8
Third .09 14 17 7/8 17 5/8
Second .08 13 3/8 14 11/16 14
First .08 13 3/4 15 1/8 14
</TABLE>
- --------------------------------------------------------------------------------
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:
59
<PAGE>
Webster Bank
Telebanking Center
P.O. Box 191
CH420
Waterbury, Connecticut 06720-0191
Worldwide Web Site
www.websterbank.com
60
