UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ending MARCH 31, 1999
----------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
----------------------- -----------------------
Commission File Number: 0-15213
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WEBSTER FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 06-1187536
- ------------------------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Webster Plaza, Waterbury, Connecticut 06720
- ------------------------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(203) 753-2921
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding for each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock (par value $ .01) 35,954,175 SHARES
- ----------------------------------- -------------------------------------
Class Issued and Outstanding at May 1, 1999
<PAGE>
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 5
Condensed Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Consolidated Financial Statements 15
Quantitative and Qualitative Disclosures about Market Risk 22
Forward Looking Statements 22
Year 2000 Readiness Disclosure Statement 23
PART II - OTHER INFORMATION 24
SIGNATURES 25
EXHIBIT INDEX 26
</TABLE>
2
<PAGE>
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
---------------------------------
<S> <C> <C>
Cash and Due from Depository Institutions $ 141,315 $ 173,863
Interest-bearing Deposits 68,158 3,560
Securities: (Note 2)
Trading at Fair Value 73,971 91,114
Available for Sale, at Fair Value 2,777,140 2,969,822
Held to Maturity, (Fair Value: $348,773 in 1999;
$404,365 in 1998) 350,115 401,154
Loans Receivable, Net 5,020,010 4,993,509
Accrued Interest Receivable 57,173 55,012
Premises and Equipment, Net 78,872 79,324
Foreclosed Properties, Net 3,230 3,526
Intangible Assets 77,952 78,380
Cash Surrender Value of Life Insurance 142,899 141,059
Prepaid Expenses and Other Assets 57,837 43,594
----------- -----------
TOTAL ASSETS $ 8,848,672 $ 9,033,917
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 5,512,191 $ 5,651,273
Federal Home Loan Bank Advances 1,505,373 1,774,560
Reverse Repurchase Agreements and Other Borrowings (Note 6) 1,028,905 738,921
Advance Payments by Borrowers for Taxes and Insurance 6,866 32,293
Accrued Expenses and Other Liabilities 83,084 82,414
----------- -----------
Total Liabilities 8,136,419 8,279,461
--------- ---------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trusts Holding Solely Junior Subordinated
Debentures of the Corporation (Note 12) 150,000 150,000
Preferred Stock of Subsidiary Corporation 49,577 49,577
SHAREHOLDERS' EQUITY Common Stock, $.01 par value:
Authorized - 50,000,000 shares;
Issued - 38,479,422 shares at March 31, 1999 and
38,353,424 shares at December 31, 1998 385 384
Paid-in Capital 250,963 249,819
Retained Earnings (Note 7) 332,577 314,791
Less Treasury Stock at cost, 2,559,433 shares at March 31, 1999
and 1,026,770 shares at December 31, 1998 (72,689) (27,914)
Less Employee Stock Ownership Plan Shares Purchased with Debt (1,128) (1,339)
Accumulated Other Comprehensive Income 2,568 19,138
----------- -----------
Total Shareholders' Equity 512,676 554,879
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,848,672 $ 9,033,917
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
MARCH 31,
-------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME:
Loans $ 93,225 $ 97,858
Securities and Interest-bearing Deposits 52,684 61,341
---------- ----------
Total Interest Income 145,909 159,199
---------- ----------
INTEREST EXPENSE:
Deposits 48,580 56,675
Borrowings 33,742 39,127
---------- ----------
Total Interest Expense 82,322 95,802
---------- ----------
NET INTEREST INCOME 63,587 63,397
Provision for Loan Losses 2,000 1,900
---------- ----------
Net Interest Income After Provision for Loan Losses 61,587 61,497
---------- ----------
NONINTEREST INCOME:
Fees and Service Charges 12,886 9,513
Gain on Sale of Loans and Loan Servicing, Net 805 266
Gain on Sale of Securities, Net 1,707 3,098
Other Noninterest Income 4,099 2,449
---------- ----------
Total Noninterest Income 19,497 15,326
---------- ----------
NONINTEREST EXPENSES:
Salaries and Employee Benefits 20,966 19,537
Occupancy Expense of Premises 4,337 3,875
Furniture and Equipment Expenses 4,682 4,367
Intangible Amortization 2,519 2,299
Marketing Expenses 2,147 1,889
Capital Securities Expense 3,661 3,662
Dividends on Preferred Stock of Subsidiary Corporation 1,020 1,038
Other Operating Expenses 8,736 8,796
---------- ----------
Total Noninterest Expenses 48,068 45,463
---------- ----------
Income Before Income Taxes 33,016 31,360
Income Taxes (Note 13) 11,225 11,639
---------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 21,791 $ 19,721
========== ==========
Net Income Per Common Share:
Basic $ 0.60 $ 0.52
Diluted $ 0.59 $ 0.50
Dividends Declared Per Common Share $ 0.11 $ 0.10
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 21,791 $ 19,721
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Loan Losses 2,000 1,900
Provision for Foreclosed Property Losses -- 208
Provision for Depreciation and Amortization 3,308 2,908
Amortization of Securities Premiums, Net 1,226 378
Amortization of Hedging Costs, Net 1,159 1,119
Amortization and Write-down of Intangibles 2,519 2,299
Amortization of Mortgage Servicing Rights 526 403
Gains on Sale of Foreclosed Properties, Net (211) (340)
Gains on Loans and Securities, Net (1,898) (3,211)
Gains on Trading Securities, Net (614) (153)
Decrease in Trading Securities 17,756 24,831
Loans Originated for Sale (20,208) (13,310)
Sale of Loans, Originated for Sale 22,276 18,835
Increase in Interest Receivable (2,161) (4,504)
Increase in Accrued Expenses and Other Liabilities, Net 4,340 5,506
Increase in Cash Surrender Value of Life Insurance (1,840) (854)
Decrease in Interest Payable (4,394) (4,660)
Decrease (Increase) in Prepaid Expenses and Other Assets, Net (2,908) (1,241)
Pooling Adjustments, Net -- 10,685
----------- -----------
Net Cash Provided by Operating Activities 42,667 60,520
----------- -----------
INVESTING ACTIVITIES:
Purchases of Securities, Available for Sale (260,514) (1,085,995)
Purchases of Securities, Held to Maturity (445) (34,830)
Maturities of Securities 97,928 37,646
Proceeds from Sale of Securities, Available for Sale 118,632 316,871
Proceeds from Sale of Securities, Held to Maturity 15,458 --
Purchases of Life Insurance -- (87,700)
Net Increase in Interest-bearing Deposits (64,599) (19,999)
Net (Increase) Decrease in Loans (30,954) 82,573
Proceeds from Sale of Foreclosed Properties 1,698 2,995
Principal Collected on Securities 243,803 178,800
Purchases of Premises and Equipment, Net (2,337) (6,009)
Cash Recieved in Acquisition 150 --
----------- -----------
Net Cash Provided (Used) by Investing Activities 118,820 (615,648)
----------- -----------
FINANCING ACTIVITIES:
Net (Decrease) Increase in Deposits (139,082) 56,377
Repayment of FHLB Advances (1,377,985) (1,489,916)
Proceeds from FHLB Advances 1,108,798 1,824,248
Repayment of Reverse Repurchase Agreements & Other Borrowings (6,792,827) (2,291,313)
Proceeds from Reverse Repurchase Agreements & Other Borrowings 7,082,809 2,460,596
Net Decrease in Advance Payments for Taxes and Insurance (25,427) (14,205)
Cash Dividends to Common and Preferred Shareholders (4,006) (4,367)
Common Stock Repurchased (52,585) --
Exercise of Stock Options 4,337 2,501
Other, Net 1,933 1,043
----------- -----------
Net Cash (Used) Provided by Financing Activities (194,035) 544,964
----------- -----------
Decrease in Cash and Cash Equivalents (32,548) (10,164)
Cash and Cash Equivalents at Beginning of Period 173,863 151,322
----------- -----------
Cash and Cash Equivalents at End of Period $ 141,315 $ 141,158
=========== ===========
</TABLE>
5
<PAGE>
Webster Financial Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------ ------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ 42 $ 3,355
Interest Paid 86,716 99,572
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer of Loans to Foreclosed Properties 1,731 4,109
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented. All adjustments were of a normal
recurring nature. The results of operations for the three month periods ended
March 31, 1999 are not necessarily indicative of the results which may be
expected for the year as a whole.
Effective January 1, 1999, Webster acquired Access National Mortgage, Inc.
("Access"). The transaction was accounted for as a purchase and therefore
results are reported only for the periods subsequent to the acquisition. See
Note 7.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Webster Financial Corporation 1998
Annual Report to Shareholders. The consolidated financial statements include the
accounts of Webster Financial Corporation ("Webster") and its subsidiaries,
Webster Bank (the "Bank") and Damman Insurance Associates.
NOTE 2 - SECURITIES
Securities with fixed maturities that are classified as held to maturity
are carried at cost, adjusted for amortization of premiums and accretion of
discounts over the estimated terms of the securities utilizing a method which
approximates the level yield method. Securities that management intends to hold
for indefinite periods of time (including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital or other similar factors) are classified as available for
sale. All equity securities are classified as available for sale. Securities
available for sale are carried at fair value with unrealized gains and losses
net of taxes included in Other Comprehensive Income (See Note 4). 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.
7
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (continued)
A summary of securities follows (in thousands):
<TABLE>
<CAPTION>
March 31,1999 December 31, 1998
----------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized ------------------ Market Amortized ---------------- Market
Cost Gains Losses Value Cost Gains Losses Value
------------- ------ ------ --------- -------------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRADING SECURITIES:
Mortgage-Backed Securities $ 73,971(a) $ -- $ -- $ 73,971 $ 91,114(a)$ --$ -- $ 91,114
------------------------------------------- ---------- -----------------------------
AVAILABLE FOR SALE PORTFOLIO:
U.S. Treasury Notes 13,510 71 -- 13,581 13,514 123 -- 13,637
U.S. Government Agency 15,000 167 -- 15,167 16,501 278 -- 16,779
Municipal Bonds and Notes 14,688 460 -- 15,148 14,688 516 -- 15,204
Corporate Bonds and Notes 77,046 343 (4,319) 73,070 81,452 454 (2,148) 79,758
Equity Securities 217,531 7,779 (5,772) 219,538 211,871 7,241 (4,664) 214,448
Mortgage-Backed Securities 2,419,361 23,467 (11,392) 2,431,436 2,582,759 39,937 (5,248) 2,617,448
Purchased Interest-Rate Contracts 14,826 -- (5,626) 9,200 15,985 -- (3,437) 12,548
---------------------------------------------- -------------------------------------------
2,771,962 32,287 (27,109) 2,777,140 2,936,770 48,549 (15,497) 2,969,822
-------------------------------------------- -----------------------------------------
HELD TO MATURITY PORTFOLIO:
U.S. Treasury Notes 2,450 4 -- 2,454 2,455 12 -- 2,467
U.S. Government Agency 1,000 10 -- 1,010 6,000 15 -- 6,015
Municipal Bonds and Notes 12,500 294 -- 12,794 12,500 347 -- 12,847
Corporate Bonds and Notes 135,859 161 (2,492) 133,528 151,536 2,626 (1,171) 152,991
Mortgage-Backed Securities 198,306 1,801 (1,120) 198,987 228,663 2,426 (1,044) 230,045
----------------------------------------------- -------------------------------------------
350,115 2,270 (3,612) 348,773 401,154 5,426 (2,215) 404,365
----------------------------------------------- -------------------------------------------
Total $3,196,048 $34,557 $(30,721) $3,199,884 $3,429,038 $53,975 $(17,712) $3,465,301
============================================= ==========================================
</TABLE>
(a) Stated at fair market value.
During the first quarter of 1999, Webster sold $15.5 million of securities
classified as held to maturity, which resulted in a loss of $193,000. The
securities were sold due to regulators request that Webster divest of the
holdings as the securities did not meet regulatory guidelines, which were issued
subsequent to the acquisition of the securities.
NOTE 3 - NET INCOME PER COMMON SHARE
Basic net income per common 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 common share is calculated by
dividing adjusted net income by the weighted-average number of diluted common
shares, including the effect of common stock equivalents. The common stock
equivalents consist of common stock options and warrants. The weighted-average
shares used in the calculation of net income per common share have been adjusted
to reflect the two-for-one stock split which was effective for shareholders of
record as of April 6, 1998. The weighted-average number of shares used in the
computation of basic net income per common share for the three month periods
ended March 31, 1999 and 1998 was 36,309,488 and 38,186,098, respectively. The
weighted-average number of shares used in the computation of diluted earnings
per common share for the three month periods ended March 31, 1999 and 1998 was
36,925,143 and 39,268,509, respectively.
8
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - COMPREHENSIVE INCOME
The provisions of Statement of Financial Accounting Standards ("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 following table summarizes comprehensive income for the three month
periods ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 21,791 $ 19,721
Other comprehensive income, net of tax
Unrealized (losses) gains on investments available for sale:
Unrealized holding (losses) gains arising during period
(net of income tax (benefit) expense of $(8,122) and $1,758
for the three months ended March 31, 1999 and 1998,
respectively) (15,765) 2,427
Less reclassification adjustment for gains included in
net income (net of income tax expense of $414 and
$1,237 for the three months ended March 31, 1999 and
1998, respectively) 805 1,708
----------- -----------
Other comprehensive (loss) income (16,570) 719
----------- -----------
Comprehensive income $ 5,221 $ 20,440
=========== ===========
</TABLE>
NOTE 5 - FORECLOSED PROPERTY EXPENSES AND PROVISIONS, NET
Foreclosed property expenses and provisions, net are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Gain on Sale of Foreclosed Property, Net $ (211) $ (340)
Provision for Losses on Foreclosed Property -- 208
Rental Income (17) (57)
Foreclosed Property Expenses 169 595
--------- --------
Foreclosed Property Expenses and Provisions, Net $ (59) $ 406
========= ========
</TABLE>
9
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - REVERSE REPURCHASE AGREEMENTS
At March 31, 1999, Webster had short term borrowings through reverse
repurchase agreements outstanding. Information concerning borrowings under
reverse repurchase agreements is summarized below (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCE AT WEIGHTED AVERAGE BOOK VALUE MARKET VALUE
MARCH 31, 1999 TERM AVERAGE RATE MATURITY DATE OF COLLATERAL OF COLLATERAL
- -------------- ---- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$856,427 1 to 11 months 5.23% Less than 2 months $1,015,867 $904,236
</TABLE>
The securities underlying the reverse repurchase agreements are all U.S.
Agency collateral and have been delivered to the broker-dealers who arrange the
transactions. Webster uses reverse repurchase agreements when the cost of such
borrowings is less than other funding sources. The average balance and the
maximum amount of outstanding short term reverse repurchase agreements at any
month-end during the 1999 first quarter was $744.8 million and $856.4 million,
respectively. The outstanding balance of reverse repurchase agreements at
December 31, 1998 was $589.4 million.
NOTE 7 - SHAREHOLDERS' EQUITY
Webster, during the first quarter 1999 period, repurchased 1.8 million
shares of its common stock. The total cost of the repurchased shares was $52.6
million with an average per share cost of approximately $29.03. The stock
repurchase was related to shares to be issued in the acquisitions of Maritime
Bank & Trust Company ("Maritime") and Village Bancorp, Inc. ("Village"). See
Note 10.
Effective January 1, 1999, Webster acquired Access National Mortgage, Inc.,
an Internet-based residential mortgage origination company, that became a
subsidiary of Webster Bank. In connection with the acquisition, Webster issued
125,998 shares of its common stock valued at approximately $3.5 million.
NOTE 8 - ACQUISITION-RELATED COSTS
Webster consumated the acquisition of Maritime on April 21, 1999. Webster
expects to consummate the acquisition of Village during the second quarter of
1999. These acquisitions will be accounted for as purchases, and therefore,
related acquisition costs are included in the cost of the acquired company and
will not impact the statement of operations for the current period.
In connection with the acquisitions of Eagle Financial Corp. ("Eagle"),
MidConn Bank, People's Savings Financial Corp. ("People's"), and DS Bancor, Inc.
("Derby") that were completed on April 15, 1998, May 31, 1997, July 31, 1997,
and January 31, 1997 Webster recorded approximately $47.2 million of
acquisition-related charges. Additionally, Webster recorded an increase of $8.7
million to the provision for loan losses related to the acquisitions of Eagle,
Derby and People's during 1998 and 1997, for conformity to Webster's credit
policies. There are no further acquisition-related accrued liabilities related
to MidConn.
10
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - ACQUISITION-RELATED COSTS (continued)
The following table presents a summary of the acquisition-related accrued
liabilities (in thousands):
<TABLE>
<CAPTION>
Derby People's Eagle
----- -------- -----
<S> <C> <C> <C>
Balance of acquisition-related accrued liabilities
at December 31, 1998 3,800 1,600 1,400
--------- --------- --------
Payments/Writedowns:
Compensation (severance and related costs) -- -- --
Data processing contract termination (175) -- --
Branch closure costs -- (19) (119)
Building costs -- (145) --
Acquisition-related and miscellaneous expenses (55) -- (221)
--------- --------- ---------
Balance of acquisition-related accrued liabilities
at March 31, 1999 $ 3,570 $ 1,436 $ 1,060
========= ========= ========
</TABLE>
The remaining total accrued liability of $6.1 million represents, for the
most part, accruals for data processing contract termination costs payable over
a future period and the estimated loss on sale of excess fixed assets due to
consolidation of overlapping branch locations.
NOTE 9 - ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Under this
statement, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Initial application of this statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this statement. Early adoption
is permitted, however, retroactive application is prohibited. Management is in
the process of evaluating the impact of this statement on its financial position
and results of operations.
11
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - PENDING ACQUISITIONS
On November 11, 1998, Webster announced a definitive agreement to acquire
Village, the holding company for Village Bank & Trust Company for $23.50 per
share in a tax-free, stock-for-cash and/or stock exchange. At the time of the
original announcement, Village, based in Ridgefield, Connecticut, had
approximately $230 million in total assets, $152 million in loans and $215
million in deposits at six branches. Webster expects to consummate the
acquisition in the second quarter of 1999 and expects to account for this
transaction as a purchase.
NOTE 11 - BUSINESS SEGMENTS
Webster has four segments for business segment reporting purposes. These
segments include consumer banking, business banking, mortgage lending and
treasury. The organizational hierarchies that define the business segments are
periodically reviewed and revised. Results may be restated in future periods to
reflect changes in methodologies and organizational structure. The following
table presents the statement of operations and total assets for Webster's
reportable segments.
12
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - BUSINESS SEGMENTS (continued)
Operating income and total assets by business segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 32,207 $ 6,842 $ 23,184 $ 1,331 $ 23 $ 63,587
Provision for Loan Losses 180 875 945 -- -- 2,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision 32,027 5,967 22,239 1,331 23 61,587
Noninterest Income 8,917 384 2,977 1,883 3,152 17,313
Noninterest Expense 30,151 3,772 5,774 1,684 3,026 44,407
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 10,793 2,579 19,442 1,530 149 34,493
Income Taxes 3,994 954 7,194 566 54 12,762
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income After Taxes $ 6,799 $ 1,625 $ 12,248 $ 964 $ 95 $ 21,731
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets at Period End $ 741,820 $ 688,750 $3,644,928 $3,750,172 $ 23,002 $8,848,672
<CAPTION>
Three Months Ended March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Business Mortgage All Total
(In thousands) Banking Banking Lending Treasury Other Segments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 33,260 $ 5,042 $ 23,432 $ 1,592 $ 71 $ 63,397
Provision for Loan Losses 306 322 1,272 -- -- 1,900
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision 32,954 4,720 22,160 1,592 71 61,497
Noninterest Income 7,460 285 1,612 3,708 770 13,835
Noninterest Expense 29,576 2,648 6,490 1,787 1,300 41,801
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 10,838 2,357 17,282 3,513 (459) 33,531
Income Taxes 4,011 872 6,394 1,300 (170) 12,407
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) After Taxes $ 6,827 $ 1,485 $ 10,888 $ 2,213 $ (289) $ 21,124
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets at Period End $ 794,272 $ 735,028 $4,007,210 $4,240,419 $ 9,688 $9,786,617
</TABLE>
The consumer banking segment includes consumer lending and the Bank's
deposit generation and direct banking activities, which include the operation of
automated teller machines and telebanking customer support, sales and small
business lending. The business banking segment includes the Bank's investment in
commercial and industrial loans and commercial real estate loans. The business
banking segment also includes deposits and cash management activities for
business banking. The mortgage lending segment includes the Bank's investment in
residential real estate loan origination, servicing and secondary marketing
activities. The treasury segment includes the Bank's investment in assets and
liabilities managed by the treasury department and includes interest-bearing
deposits, securities, FHL Bank Advances, reverse repurchase agreements and other
borrowings. All other includes the results of Webster's trust and investment and
insurance subsidiaries, which offer products to both consumer and business
customers.
Management allocates indirect expenses to its business segments. These
expenses include administration, finance, operations and other support related
functions. Net income (loss) after income taxes for the segments do not include
certain income and expense categories, totaling $60,000 for the three months
ended March 31, 1999 and ($1.4) million for the same period in 1998, that do not
directly relate to segments. The major categories not included in segments were
(on a before tax basis) interest expense of $3.7 million on debt reflected as
capital at the segment level and other income not related to the segments of
$2.2 million. For the three months ended March 31, 1998, the major categories
not included in segments were interest expense of $3.7 million on debt reflected
as capital at the segment level and other income not related to the segments of
$1.5 million.
13
<PAGE>
Webster Financial Corporation and Subsidiaries
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
CORPORATION
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, subsequently renamed
Webster Capital Trust II ("Trust II"), completed a $50 million private placement
of 10.00% capital securities. Proceeds from the issue were invested by Trust II
in junior subordinated deferrable debentures issued by Eagle due in 2027. These
debentures represent the sole assets of Trust II.
The subordinated debt securities are unsecured obligations of Webster and
are subordinate and junior in right of payment to all present and future senior
indebtedness of Webster. Webster has entered into guarantees, which together
with Webster's obligations under the subordinated debt securities and the
declarations of trust governing Trust I and Trust II, 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 13 - INCOME TAXES
The State of Connecticut enacted tax law changes in May 1998, allowing for
the formation of a Passive Investment Company ("PIC") by financial institutions.
This new legislation exempts Passive Investment Companies from state income
taxation in Connecticut, and exempts from inclusion in Connecticut taxable
income the dividends paid from a passive investment company to a related
financial institution. Webster Bank qualifies as a financial institution under
the new statute, and incorporated Webster Mortgage Investment Corporation
("WMIC") to qualify as a PIC. WMIC began operations in the first quarter of
1999. Webster's operation of a PIC subsidiary is expected to significantly
reduce its Connecticut tax liability in 1999. Webster Mortgage Investment
Corporation is a wholly owned subsidiary of Webster Bank.
NOTE 14 - SUBSEQUENT EVENTS
On November 4, 1998, Webster announced a definitive agreement to acquire
Maritime for $26.67 per share in a tax-free, stock-for-stock exchange. At the
time of the original announcement, Maritime, based in Essex, Connecticut, had
approximately $100 million in total assets and $90 million in deposits at three
branches. Webster consummated the acquisition on April 21, 1999, and accounted
for this transaction as a purchase.
14
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GENERAL
- -------
Webster Financial Corporation ("Webster" or the "Corporation"), through its
subsidiaries, Webster Bank (the "Bank") and Damman Insurance Associates
("Damman"), delivers financial services to individuals, families and businesses
throughout Connecticut. Webster emphasizes five business lines - consumer
banking, business banking, mortgage lending, trust and investment services, and
insurance 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.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets were $8.8 billion at March 31, 1999, as compared to $9.0
billion at December 31, 1998. The decrease of $185.2 million or 2.05% is
primarily the result of decreases in cash of $32.5 million and securities of
$260.9 million partially offset by increases in interest-bearing deposits of
$64.6 million and net loans of $26.5 million.
During the first quarter of 1999, Webster's borrowings increased
approximately $20.8 million. Lower cost borrowings through short-term reverse
repurchase agreements and dollar roll transactions were utilized during the
current quarter. FHLB advances decreased $269.2 million while other borrowings
increased $290.0 million. The decrease in total deposits of $139.1 million or
2.5% was primarily attributable to a $124.6 million reduction in certificates of
deposits.
Shareholders' equity was $512.7 million at March 31, 1999 and $554.9
million at December 31, 1998. The net decrease in equity of $42.2 million is
primarily due to common stock repurchases of $52.6 million and $16.6 million of
other comprehensive loss due to a decline in the fair value of available for
sale securities partially offset by $21.8 million of net income. At March 31,
1999, the Bank had Tier 1 leveraged, Tier 1 risk-based, and total risk-based
capital ratios of 6.02%, 11.56% and 12.78%, respectively. The Bank met the
regulatory capital requirements to be categorized as a "well capitalized"
institution at March 31, 1999.
ASSET QUALITY
- -------------
Webster devotes significant attention to maintaining asset quality through
conservative underwriting standards, active servicing of loans, aggressively
managing nonaccrual assets and maintaining adequate reserve coverage on
nonaccrual assets. At March 31, 1999, residential and consumer loans comprised
approximately 83% of the loan portfolio. Securities transactions are executed
under the guidelines of internal corporate investment policy and in adherence to
applicable regulatory, federal and state regulations.
15
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A breakdown of loans receivable, net by type as of March 31, 1999 and December
31, 1998 follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Residential Mortgage Loans $ 3,727,087 $ 3,749,152
Commercial Real Estate Loans 429,379 416,203
Commercial Loans 450,649 401,772
Home Equity Loans 430,516 439,369
Consumer Loans 39,133 42,122
-------------- ---------------
Total Loans 5,076,764 5,048,618
Allowance for Loan Losses (56,754) (55,109)
-------------- ---------------
Loans Receivable, Net $ 5,020,010 $ 4,993,509
============== ===============
</TABLE>
Included above at March 31, 1999 and December 31, 1998 were loans held for
sale of $13.1 million and $1.7 million, respectively.
The following table details the nonaccrual assets at March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Loans Accounted For on a Nonaccrual Basis:
Residential Real Estate $ 10,663 $ 9,040
Commercial 14,088 14,703
Consumer 2,097 1,636
-------- ---------
Total Nonaccrual Loans 26,848 25,379
Foreclosed Properties:
Residential and Consumer 1,649 1,153
Commercial 1,580 2,373
-------- ---------
Total Nonaccrual Assets $ 30,077 $ 28,905
======== =========
</TABLE>
At March 31, 1999, Webster's allowance for losses on loans of $56.8 million
represented 211.4% of nonaccrual loans and its total allowances for losses on
nonaccrual assets of $57.0 million amounted to 188.0% of nonaccrual assets. A
detail of the changes in the allowances for losses on loans and foreclosed
property for the three months ended March 31, 1999 follows (in thousands):
<TABLE>
<CAPTION>
Allowances For Losses On
-----------------------------
Foreclosed Total
Loans Properties Allowance for Losses
----- ---------- --------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 55,109 $ 207 $ 55,316
Provisions for Losses 2,000 -- 2,000
Losses Charged to Allowances (844) (9) (853)
Recoveries Credited to Allowances 489 9 498
---------- ------ ---------
Balance at March 31, 1999 $ 56,754 $ 207 $ 56,961
========== ====== =========
</TABLE>
16
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The goal of Webster's asset/liability management policy is to manage
interest-rate risk so as to maximize net interest income over time in changing
interest-rate environments while maintaining acceptable levels of risk. Webster
must provide for sufficient liquidity for daily operations while maintaining
mandated regulatory liquidity levels. To this end, Webster's strategies for
managing interest-rate risk are responsive to changes in the interest-rate
environment and market demands for particular types of deposit and loan
products. Management measures interest-rate risk using simulation analyses with
particular emphasis on measuring changes in the market value of portfolio equity
and changes in net interest income in different interest-rate environments.
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.
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.
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 unmatched 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, floors 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.
17
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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
on borrowing lines of credit and to holders of Webster's 8 3/4% Senior Notes,
Webster's 9.36% Capital Trust I Capital Securities and Webster's Capital Trust
II 10.00% Capital Securities. There are certain restrictions on the payment of
dividends by the Bank to Webster. 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 March 31, 1999 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.
Webster Bank had mortgage commitments outstanding of $137.1 million,
non-mortgage commitments of $16.1 million, unused home equity credit lines of
$311.6 million and commercial lines and letters of credit of $337.9 million at
March 31, 1999.
18
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
GENERAL
- -------
Net income for the three month period ended March 31, 1999 was $21.8
million or $.59 per diluted share compared to $19.7 million or $.50 per diluted
share for the same period ended March 31, 1998. The increase in net income of
$2.1 million for the current quarter period is primarily attributable to
noninterest income that increased $4.2 million, lower total tax expense of
$414,000 that was partially offset by an increase in operating expenses of $2.6
million. Net interest income of $63.6 million for the current quarter period
remained virtually unchanged from the same period a year ago. Lower interest
income was offset by reduced interest expense for the three month period ended
March 31, 1999. Earnings per share for the current quarter period benefited from
a 2.3 million reduction in the number of average diluted shares due to common
stock repurchases.
NET INTEREST INCOME
- -------------------
Net interest income for the three month periods ended March 31, 1999 and
1998, amounted to $63.6 million and $63.4 million, respectively. Lower total
interest income and total interest expense for the current quarter period were
the result of both a lower yield and volume of average funds. Interest-rate
spread for the 1999 and 1998 quarter periods was 2.91% and 2.62%, respectively.
The increase in interest-rate spread in the current quarter period was primarily
attributable to a decrease in the cost of deposits and borrowed funds.
INTEREST INCOME
- ---------------
Total interest income for the three month periods ended March 31, 1999 and
1998, was $145.9 million and $159.2 million, respectively. The decrease in
interest income for the current quarter period is primarily the result of a
decrease of $519.2 million in average loans and lower realized yields on both
securities and loans. The yield on total interest-earning assets for the three
month periods ended March 31, 1999 and 1998, was 6.98% and 7.18%, respectively.
INTEREST EXPENSE
- ----------------
Total interest expense for the three month periods ended March 31, 1999 and
1998, was $82.3 million and $95.8 million, respectively. The reduction in
interest expense for the current quarter period of $13.5 million or 14.07% is
primarily the result of a 41 basis point decrease in the cost of deposits and a
53 basis point decrease in the cost of borrowed funds. Average interest-bearing
liability funds were $341.7 million lower for the current year quarter, which
further contributed to the reduction in total interest expense. The total cost
of interest-bearing liabilities was 4.07% and 4.56%, respectively for the 1999
and 1998 first quarter periods.
19
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
Three Months Ended March 31, 1999 1998
- ---------------------------- ------------------------------------------------------------------------
Average Average Average Average
(Dollars in Thousands) Balance Interest Yield Balance Interest Yield
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Loans $5,056,637 $93,225 7.40 % $5,025,015 $97,858 7.80 %
Securities 3,324,126 52,684 6.34 3,843,314 61,341 6.39
---------- ------- ---- ---------- ------- ----
TOTAL INTEREST-EARNING ASSETS 8,380,763 145,909 6.98 8,868,329 159,199 7.18
------- -------
Noninterest-Earning Assets 575,326 515,357
----------- ------------
TOTAL ASSETS $8,956,089 $9,383,686
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Deposits $5,547,148 48,580 3.86 $5,748,467 56,675 4.27
Borrowings 2,596,426 33,742 5.27 2,736,770 39,127 5.80
---------- ------- ---- ------------ ------- ----
TOTAL INTEREST-BEARING LIABILITIES 8,143,574 82,322 4.07 8,485,237 95,802 4.56
------- -------
Noninterest-Bearing Liabilities 77,996 159,537
------------- -------------
TOTAL LIABILITIES 8,221,570 8,644,774
Capital Securities and Preferred Stock of
Subsidiary Corporation 199,784 198,221
SHAREHOLDERS' EQUITY 534,735 540,691
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,956,089 $9,383,686
========== ==========
NET INTEREST INCOME $63,587 $63,397
======= =======
INTEREST RATE SPREAD 2.91 % 2.62 %
======= ========
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS 3.03 % 2.87 %
======= ========
</TABLE>
20
<PAGE>
Webster Financial Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loans losses was $2.0 million and $1.9 million,
respectively for the three month periods ended March 31, 1999 and 1998. At March
31, 1999 the allowance for loan losses was $56.8 million and represented 206.4%
of nonaccrual loans, compared to $61.2 million and 142.0%, respectively, a year
earlier.
NONINTEREST INCOME
- ------------------
Total noninterest income increased $4.2 million or 27.2% when the quarter
ended March 31, 1999 is compared to the same quarter in 1998. The increase for
the current quarter is primarily attributable to a $3.4 million or 35.5%
increase in fees and service charges and $1.7 million increase in other
noninterest income due to income earned on life insurance. Realized net gains on
the sale of securities and loans decreased $852,000 for the current year period.
NONINTEREST EXPENSES
- --------------------
Total noninterest expenses for the three month periods ended March 31, 1999
and 1998, was $48.1 million and $45.5 million, respectively. The $2.6 million or
5.7% increase for the current quarter period was the result of higher costs for
salaries and benefits of $1.4 million, occupancy expense of $462,000, furniture
and fixtures expense of $315,000, marketing expenses of $258,000 and intangible
assets amortization. These unfavorable variances were partially offset by a
favorable $465,000 variance in foreclosure expenses.
INCOME TAXES
- ------------
Total income tax expense for the current period was $11.2 million
reflecting an approximate effective tax rate of 34% as compared to $11.6 million
or 37% effective tax rate for the same period in 1998. During the first quarter
of 1999, Webster formed a Connecticut Passive Investment Company. The State of
Connecticut enacted tax law changes in May 1998, allowing for the formation of a
Passive Investment Company ("PIC") by financial institutions. This new
legislation exempts Passive Investment Companies from state income taxation in
Connecticut, and exempts from inclusion in Connecticut taxable income the
dividends paid from a passive investment company to a related financial
institution. Webster Bank qualifies as a financial institution under the new
statute. The legislation was effective for tax years beginning on or after
January 1, 1999.
21
<PAGE>
Webster Financial Corporation and Subsidiaries
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table details the estimated market value of Webster's
financial assets at March 31, 1999 if interest rates instantaneously increase or
decrease 100 basis points.
<TABLE>
<CAPTION>
Book Market Estimated Market Value Impact
Value Value -100 BP +100 BP
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Sensitive Assets
Trading $ 73,971 $ 73,971 $ (84) $ (1,236)
Non-Trading 8,114,108 8,144,105 142,519 (204,539)
Interest-Sensitive Liabilities 8,246,046 8,128,046 (122,350) 116,058
</TABLE>
The table above excludes earning assets that are not directly impacted by
changes in interest rates. These assets include equity securities of $219.5
million (See Note 2 to Consolidated Financial Statements) and nonaccrual loans
of $26.8 million (See "Asset Quality" within the MD&A). Values for mortgage
servicing rights have been included in the table above as changes 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 March 31, 1999, 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 5.7% and an instantaneous
100 basis point decline in interest rates would increase net interest income
over the next twelve months by about 1.0%. The above estimated market values are
subject to factors that could cause actual results to differ from such
projections and estimates.
FORWARD LOOKING STATEMENTS
- --------------------------
Statements in the sections captioned "Management's Discussion and Analysis
of Consolidated Financial Statements," "Quantitative and Qualitative Disclosures
about Market Risk" and "Year 2000 Readiness Disclosure Statement" are
forward-looking statements within the meaning of the Securities and Exchange Act
of 1934, as amended. Actual results could differ materially from those
management expectations, projections and estimates. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of Webster's loan and investment portfolios, changes in accounting
principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting Webster's operations, markets,
products, services and prices. Such developments could have an adverse impact on
Webster's financial position and results of operations.
22
<PAGE>
Webster Financial Corporation and Subsidiaries
YEAR 2000 READINESS DISCLOSURE STATEMENT
- --------------------------------------------------------------------------------
The Corporation's overall Year 2000 project plan continues to meet
regulatory requirements and targeted objectives. The following discussion
addresses the current status of the project and updates the 1998 Annual Report
Year 2000 Readiness Disclosure Statement.
I. THE CORPORATION'S STATE OF READINESS
During the first quarter of 1999, the Corporation focused on completing the
validation of mission critical applications. At March 31, 1999, validation of
98% of identified core functionality was completed. One mission critical
application, originally targeted for completion by March 31, 1999, is now
anticipated to be completed by June 30, 1999. The third party vendor supplied
update has been installed, test scripts have been revised, and testing is in
progress.
All identified non-information technology systems, including vaults,
security, and environmental systems, have been upgraded for Year 2000
compliance. Automated teller machines (ATM's) were anticipated to be Year 2000
compliant by March 31, 1999, but are now anticipated to be compliant by June 30,
1999. Year 2000 upgrades have been received but not installed.
The Corporation has not made any significant revisions to the Year 2000
project plan as reported in the 1998 Annual Report and anticipates meeting the
June 30, 1999 target date for completion of the validation and implementation
phases.
II. THE COSTS TO ADDRESS THE CORPORATION'S YEAR 2000 ISSUES
At March 31, 1999, the Corporation's estimated total direct costs for Year
2000 remediation is approximately $1.2 million. Approximately $650,000 of direct
costs have been incurred to date. Included in these direct costs, are expenses
related to the replacement or upgrade of hardware and software that amounted to
approximately $145,000 and expenses related to consulting services for Year 2000
management and systems testing that amounted to approximately $488,000. During
the next nine months, the Corporation anticipates Year 2000 readiness direct
expenses to total approximately $370,000.
III. THE RISKS OF THE CORPORATION'S YEAR 2000 ISSUES
During the first quarter of 1999, the Corporation developed risk
assessments and strategies for each line of business for core business
processes. Contingency plans were developed for potential business disruptions
resulting from problems encountered with internal operations and infrastructure
or external connections. The Corporation will continue to identify and revise
potential scenarios during 1999 as needed.
IV. THE CORPORATION'S CONTINGENCY PLANS
At March 31, 1999, the Corporation has completed contingency plans for 98%
of identified core business functions. Contingency planning is scenario-driven
and focuses on risk assessment, alternate solutions for business resumption and
approaches to minimize the impact of each scenario. Testing and validation of
contingency plans is anticipated to be completed by June 30, 1999. Contingency
plans will continue to be reviewed and refined during 1999 and as changes in the
external environment occur.
During the mid-December 1999 through mid-January 2000 period, the
Corporation will take an event management approach intended to ensure a state of
readiness. Event management plans will continue to be reviewed and refined
during 1999.
23
<PAGE>
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not Applicable.
(b) Not Applicable.
(c) In January 1999, as part of Webster's acquisition of Access
National Mortgage, Inc. ("Access"), Webster issued 125,998 shares
of its common stock valued at approximately $3.5 million. The
issuance was a private placement to the stockholders of Access
pursuant to the Agreeement and Plan of Merger, dated as of
November 13, 1998, among Webster, Access and the stockholders of
Access. The offer and sale of the stock satisfied the
requirements of Section 4(2) of the Securities Act of 1933, as
amended (transactions by an issuer not involving any public
offering).
(d) Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not Applicable
Item 5. OTHER INFORMATION - Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
27 Financial Data Tables.
(b) Reports on Form 8-K
Webster filed the following Current Report on Form 8-K with the
Securities and Exchange Commission (the "SEC") during the quarter ended March
31, 1999:
Current Report on Form 8-K filed with the SEC on February 25, 1999
(date of report January 29, 1999) (announcing the date of Webster's
1999 Annual Meeting of Shareholders).
24
<PAGE>
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
-----------------------------
Registrant
Date: May 14, 1999 By: /s/ John V. Brennan
--------------------- ------------------------------------
John V. Brennan
Executive Vice President
Chief Financial Officer and Treasurer
Principal Financial Officer
Principal Accounting Officer
26
<PAGE>
Webster Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Tables.
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 141,315 141,158
<INT-BEARING-DEPOSITS> 4,913 94,668
<FED-FUNDS-SOLD> 63,245 0
<TRADING-ASSETS> 73,971 82,713
<INVESTMENTS-HELD-FOR-SALE> 2,777,140 3,799,739
<INVESTMENTS-CARRYING> 350,115 410,785
<INVESTMENTS-MARKET> 348,773 411,302
<LOANS> 5,076,764 4,958,633
<ALLOWANCE> 56,754 61,155
<TOTAL-ASSETS> 8,848,672 9,802,789
<DEPOSITS> 5,512,191 5,792,321
<SHORT-TERM> 2,534,278 3,095,208
<LONG-TERM> 0 0
<LIABILITIES-OTHER> 89,349 171,353
0 0
0 0
<COMMON> 385 380
<OTHER-SE> 512,291 543,950
<TOTAL-LIABILITIES-AND-EQUITY> 8,848,672 9,802,789
<INTEREST-LOAN> 93,225 97,858
<INTEREST-INVEST> 52,684 61,341
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 145,909 159,199
<INTEREST-DEPOSIT> 48,580 56,675
<INTEREST-EXPENSE> 82,322 95,802
<INTEREST-INCOME-NET> 63,587 63,397
<LOAN-LOSSES> 2,000 1,900
<SECURITIES-GAINS> 1,707 3,098
<EXPENSE-OTHER> 48,068 45,463
<INCOME-PRETAX> 33,016 31,360
<INCOME-PRE-EXTRAORDINARY> 33,016 31,360
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21,791 19,721
<EPS-PRIMARY> 0.60 0.52
<EPS-DILUTED> 0.59 0.50
<YIELD-ACTUAL> 2.91 2.62
<LOANS-NON> 26,848 43,077
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 55,109 59,518
<CHARGE-OFFS> 844 998
<RECOVERIES> 489 735
<ALLOWANCE-CLOSE> 56,754 61,155
<ALLOWANCE-DOMESTIC> 56,754 61,155
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
