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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended December 31, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
Commission File Number: 0-15213
WEBSTER FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1187536
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Webster Plaza, Waterbury, Connecticut 06720
---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 753-2921
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 per value
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Based upon the closing price of the registrant's common stock as of
March 15, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $211,924,494. Solely for purposes of this
calculation, the shares held by directors and executive officers of the
registrant and by shareholders beneficially owning more than 10% of the
registrant's outstanding common stock, who may or may not be deemed to have been
excluded.
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share
Issued and Outstanding at March 27, 1996 : 8,103,746
DOCUMENTS INCORPORATED BY REFERENCE
Part I and II: Portions of the Annual Report to Shareholders for fiscal year
ended December 31, 1995
Part III: Portions of the Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 25, 1996.
WEBSTER FINANCIAL CORPORATION
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................................................ 3
General.................................................................................... 3
Recent Acquisitions........................................................................ 4
FDIC Assisted Acquisitions................................................................. 5
Lending Activities......................................................................... 5
Segregated Assets.......................................................................... 16
Investment Activities...................................................................... 18
Sources of Funds........................................................................... 21
Bank Subsidiaries.......................................................................... 24
Employees.................................................................................. 24
Market Area and Competition................................................................ 24
Federal Savings Bank Regulation............................................................ 27
Federal Reserve System..................................................................... 34
Federal Home Loan Bank System.............................................................. 35
Taxation................................................................................... 35
Item 2. Properties...................................................................................... 37
Item 3. Legal Proceedings............................................................................... 39
Item 4. Submission of Matters to a Vote of Security Holders............................................. 39
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters................................................................... 39
Item 6. Selected Financial Data......................................................................... 40
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................................................ 40
Item 8. Financial Statements and Supplementary Data..................................................... 40
Item 9. Disagreements on Accounting
and Financial Disclosures..................................................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 41
Item 11. Executive Compensation.......................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................................ 41
Item 13. Certain Relationships and Related Transactions.................................................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................................................... 41
2
PART I
Item 1. Business
--------
General
Wesbster Financial Corporation, ("Webster" or the "Corporation"),
through its subsidiary, Webster Bank, ("Webster Bank" or the "Bank") delivers
financial services to local individuals and businesses. Webster's Mission is to
build valuable banking relationships by helping individuals, families and
businesses to reach their financial goals. The company has grown profitably in
recent years, primarily through a series of acquisitions which have expanded and
strengthened its franchise and have accelerated Webster's transition from a
tranditional thrift institution to a full-service retail bank. Webster is
organized along three lines of business - consumer, business and mortgage
banking, each focused on the special needs of its customers. Webster serves
275,000 customers from 64 banking offices in Connecticut, extending from the
Massachusetts border to Long Island Sound.
Webster's goals are to ensure customer satisfaction by providing
superior customer service and by delivering quality financial products and
services, to provide a stimulating and challenging work environment that
encourages, develops and rewards excellence, and to make a meaningful investment
in the communities Webster serves.
Assets at December 31, 1995 were $3.2 billion compared to $3.1
billion a year earlier. Net loans receivable amounted to $1.89 billion at
December 31, 1995 compared to $1.87 billion a year ago. Deposits were $2.40
billion at December 31, 1995 compared to $2.43 billion at December 31, 1994.
Prior to November 1, 1995, Webster had two savings bank
subsidiaries: First Federal Bank, a federal savings bank ("First Federal"),
founded in 1935, with its home office in Waterbury, Connecticut, and Bristol
Savings Bank ("Bristol"), a state chartered savings bank, founded in 1870, with
its home office in Bristol, Connecticut. References herein to Webster Bank or
the Bank prior to November 1, 1995 mean First Federal, unless the context
otherwise indicates. On November 1, 1995, in the following sequence: (i) Bristol
converted from a state savings bank charter to a federal savings bank charter
and was concurrently renamed as Webster Bank, (ii) First Federal Bank merged
into Webster Bank, as the surviving savings bank with its home office in
Waterbury, Connecticut, (iii) Webster acquired Shelton Bancorp, Inc. ("Shelton")
and its wholly-owned subsidiary, Shelton Savings Bank, through a merger of a
wholly-owned subsidiary of Webster formed for such purpose into Shelton, as the
surviving corporation, (iv) Shelton then merged into Webster, as the surviving
corporation, and (v) thereafter Shelton Savings Bank merged into Webster Bank,
as the surviving savings bank. References to Webster Bank or the Bank on and
after November 1, 1995 mean the surviving bnak in the transactions that were
consummated on such date, unless the context otherwise indicates.
Webster expanded its banking operations by acquiring Shelton in
1995 and 20 former Shawmut Bank Connecticut ("Shawmut") branch banking offices
in the Hartford banking market in February 1996. See "Shelton Acquisition" and
"Shawmut Transaction." In preceding years, Webster expanded its operations
through the acquisition of Bristol in 1994 (see "Recent Acquisitions") and
Shoreline Bank and Trust ("Shoreline") in 1994 and the FDIC-assisted
acquisitions of First Constitution Bank ("First Constitution") in 1992 and
Suffield Bank ("Suffield") in 1991. (See "FDIC Assisted Acquisitions" 1991.)
These acquisitions have significantly expanded the market areas served by the
Corporation.
On an unconsolidated basis at December 31, 1995, the assets of
Webster consisted primarily of its investment in the Bank and $61.8 million of
cash and other investments. The principal sources of Webster's revenues on an
unconsolidated basis are dividends from the Bank and interest and dividend
income from other investments. See Note 18 to Webster's Consolidated Financial
Statements for parent-only financial statements.
The Bank's deposits are federally insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a Bank Insurance Fund ("BIF") member
institution and approximately at December 31, 1995 63% of the Bank's deposits
were subject to BIF assessment rates and 37% to Savings Association Insurance
Fund ("SAIF") assessment rates. After giving effect to the
3
Shawmut Transaction, approximately 72% of the Bank's deposits are subject to BIF
assessment rates and 28% to SAIF assessments rates. See "Bank Regulation."
Webster as a holding company, and the Bank are subject to
comprehensive regulation, examination and supervision by the OTS, as the primary
federal regulator. The bank is also subject to regulation, examination and
supervision by the FDIC as to certain matters. At December 31, 1995, the Board
of Governors of the Federal Reserve System ("FRB") also has regulatory authority
over the Bank as to some matters. See "Holding Company Regulation" and "Bank
Regulation."
Webster's executive offices are located at Webster Plaza,
Waterbury, Connecticut, 06702. Its telephone number is (203) 753-2921
Recent Acquisitions
The Shawmut Transaction - On October 1, 1995, Webster Bank entered
into a Purchase and Assumption Agreement with Shawmut Bank Connecticut National
Association (now Fleet National Bank of Connecticut), as part of the
Fleet/Shawmut merger, to acquire 20 former Shawmut branch banking offices in the
Hartford Banking Market. The Shawmut Transaction was consummated on February 16,
1996 with Webster Bank receiving approximately $845 million in BIF insured
deposits, and $586 million in loans. In connection with the Shawmut Transaction,
Webster completed the sale of 1,249,600 shares of its common stock in an
underwritten public offering in December 1995. The Shawmut Transaction is being
accounted for as a purchase. The results of operations related to the Shawmut
branch banking offices prior to acquisition are not included in the accompanying
Consolidated Financial Statements. Such results will only be included for the
period subsequent to the consummation of the Shawmut Transaction.
The Shelton Bancorp, Inc. Acquisition - On November 1, 1995,
Webster acquired Shelton and its subsidiary, Shelton Savings Bank, a $295
million asset savings bank in Shelton, Connecticut, with $273 million in BIF
insured deposits. In connection with the merger with Shelton, Webster issued
1,292,549 shares of its common stock for all the outstanding shares of Shelton
common stock. Under the terms of the agreement, Shelton shareholders received
.92 of a share of Webster common stock in a tax free exchange for each of their
Shelton common shares. This acquisition was accounted for as a pooling of
interests. The Corporation's Consolidated Financial Statements include Shelton's
financial data as if Shelton had been combined at the beginning of the earliest
period presented.
Shoreline Bank and Trust Company - On December 16, 1994, Webster
acquired Shoreline, a $51.0 million asset commercial bank based in Madison,
Connecticut, with $47.0 million in BIF insured deposits. To effect the
acquisition, Shoreline was merged into Webster Bank and its Madison banking
office became a full service office of Webster Bank. In connection with the
merger, the Corporation issued 266,500 shares of its common stock for all of the
outstanding shares of Shoreline common stock. This acquisition was accounted for
as a pooling of interests. The Corporation's Consolidated Financial Statements
include Shoreline's financial data as if Shoreline had been combined at the
beginning of the earliest period presented.
Bristol Savings Bank - On March 3, 1994, Webster acquired Bristol,
a state chartered savings bank with $486 million in assets which became a
wholly-owned subsidiary of Webster. In connection with the conversion of Bristol
from a mutual to a stock charter concurrently with the
4
acquisition, Webster completed the sale of 1,150,000 shares of its common stock
in related subscription and public offerings. Webster invested in Bristol a
total of $31.0 million, including the net proceeds of approximately $21.9
million from subscription and public offerings plus existing funds from the
holding company. As a result of this investment, Bristol met all ratios required
by the FDIC for a "well-capitalized" savings bank. The Bristol acquisition was
accounted for as a purchase. Results of operations relating to Bristol are
included in the Corporation's Consolidated Financial Statements only for the
period subsequent to the effective date of the acquisition. Webster maintained
Bristol as a separate savings bank subsidiary until November 1, 1995, when First
Federal and Bristol were merged and renamed as Webster Bank.
FDIC Assisted Acquisitions
Webster Bank significantly expanded its retail banking operations
through assisted acquisitions of First Constitution Bank ("First Constitution")
in October 1992 and Suffield Bank ("Suffield") in September 1991 from the
Federal Deposit Insurance Corporation ("FDIC"). These acquisitions, which were
accounted for as purchases, involved financial assistance from the FDIC and
extended Webster Bank's retail banking operations into new market areas by
adding 21 branch offices, $1.5 billion in retail deposits and approximately
150,000 customer accounts. See Note 2 to the Consolidated Financial Statements
for additional information concerning the terms of these assisted acquisitions.
5
Lending Activities
General. Webster originates residential, consumer, and business
loans. Total loans receivable was $1.9 billion at December 31, 1995 and 1994.
All references to loan and allowance for loan loss balances and ratios in the
Lending Activities section exclude Segregated Assets, which are discussed
immediately after this section. At December 31, 1995, first mortgage loans
secured by one-to-four family properties comprised 77.2% of the Corporation's
loan portfolio, before net items.
Nonaccrual loans, which include most loans delinquent 90 days or
more, were $37.8 million at December 31, 1995, compared to $34.9 million at
December 31, 1994, out of a total loan portfolio, before net items, of over
$1.94 billion at December 31, 1995 and $1.93 billion at December 31, 1994. The
ratio of nonaccrual loans to total loans before net items was 1.9% and 1.8% at
December 31, 1995 and 1994, respectively. Nonaccrual assets, which includes
nonaccrual loans and real estate owned were $55.0 million and $61.5 million at
December 31, 1995 and 1994 respectively.
One-to-Four Family First Mortgage Loans. Webster originates both
fixed-rate and adjustable-rate mortgage loans. The Corporation originates
one-year, three-year and five-year adjustable-rate mortgage loans (ARMs) with
caps on the annual and lifetime interest rate adjustments, which currently are
generally 2% and 6%, respectively. At December 31, 1995, 63% of Webster's total
mortgage loans before net items were adjustable-rate loans. Interest rates on
adjustable loans originated as of December 31, 1995 were 2.75% above the
constant maturity one-year U.S. Treasury yield index. There are no prepayment
penalties on any of Webster's adjustable-rate loans. Webster has offered
adjustable-rate mortgage loans at initial interest rates discounted from the
fully indexed rate.
Although adjustable-rate mortgage loans allow Webster to increase
the sensitivity of its asset base to changes in interest rates, the extent of
this interest sensitivity is limited by the interest rate "caps" contained in
adjustable-rate loans. The terms of such loans may also increase the likelihood
of delinquencies in periods of high interest rates, particularly if such loans
are originated at discounted interest rates. Federal law permits the FRB to
promulgate regulations limiting the maximum interest rate that may apply during
the term of adjustable rate mortgage loans. Under the current regulations, no
specific interest rate limit is set, but lenders are required to impose interest
rate caps on all adjustable-rate mortgage loans and all dwelling-secured
consumer loans, including home equity loans, which provide for interest rate
adjustments.
Webster originates 15 to 30 year fixed-rate mortgage loans on
one-to-four family units. Webster has exchanged fixed-rate, long-term mortgage
loans for mortgage-backed
6
securities guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). At December 31, 1995, $555.5 million or 37% of
Webster's total residential mortgage loans before net items had fixed rates.
Webster sells mortgage loans in the secondary market when such
sales are consistent with its asset/liability management objectives. At December
31, 1995, Webster had $2.9 million of adjustable and fixed-rate mortgage loans
held for sale.
Webster also makes residential construction loans to individuals to
construct one-to-four family residential units. At December 31, 1995, such
construction loans totaled $54.4 million or 2.8% of Webster's total loans
receivable before net items.
All of the conventional mortgage loans on one-to-four family units
originated by Webster include a "due-on-sale" clause, which is a provision
giving Webster the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes of the
real property which is subject to the mortgage and the loan is not repaid.
Webster actively enforces "due-on-sale" clauses.
Commercial and Commercial Real Estate Mortgage Loans. Webster had
$197.9 million, or 10.2% of its total loans receivable before net items, in
commercial and commercial real estate loans outstanding as of December 31, 1995,
excluding Segregated Assets. Commercial real estate loans are secured by
multi-family residences, office buildings, retail outlets, warehouses, land or
other commercial real properties. Commercial loans are secured by assets other
than real estate, such as inventory or trade receivables.
Loans secured by commercial and multi-family residential
properties can involve greater risks than single-family residential mortgage
lending. Such loans generally are substantially larger than single-family
residential mortgage loans, and repayment of the loan generally depends on cash
flow generated by the property. Because the payment experience on loans secured
by such property is often dependent on successful operation or management of the
security property, repayment of the loan may be subject to a greater extent to
adverse conditions in the real estate market or the economy as compared to
one-to-four family residential mortgage loans. The commercial real estate
business is cyclical and subject to downturns, overbuilding and local economic
conditions.
At December 31, 1995, $14.9 million of Webster's $41.8 million
allowance for loan losses was allocated to commercial and commercial real estate
loans. See "Management's Discussion and Analysis and Results of Operations"
contained in the annual report to shareholders and incorporated herein by
reference. The annual report is filed as an exhibit hereto. Also see "Business
- -- Lending Activities -- Nonaccrual Loans and Delinquencies" for more
information about Webster's asset quality, allowance for loan losses and
provisions for loan losses.
Consumer Loans. At December 31, 1995, consumer loans were $172.3
million or 8.9% of Webster's total loans receivable before net items. Consumer
loans consist primarily of home equity credit lines, home improvement loans,
passbook loans and other consumer loans. The allowance for losses on consumer
loans was $7.9 million at December 31, 1995.
7
The following table sets forth the composition of Webster's loan portfolio,
excluding Segregated Assets, in dollar amounts and in percentages at the dates
shown, and a reconciliation of loans receivable, net.
At December 31,
1995 1994 1993 1992 1991
------------------- ---------------- ----------------- -------------- -------------
Amount % Amount % Amount % Amount % Amount %
(Dollars in thousands)
Residential mortgage loans:
1-4 family units...................$ 1,498,024 79.2% $1,465,419 78.4% $1,263,618 86.1% $1,321,825 86.9% $501,114 71.4%
Multi-family units................. 13,198 0.7 5,931 0.3 -- -- 5,320 0.3 5,073 0.7
Construction....................... 54,410 2.9 53,779 2.9 28,930 2.0 15,033 1.0 9,642 1.4
Land............................... 2,652 0.1 26,712 1.4 29,464 2.0 12,045 0.8 3,390 0.5
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Total residential mortgage loans. 1,568,284 82.9 1,551,841 83.0 1,322,012 90.1 1,354,223 89.0 519,219 74.0
Residential loans held for sale..... 2,872 0.2 24,735 1.3 11,505 0.8 7,240 0.5 -- --
Commercial mortgage loans:
Income producing properties........ -- -- -- -- 135 0.0 348 0.0 14,645 2.1
Land............................... 19,867 1.1 5,60 0.3 -- -- -- -- -- --
Construction....................... 8,887 0.5 4,237 0.2 2,083 0.1 5,735 0.4 5,752 0.8
Other commercial real estate....... 115,976 6.1 130,248 7.0 40,306 2.7 41,636 2.7 27,227 3.9
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Total commercial mortgage loans.. 144,730 7.7 140,092 7.5 42,524 2.8 47,719 3.1 47,624 6.8
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Total mortgage loans................. 1,715,886 90.8 1,716,668 91.8 1,376,041 93.7 1,409,182 92.6 566,843 80.8
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Less mortgage loans net items:
Residential loans in process....... 20,642 1.1 25,523 1.4 16,994 1.2 3,295 0.2 2,736 0.4
Commercial loans in proces......... -- -- 1,174 0.1 487 0.0 508 0.0 436 0.1
Allowance for loan losses.......... 30,799 1.6 36,252 1.9 38,477 2.6 44,384 2.9 7,696 1.1
Unearned (premiums) discounts and
deferred loan fees, net.......... (12,207) (0.5) (13,906) (0.8) (10,318) (0.8) 2,091 0.1 1,684 0.2
------------ ----- ---------- ---- ----------- ----- ---------- ---- --------- -----
Net mortgage loans............... 1,676,652 88.6 1,667,625 89.2 1,330,401 90.7 1,358,904 89.4 554,291 79.0
------------ ----- ---------- ----- ----------- ----- ---------- ----- --------- -----
Consumer loans:
Home improvement................... 6,980 0.4 4,718 0.3 4,413 0.3 6,274 0.4 18,355 2.6
Home equity credit lines........... 122,737 6.5 128,828 6.9 103,523 7.1 100,821 6.6 104,264 14.9
Education.......................... 135 0.0 483 0.0 684 0.0 451 0.0 758 0.1
Personal........................... 31,653 1.7 23,231 1.3 13,928 0.9 14,553 1.0 4,572 0.7
Marine loans....................... 462 0.0 226 0.0 246 0.0 1,160 0.1 131 0.0
Automobiles........................ 2,195 0.1 2,399 0.1 2,584 0.2 2,604 0.2 3,633 0.5
Secured by deposits................ 8,121 0.4 7,171 0.4 7,207 0.5 8,277 0.5 5,416 0.8
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Total consumer loans............. 172,283 9.1 167,056 9.0 132,585 9.0 134,140 8.8 137,129 19.6
Less:
Allowance for loan losses......... 7,865 0.4 7,312 0.4 5,955 0.4 4,626 0.3 2,563 0.4
Deferred loan costs, (net)........ (1,255) (0.1) -- -- -- -- -- -- -- --
-------------- ------------------------------------------- ---------------- -------- -----
Net consumer loans............... 165,673 8.8 159,744 8.6 126,630 8.6 129,514 8.5 134,566 19.2
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Consumer loans held for sale, net.. -- -- -- -- -- -- 23,116 1.5 -- --
Commercial non-mortgage loans........ 53,194 2.8 45,055 2.4 11,640 0.8 11,404 0.7 13,417 1.9
Less:
Allowance for loan losses.......... 3,133 0.2 3,208 0.2 736 0.1 770 0.1 796 0.1
Unearned (premiums) discounts and
deferred loan fees, net.......... 430 0.0 -- -- -- -- -- -- -- --
------------ ----- ----------- ------------------ ------ ---------- ----- --------- -----
Net commercial non-mortgage loans. 49,631 2.6 41,847 2.2 10,904 0.7 10,634 0.6 12,621 1.8
------------ ----- ----------- ----- ----------- ----- ---------- ----- --------- -----
Loans receivable, net ............. $1,891,956 100.0% $1,869,216 100.0% $1,467,935 100.0% $1,522,168 100.0% $701,478 100.0%
=========== ===== =========== ===== =========== ===== ========== ====== ========= =====
8
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, 1995.
Contractual Maturity
----------------------------------------------------
One Year One to Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
(In thousands)
Contractual Maturity:
Construction loans:
Residential mortgage.................................. $ 582 $ - $ 53,828 $ 54,410
Commercial mortgage................................... 890 1,420 6,577 8,887
Commercial non-mortgage loans........................... 14,113 21,938 17,143 53,194
---------- ---------- --------- ----------
Total............................................... $ 15,585 $ 23,358 $ 77,548 $ 116,491
============ ========== ======== ==========
Interest-Rate Sensitivity:
Fixed rates............................................. $ 1,555 $ 6,829 $ 29,751 $ 38,135
Variable rates.......................................... 14,030 16,529 47,797 78,356
---------- ---------- ----------- ----------
Total............................................... $ 15,585 $ 23,358 $ 77,548 $ 116,491
=========== ========== ============ ==========
Loan Originations. Federally chartered savings institutions are
authorized to originate real estate mortgage loans throughout the United States.
However, almost all of the real estate mortgage loans originated by Webster are
secured by real estate located in Connecticut.
Loan originations come from a number of sources. Residential loan
originations are attributable primarily to present depositors and borrowers,
walk-in customers, referrals from real estate brokers, builders, loan
originators and third party correspondents. Webster seeks to attract consumer
loans by direct advertising and solicitation of its existing deposit and loan
customers.
Federal regulations provide that real estate loans may not exceed 100%
of the appraised value of the security property at the time of origination. With
respect to home loans originated or refinanced in excess of 90% of the appraised
value of the security property, that part of the unpaid balance that exceeds 80%
of the property's value must be insured or guaranteed by a qualified mortgage
insurance company. These regulations also require an institution's board of
directors specifically to approve all loans on the security of real estate which
are not home loans and which at the time of origination are in excess of 90% of
the appraised value of the security property.
Webster makes single-family conventional first mortgage loans with a
loan-to-value ratio of up to 95%. Webster requires private mortgage insurance
for 25% of the amount of the outstanding principal balance of any loan having a
loan-to-value ratio over 90%. If the loan-to-value ratio is between 80% and 90%,
Webster requires private mortgage insurance for 20% of the outstanding principal
balance of the loan.
Property securing real estate loans originated by Webster is usually
appraised by one of several professionally-qualified, state-licensed independent
appraisers who have been ratified by the Board of Directors of Webster. Webster
also employs staff appraisers, who also must be state licensed. For all first
mortgage real estate loans, Webster requires the borrower to obtain title, fire
and extended casualty insurance and, where appropriate, flood insurance and
business interruption coverage. Loans are approved by certain officers with
specified approval authority. Loans approved in excess of $500,000 are ratified
by the Board of Directors.
9
Purchase and Sale of Loans and Loan Servicing. Webster has been a
seller and purchaser of whole loans and participations in the secondary market.
During 1995 and 1994, Webster originated residential mortgages that were
transferred primarily to the Federal National Mortgage Association ("FNMA") for
conversion into mortgage-backed securities. Webster generally retains the right
to service the underlying loans for these securities. During 1994, Webster
securitized some of its owned residential mortgage loans into mortgage-backed
securities and these assets were reclassified on Webster's balance sheet
accordingly. Securitization limits credit risk and increases liquidity since
these securities can be easily sold in the secondary market.
Loan servicing on purchased loans is generally performed by the loan
seller, which retains a portion of the interest paid by the borrower in
consideration for the servicing of the loan. Certain direct costs of servicing
loans for others, such as attorneys' fees and court costs associated with
collecting delinquent loans, are borne pro-rata by the owners of the loans.
Other costs of servicing loans are part of the servicing institution's general
operating expenses and vary from period to period, depending primarily on rates
of delinquency and resulting collection efforts required of the institution
servicing the loans. Because servicing revenues generally are collected when
loan payments are received, such revenues also vary with the rates of
delinquency.
The following table sets forth information as to Webster's mortgage
loan servicing portfolio at the dates shown. The decrease of total loans
serviced for 1995 is primarily due to the sale of mortgage loan servicing rights
on both owned and non-owned loans while the 1994 increase is mostly due to the
Bristol and Shoreline acquisitions.
At December 31,
-------------------------------------------------------------------
1995 1994 1993
-------------------- ---------------------- ---------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
Loans owned and serviced................ $1,324,257 63.7% $ 1,509,219 61.5% $ 1,262,448 77.9%
Loans serviced for others............... 753,053 36.3 944,547 38.5 357,687 22.1
---------- ------ ------------- ------ ------------- ------
Total loans serviced by Webster..... $2,077,310 100.0% $2,453,766 100.0% $ 1,620,135 100.0%
========== ====== ========== ======= ============= ======
Webster, from time to time, has purchased whole loans and loan
participations. The loans and loan participations purchased are secured by
property located in Connecticut and in other areas of the United States. There
can be significant risks associated with the purchase of loans secured by
properties located outside a savings institution's local lending territory. The
purchaser may be unfamiliar with the local economy in the area where the
security properties are located and is generally dependent on the loan seller to
service the loan and deal with delinquencies and foreclosures. Webster seeks to
reduce such risks by underwriting purchased loans using at least the same
conservative underwriting policies as used for locally originated loans; using
underwriting standards which meet the requirements of FNMA and FHLMC; and
purchasing only loans secured by one-to-four family owner occupied residences.
The Corporation may also purchase insurance to cover a portion of losses on
purchased loans.
10
The table below shows mortgage loan origination, purchase, sale and repayment
activities of Webster for the periods indicated.
At December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
First mortgage loan originations and purchases:
Permanent:
Mortgage loans originated..................................... $ 271,997 $ 665,108 $ 309,286
Construction:
1-4 family units.............................................. 50,445 44,491 24,805
----------- ------------ ------------
Total permanent and construction loans originated 322,442 709,599 334,091
Loans and participations purchased.............................. 2,123 37,158 3,092
Loans acquired in the Bristol acquisition. . . . . . ........... -- 255,562 --
----------- ------------ ------------
Total loans originated and purchased........................ 324,565 1,002,319 337,183
----------- ------------ -----------
First mortgage loan sales and principal reductions:
Loans securitized and sold...................................... 109,787 495,135 92,123
Loan principal reductions....................................... 204,314 119,507 260,712
Reclassified to REO............................................. 11,246 47,050 17,489
----------- ------------ ------------
Total loans sold and principal reductions................... 325,347 661,692 370,324
----------- ------------ ------------
(Decrease) Increase in mortgage loans
receivable before net items................................... $ (782) $ 340,627 $ (33,141)
============ ========== ============
Fee Income from Lending Activities. Webster realizes loan origination,
commitment and other fee income from its lending activities, including
non-refundable application fees and appraisal fees, document preparation fees,
tax service fees and other miscellaneous fees which are dependent upon the type
of loan originated. Webster also receives late payment fees, loan modification
fees and servicing fees from existing loans. Income realized from these
activities can vary significantly with the volume and type of loans in the
portfolio and in response to competitive factors. Webster also realizes
prepayment penalties from early repayment of its fixed-rate loans originated
prior to 1983. Total prepayment penalties have declined significantly since
1983. Webster currently does not include a prepayment penalty clause in any of
its residential mortgage loans.
Usury Limitations. Federal legislation first enacted in 1980 has
preempted all state usury laws concerning residential first mortgage loans
unless the state legislature acted to override the preemption by April 1, 1983.
The Connecticut Legislature did not act to override the federal preemption.
Connecticut law imposes no ceiling on interest rates on the types of loans
currently originated by the Bank.
11
Nonaccrual Assets and Delinquencies. When an insured institution
classifies problem assets as either "substandard" or "doubtful," it is required
to establish general allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies problem assets as "loss,"
it is required either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge-off such amount. An
institution's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS which can
order the establishment of additional valuation allowances. See "Classification
of Assets" below.
The following table sets forth certain information regarding Webster's
loans (excluding Segregated Assets) accounted for on a nonaccrual basis,
accruing loans which are greater than 90 days past due and real estate acquired
through foreclosure at the dates indicated.
At December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Loans accounted for on a nonaccrual basis:
Residential real estate......................... $ 20,560 $18,390 $27,995 $ 39,633 $ 8,873
Commercial . . . . . . . . ..................... 15,296 15,268 4,132 1,846 4,934
Consumer. . . . . . . . . . . . ................ 1,987 1,237 1,137 4,311 523
Real estate acquired through foreclosure and
in-substance foreclosures:
Residential and consumer...................... 6,368 9,296 18,753 11,674 2,887
Commercial.................................... 10,808 17,292 6,711 7,744 15,063
---------- --------- --------- ---------- ----------
Total......................................... $ 55,019 $ 61,483 $ 58,728 $ 65,208 $32,280
========== ========= ========= ========== =======
Interest on nonaccrual loans that would have been recorded as
additional income for the years ended December 31, 1995, 1994 and 1993 had the
loans been current in accordance with their original terms approximated
$2,984,000, $2,784,000 and $3,132,000, respectively.
See Note 1(e) to the Consolidated Financial Statements contained in the
annual report to shareholders and incorporated herein by reference for a
description of Webster's nonaccrual loan policy.
The following table sets forth information as to delinquent loans,
excluding Segregated Assets, in Webster's loans receivable portfolio before net
items.
At December 31,
--------------------------------------------------------------
1995 1994
---- ----
Percentage Percentage
Principal of Loans Principal of Loans
Balances Receivable Balances Receivable
-------- ---------- -------- ----------
(Dollars in thousands)
Past due 30-89 days and still accruing:
Residential real estate.................... $ 28,396 1.46% $ 26,161 1.36%
Commercial................................. 11,099 0.57 9,933 0.51
Consumer................................... 2,640 0.14 2,069 0.11
-------- ---- ---------- -----
Total.................................. $ 42,135 2.17% $ 38,163 1.98%
========== ====== ========== =====
12
Classification of Assets. Under the OTS' problem assets classification
system, a savings institution's problem assets are classified as "substandard,"
"doubtful" or "loss" (collectively "classified assets"), depending on the
presence of certain characteristics. An asset is considered "substandard" if
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the institution will sustain
"some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions and
values, "highly questionable and improbable." Assets classified "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted. In
addition, assets that do not currently warrant classification in one of the
foregoing categories but which are deserving of management's close attention are
designated as "special mention" assets.
At December 31, 1995, the Bank's classified assets totaled $82.6
million, consisting of $75.8 million in loans classified as "substandard," $6.8
million in loans classified as "doubtful" and $0 classified as "loss". At
December 31, 1994, the Bank's classified loans totaled $106.4 million,
consisting of $97.8 million in loans classified as "substandard," $8.3 million
in loans classified as "doubtful" and $300,000 classified as "loss." In
addition, at December 31, 1995 and 1994, the Bank had $29.8 million and $45.9
million, respectively, of special mention loans.
Allowance for Loan Losses. Webster's allowance for loan losses at
December 31, 1995 totalled $41.8 million. See "Management's Discussion and
Analysis -- Results of Operations Asset Quality and Comparison of Years ended
December 31, 1995 and 1994," contained in the annual report to shareholders and
incorporated herein by reference. In assessing the specific risks inherent in
the portfolio, management takes into consideration the risk of loss on Webster's
nonaccrual loans, classified loans and watch list loans including an analysis of
the collateral for the loans. Other factors considered are Webster's loss
experience, loan concentrations, local economic conditions and other factors.
13
The following is a summary of activity in the allowance for loan losses
for the periods indicated:
Years Ended December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of period........................... $ 46,772 $45,168 $49,780 $ 11,055 $ 7,952
Charge-offs:
Residential real estate. .............................. ( 6,952) (12,761) (8,208) (1,027) (429)
Consumer. . . . ....................................... (418) (760) (1,236) (706) (239)
Commercial. . . . . ................................... (3,490) (3,578) (2,223) (1,424) (2,864)
--------- --------- --------- ---------- --------
(10,860) (17,099) (11,667) (3,157) (3,532)
Recoveries:
Residential real estate................................ 657 388 205 10 --
Consumer............................................... 943 1,701 749 558 3
Commercial............................................. 1,185 1,015 114 9 3
--------- --------- --------- ---------- --------
2,785 3,104 1,068 577 6
Net charge-offs...................................... (8,075) (13,995) (10,599) (2,580) (3,526)
Additions to allowance for acquired loans................ -- 12,819 -- 35,731 2,285
Transfer from allowance for losses
for loans held for sale................................ -- -- 2,390 -- --
Provisions charged to operations........................ 3,100 2,780 3,597 5,574 4,344
--------- --------- --------- ---------- --------
Balance at end of period................................. $ 41,797 $ 46,772 $45,168 $ 49,780 $11,055
========= ========= ======= ========== ========
Ratio of net charge-offs to average loans
outstanding............................................ 0.4% 0.8% 0.7% 0.3% 0.5%
14
The following table presents an allocation of Webster's allowance for
loan losses at the dates indicated and the related percentage of loans in each
category to Webster's gross loan portfolio.
December 31,
1995 1994 1993 1992 1991
--------------------- ------------------ ------------------- ------------------ ---------------
Amount % Amount % Amount % Amount % Amount %
------ ------- ------ ------- ------ ------- ------ ------- ------ ----
(Dollars in thousands)
Balance at End of Period
Applicable to:
Residential mortgage loans.... $19,013 80.93% $25,399 81.74% $35,473 87.71% $39,888 86.29% $ 3,917 72.37%
Commercial mortgage loans..... 11,786 7.46 10,853 7.26 3,004 2.80 4,496 3.02 3,779 6.64
Commercial non-mortgage loans. 3,133 8.87 3,208 2.34 736 .77 770 .72 796 1.87
Consumer loans................ 7,865 2.74 7,312 8.66 5,955 8.72 4,626 9.97 2,563 19.12
--------- ------ --------- ------ --------- ----- --------- ------ --------- ------
Total..................... $41,797 100.00% $46,772 100.00% $45,168 100.0% $49,780 100.0% $ 11,055 100.0%
======== ====== ========== ====== ========= ===== ========= ===== ========= =====
15
Segregated Assets
Segregated Assets at December 31, 1995 and 1994 consist of the
following assets purchased from the FDIC in the First Constitution Acquisition
which are subject to a loss-sharing arrangement with the FDIC:
At December 31,
1995 1994
---- ----
Amount % Amount %
------ - ------ -
(Dollars in thousands)
Commercial real estate loans........................... $ 79,995 74.0% $ 98,813 69.8%
Commercial non-mortgage loans.......................... 10,439 9.7 15,377 10.9
Multi-family mortgage loans............................ 16,341 15.1 18,124 12.8
Other real estate owned................................ 1,299 1.2 9,202 6.5
----------- ----- ----------- ------
108,074 100.0% 141,516 100.0%
===== ======= =====
Less allowance for segregated assets................... 3,235 4,420
----------- -----------
Segregated Assets, net................................. $ 104,839 $ 137,096
=========== ===========
Under the Purchase and Assumption Agreement with the FDIC, during the
first five years after October 2, 1992 (the "Acquisition Date") the FDIC is
required to reimburse the Bank quarterly for 80% of all net charge-offs (i.e.,
the excess of charge-offs over recoveries) and certain permitted expenses
related to the commercial non-mortgage loans, commercial real estate loans and
multi-family loans acquired by the Bank.
During the sixth and seventh years following the Acquisition Date, the
Bank is required to pay quarterly to the FDIC an amount equal to 80% of the
recoveries during such years on Segregated Assets that 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
and 100% thereafter.
Upon termination of the seven-year period after the Acquisition Date,
if the sum of net charge-offs on Segregated Assets during the first five years
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. As of December 31, 1995,
the Bank has received $38.0 million in reimbursements for net charge-offs and
permitted expenses from the FDIC. At December 31, 1995, the Bank had a $3.2
million allowance for losses to cover its share of losses on the Segregated
Assets.
A detail of changes in the allowance for the Bank's share of losses for
Segregated Assets follows:
Years Ended December 31,
------------------------
1995 1994
---- ----
(In thousands)
Balance at beginning of period ........... $ 4,420 $ 5,042
Provisions................................ -- 375
Charge-offs............................... (1,772) (1,505)
Recoveries................................ 587 508
-------- ---------
Balance at end of period.............. $ 3,235 $ 4,420
======= =======
16
The following table sets forth information regarding Segregated Assets
delinquencies and nonaccruals at December 31, 1995 and 1994:
At December 31,
---------------------------
1995 1994
---- ----
(In thousands)
Past due 30-89 days and still accruing:
Commercial real estate loans............. $ 1,042 $ 1,251
Commercial non-mortgage loans............ 79 271
Multi-family loans....................... 386 1,021
--------- ---------
1,507 2,543
--------- ---------
Loans accounted for on a nonaccrual basis:
Commercial real estate loans............. 2,604 13,795
Commercial non-mortgage loans............ 1,203 3,678
Multi-family real estate loans........... 1,432 576
--------- ---------
5,239 18,049
--------- ---------
Total................................. $ 6,746 $ 20,592
======== =========
Interest on nonaccrual Segregated Assets that would have been recorded
as additional income had the loans been current in accordance with their
original terms approximated $1,207,000, $2,047,000 and $2,929,000 for the years
ended December 31, 1995, 1994 and 1993 respectively.
The following table sets forth the contractual maturity and interest
rate sensitivity of commercial loans contained in the Segregated Assets
portfolio at December 31, 1995.
Contractual Maturity
-----------------------------------------------------
One Year One to Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
(In thousands)
Contractual Maturity:
Commercial loans........................................ $ 1,341 $ 2,258 $ 6,840 $ 10,439
---------- ---------- ---------- ----------
Total............................................... $ 1,341 $ 2,258 $ 6,840 $ 10,439
========== ========== ========== ==========
Interest Rate Sensitivity:
Predetermined Rates..................................... $ 79 $ 288 $ 1,625 $ 1,992
Variable Rates.......................................... 1,262 1,970 5,215 8,447
---------- ---------- ---------- ----------
Total............................................... $ 1,341 $ 2,258 $ 6,840 $ 10,439
========== ========== ========== ==========
17
Investment Activities
The Bank has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of federal agencies,
certificates of deposit of federally insured banks and savings institutions,
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper, corporate debt
securities, and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. The Bank also is required to maintain liquid assets at minimum levels
which vary from time to time. See "Regulation -- Savings Bank Regulation --
Liquidity."
Webster, as a Delaware corporation, has authority to invest in any type
of investment permitted under Delaware law. As a unitary holding company,
however, its investment activities are subject to certain regulatory
restrictions described under "Holding Company Regulation."
Webster, directly or through the Bank, maintains an investment
portfolio that provides not only a source of income but also, due to staggered
maturity dates, a source of liquidity to meet lending demands and fluctuations
in deposit flows. The securities constituting Webster's investments in corporate
bonds and notes generally are publicly traded and are considered investment
grade quality by a nationally recognized rating firm. The commercial paper and
collateralized mortgage obligations ("CMOs") in Webster's investment portfolio
are all rated in at least the top two rating categories by at least one of the
major rating agencies at time of purchase. One of the inherent risks of
investing in mortgage-backed securities, including CMOs, is the ability of such
instruments to incur prepayments of principal prior to maturity at prepayment
rates different than those estimated at the time of purchase. This generally
occurs because of changes in market interest rates. The market values of
fixed-rate mortgage-backed securities are sensitive to fluctuations in market
interest rates, declining in value as interest rates rise. If interest rates
decrease, as had been the case during 1995, the market value of loans and
mortgage-backed securities generally will increase causing the level of
prepayments to increase. Except for $8.4 million invested by Webster at the
holding company level at December 31, 1995 in the common stock of certain
entities, Webster's investments, directly and through the Bank, were investments
of the type permitted federally chartered savings institutions. Webster's
investment portfolio is managed by its Treasurer in accordance with a written
investment policy approved by the Board of Directors. A report on investment
activities is presented to the Board of Directors monthly.
18
The following table sets forth Webster's interest-bearing deposits and
the composition of its securities portfolio at the dates indicated.
At December 31,
----------------------------------------------------------
1995 1994 1993
-------------- ------------------ ----------------
% of % of % of
Book Port- Book Port- Book Port-
Value folio Value folio Value folio
----- ----- ----- ----- ----- -----
(Dollars in thousands)
Interest-bearing Deposit....................... $26,017 100.0% $54,318 100.0% $21,414 100.0%
======= ===== ======= ===== ======= =====
Trading Securities:
Mortgage Backed Securities:
GNMA..................................... 14,766 1.4% 13,706 1.7% 31,769 4.7%
Collateralized Mortgage Obligations...... 29,838 2.9 9,311 1.1 17,906 2.6
Equity Securities............................ -- -- 78 0.0 263 0.0
------ ---- ------ ---- --------- ---
44,604 4.3 23,095 2.8 49,938 7.3
------ ---- ------ ---- --------- ---
Available for Sale Portfolio:
U.S. Treasury Notes:
Matures within 1 year...................... 1,000 0.1 6,416 0.8 2,163 0.3
Matures over 1 within 5 years.............. -- -- 7,530 0.9 -- --
U.S. Government Agency:
Matures within 1 year...................... -- -- 100 0.0 5,002 0.7
Matures over 1 within 5 years.............. 12,901 1.2 33,480 4.0 53,809 7.9
Corporate Bonds and Notes:
Matures over 1 within 5 years.............. 23,005 2.2 -- -- -- --
Matures over 5 through 10 years........... 2,737 0.2 2,985 0.4 5 0.0
Matures over 10 years...................... -- -- -- -- 3,222 0.5
Mutual Funds................................. 34,077 3.2 20,146 2.4 32,459 4.8
Equity Securities:
Stock in Federal Home Loan Bank of Boston 30,039 2.9 26,269 3.2 15,897 2.3
Other Equity Securities.................... 9,195 0.9 13,619 1.6 7,799 1.1
Mortgage Backed Securities:
FNMA....................................... 139,860 13.4 11,316 1.4 -- --
FHLMC...................................... 62,572 6.0 -- -- -- --
GNMA....................................... 20,443 2.0 -- -- -- --
Collateralized Mortgage Obligations.......... 155,321 14.9 57,121 6.9 63,369 9.3
Unamortized Hedge............................ 816 0.1 -- -- -- --
Unrealized Securities Gains (Losses), Net...... 6,122 0.6 (3,768) (0.5) 207 0.0
-------- ----- ------- ----- ------- -----
498,000 47.7 175,214 21.1 183,932 26.9
-------- ----- ------- ----- ------- -----
Held to Maturity Portfolio:
U.S. Treasury notes:
Matures within 1 year...................... 1,577 0.2 3,318 0.4 6,314 0.9
Matures over 1 within 5 years.............. 8,262 0.8 19,567 2.4 25,278 3.7
U.S. Government Agency:
Matures within 1 year...................... 1,003 0.1 -- -- -- --
Matures over 1 within 5 years. . . . ..... 39,868 3.8 61,822 7.5 2,702 0.4
Matures over 5 through 10 years. . . ...... 999 0.1 1,000 0.1 699 0.1
Corporate Bonds and Notes:
Matures within 1 year. . . . .............. -- -- 702 0.1 1,110 0.2
Matures over 1 within 5 years. . . . . .... 2,555 0.2 2,564 0.3 3,379 0.5
Matures over 5 through 10 years............ 330 0.0 418 0.1 363 0.1
Other...................................... -- -- -- -- 3,739 0.5
Mortgage Backed Securities:
FHLMC........................................ 42,877 4.1 87,650 10.6 75,875 11.1
FNMA ........................................ 31,785 3.0 167,254 20.2 24,541 3.6
GNMA......................................... 1,622 0.2 1,919 0.2 2,496 0.4
Collateralized Mortgage Obligations.......... 370,762 35.5 283,861 34.2 301,403 44.2
Other Mortgage Backed Securities ............ 308 0.0 374 0.0 617 0.1
-------- ------ -------- ------ -------- -------
501,948 48.0 630,449 76.1 448,516 65.8
------- ------ ------- ------ ------- ------
Total.................................... 1,044,640 100.0% 828,758 100.0% 682,386 100.0%
========= ===== ======= ======= ======= =====
19
The average remaining life of the securities portfolio, exclusive of
equity securities with no maturity, is 14.1 and 15.1 years at December 31, 1995
and 1994, respectively. Although the stated final maturity of these obligations
are long-term, the weighted average life generally is much shorter due to
prepayments of principal.
The following table sets forth the contractual maturities of Webster's
securities and mortgage-backed securities at December 31, 1995 and the weighted
average yields of such securities.
Due Due
Due After One, But After Five, But Due
Within One Year Within Five Years Within 10 Years After 10 Years
------------------ ------------------ ------------------ -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Interest-Bearing Deposits..... $ 26,017 5.69% $ -- -- % $ -- --% $ -- -- %
Trading Portfolio:
Mortgaged-Backed Securities -- -- -- -- -- -- 44,604 6.80
Available For Sale Portfolio:
U.S. Government Agency..... -- -- 12,522 5.41 -- -- -- --
Mutual Funds. . . ......... -- -- -- -- -- -- 33,947 --
Equity Securities (a)...... -- -- 1,590 7.05 -- -- 10,340 --
Corporate Bonds and Notes 23,000 4.51 5 5.00 2,730 6.22 -- --
U.S. Treasury Notes........ 1,000 4.63 -- -- -- -- -- --
Mortgaged-Backed Securities -- -- 816 -- -- -- 382,099 6.93
Held to Maturity Portfolio:
U.S. Treasury Notes ...... 1,577 4.97 8,262 6.45 -- -- -- --
U.S. Government Agencies... 1,003 8.10 39,868 5.89 999 6.32
Corporate Bonds and Notes -- -- 2,555 6.60 330 6.96
FHL Bank Stock................ -- -- -- -- -- -- 30,039 6.70
Mortgage-Backed Securities -- -- 20,961 6.18 11,219 6.48 415,174 7.27
------ ------ -------- ---- ------ ---- --------- ----
Totals................... $ 52,597 5.18% $ 86,579 5.99% $ 15,278 6.43% $ 916,203 6.73%
======== ==== ======== ==== ======= ==== ========== ====
(a) Adjusted to a fully taxable equivalent basis.
20
Sources of Funds
General. Deposits, loan repayments, securities maturities as well as
earnings are the primary sources of Webster's funds for use in its lending and
investment activities. While scheduled loan repayments are a relatively stable
source of funds, deposit flows and loan prepayments are influenced by prevailing
interest rates, money market and local economic conditions. Webster also derives
funds from FHL Bank advances and other borrowings.
Webster attempts to control the flow of funds in its deposit accounts
according to its need for funds and the cost of alternative sources of funds.
Webster controls the flow of funds primarily by the pricing of deposits, which
is influenced to a large extent by competitive factors in its market area.
Deposit Activities. Webster has developed a variety of deposit programs
designed to attract both short-term and long-term deposits from the general
public. These deposit programs include passbook and statement savings accounts,
club accounts, regular and NOW checking accounts, money market accounts and
certificate accounts with short and long term maturities.
Webster gathers retail and commercial deposits through its 64 full
service banking offices. In 1995, Webster introduced Check Card, a debit card
that can be used at over 12 million merchant locations worldwide. Also
introduced was the Webster One account, a relationship banking account that
affords customers the opportunity to avoid fees, earn more on savings and
simplify their bookkeeping with one combined statement when they link all of
their balances with Webster. Webster relies primarily on competitive pricing
policies and advertising to attract and retain deposits and also emphasizes
customer service and convenience. The Bank's First Call telephone banking
service provides automated customer access to account information and Webster
representatives 24 hours a day, seven days a week. Additionally, customers may
transfer funds, inquire about checks and ATM transactions. Its customer services
include ATM's that utilize state-of-the art technology, membership in the
"Yankee-24" and Cirrus ATM networks and convenient business hours of operation,
including Saturday hours. Webster provides automatic loan payment features from
its accounts as well as direct deposit of Social Security and other payments.
Webster has not used brokers to obtain deposits, however, some residual brokered
deposits have been received through acquired banks.
Webster charges fees for certain deposit account services and early
withdrawal penalties on its certificate accounts. These fees offset the cost of
providing additional services or are intended to offset the adverse effects of
the withdrawal of funds during periods of rising interest rates.
21
The following table sets forth the deposit accounts of Webster in
dollar amounts and as percentages of total deposits at the dates indicated.
At December 31,
1995 1994 1993
------------------------------- --------------------------- -----------------------------
Weighted % of Weighted % of Weighted % of
average total average total average total
rate Amount deposits rate Amount deposits rate Amount deposits
---- ------ -------- ---- ------ -------- ---- ------ --------
(Dollars in thousands)
Balance by account type:
Demand deposits and NOW accounts. 1.18% $ 351,189 14.6 .98% $ 327,094 13.4% 1.01% $ 235,123 12.0%
Regular savings.................. 2.09 471,588 19.6 2.09 561,196 23.1 2.07 474,213 24.1
Money market accounts............ 4.03 87,371 3.6 4.89 125,987 5.2 3.18 95,475 4.9
Certificate accounts............. 5.59 1,490,054 62.2 4.62 1,417,668 58.3 4.11 1.160,824 59.0
------ ------------ ------ ------ ------------ ------- ------ ----------- -------
Total deposits................ 4.20% $ 2,400,202 100.0% 3.56% $ 2,431,945 100.0% 3.20% $ 1,965,635 100.0%
====== ============ ====== ====== ============ ======= ====== =========== =======
22
Maturity information regarding Webster's deposit accounts of $100,000
or more at December 31, 1995 is shown below.
Total
Deposits Over Over
of Three Months Six Months
$100,000 Three Months through through Over % of Total
or more or less Six Months One Year One Year Deposits
----------- ------------ ------------ ---------- -------- ---------
(Dollars in thousands)
$129,800 $33,848 $33,070 $29,964 $32,918 5.41%
Additional information concerning the deposits of Webster is included
in Note 8 of the Consolidated Financial Statements contained in the annual
report to shareholders and incorporated herein by reference.
Borrowings. The FHL Bank System functions in a reserve credit capacity
for savings institutions and certain other home financing institutions. Members
of the FHL Bank System are required to own capital stock in the FHL Bank.
Members are authorized to apply for advances on the security of such stock and
certain of their home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States) provided certain
creditworthiness standards have been met. See "Federal Home Loan Bank System."
Under its current credit policies, the FHL Bank limits advances based on a
member's assets, total borrowings and net worth.
Webster Bank uses FHL Bank advances as an alternative source of funds
to deposits in order to fund its lending activities when it determines that it
can profitably invest the borrowed funds over their term. At December 31, 1995,
Webster Bank had outstanding FHL Bank advances of $383.1 million and other
borrowings in the amount of $170.0 million, compared with FHL Bank advances of
$370.7 million and other borrowings of $43.7 million at December 31, 1994.
The following table sets forth certain information as to Webster Bank's
FHL Bank short-term borrowings at the dates and for the years indicated.
At December 31,
1995 1994 1993
---- ---- ----
(Dollars in thousands)
Average amount outstanding during the period:
FHL Bank short-term advances................. $ 268,563 $ 261,133 $150,224
Amount outstanding at end of period:
FHL Bank short-term advances................. 209,401 232,000 190,000
Highest month end balance of short-term
borrowings................................... 379,713 387,887 206,472
Weighted average interest rate of short-term
borrowings at end of period.................. 6.09% 5.92% 3.54%
Weighted average interest rate of short-term
borrowings during the period................. 6.13% 4.69% 3.58%
Reverse repurchase agreements were also transacted during 1995 as a source of
short term borrowings. Webster Bank uses reverse repurchase agreements when the
cost of such borrowings is favorable as compared to other funding sources. The
average balance for the year and the maximum amount of outstanding reverse
repurchase agreements at any month-end
23
during 1995 was $37.8 million and $126.9 million, respectively. The
weighted-average interest rate of the reverse repurchase agreements outstanding
at December 31, 1995 was 5.80%. No reverse repurchase agreements were transacted
during 1994.
Equity Offering. In December 1995, Webster completed the sale of
1,249,600 shares of common stock in an underwritten public offering raising
$32.1 million of additional capital, net of expenses, which was invested in the
Bank to facilitate its completion of the Shawmut Transaction and to have the
Bank remain well capitalized for regulatory purposes.
Bank Subsidiaries
The Bank is permitted to invest up to 2% of its assets in the stock,
paid-in surplus, and unsecured obligations of subsidiary service corporations
engaged in certain activities, and an additional 1% of its assets when the
additional funds are used primarily for community or inner-city development or
investment. In addition, since the Bank meets all applicable minimum regulatory
capital requirements, it is also permitted to invest up to 50% of its regulatory
capital in conforming loans to service corporations. At December 31, 1995, the
Bank's direct investment in its service corporation subsidiary totaled $198,583.
As of December 31, 1995, the activities of such service corporation subsidiary
consisted primarily of the selling of mutual funds and annuities through a third
party provider. The service corporation receives a portion of the sales
commissions generated and rental income for the office space leased to the
provider. The Bank also has an operating subsidiary, the primary function of
which is to dispose other real estate owned.
Employees
At December 31, 1995, Webster had 714 employees (including 152
part-time employees), none of whom was represented by a collective bargaining
group. Webster maintains a comprehensive employee benefit program providing,
among other benefits, group medical and dental insurance, life insurance,
disability insurance, a pension plan, an employee investment plan and an
employee stock ownership plan. Management considers Webster's relations with its
employees to be good.
Market Area And Competition
The Bank is headquartered in Waterbury, Connecticut (New Haven County)
and conducts business from its home office in downtown Waterbury and 64 branch
offices in Waterbury, Southbury, Ansonia, Bethany, Oxford, Cheshire, Prospect,
Branford, Derby, East Haven, Hamden, Madison, Milford, Naugatuck, New Haven,
North Haven, Orange and West Haven (New Haven County), Watertown (Litchfield
County), Fairfield, and Shelton (Fairfield County), and Suffield, East Windsor,
Bristol, Plainville, Terryville, Enfield, Windsor Locks, Berlin, East Hartford,
Farmington, Glastonbury, Hartford, Manchester, New Britain, Newington, Simsbury,
West Hartford, Wethersfield and Southington (Hartford County) and Cromwell and
Middletown (Middlesex County). Waterbury is approximately 30 miles southwest of
Hartford and is located on Route 8 midway between Torrington and the New Haven
and Bridgeport metropolitan areas. Most of the Bank's depositors live, and most
of the properties securing its mortgage loans are located, in the same area or
the adjoining counties. The Bank's market area has a diversified economy with
the workforce employed primarily in manufacturing, financial services, health
care, industrial and technological companies.
24
The Bank faces substantial competition for deposits and loans
throughout its market areas. The primary factors stressed by the Bank in
competing for deposits are interest rates, personalized services, the quality
and range of financial services, convenience of office locations, automated
services and office hours. Competition for deposits comes primarily from other
savings institutions, commercial banks, credit unions, money market funds and
other investment alternatives. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized service. Competition for origination of first mortgage loans
comes primarily from other savings institutions, mortgage banking firms,
mortgage brokers, commercial banks and insurance companies. The Bank faces
competition for deposits and loans throughout its market area not only from
local institutions but also from out-of-state financial institutions which have
opened loan production offices or which solicit deposits in its market area.
The OTS's statement of policy on branching by federally chartered
savings institutions, as recently amended, permits a federal association to
branch into any state or states of the United States and its territories, except
as otherwise prohibited under federal law. The OTS statement of policy expressly
preempts any contrary state law. Connecticut permits interstate stock
acquisitions between Connecticut depository institutions, (i.e., commercial
banks, savings banks, and savings and loan associations) and depository
institutions in other states that have adopted reciprocal legislation, subject
to the approval of the Connecticut Banking Commissioner. Connecticut also
permits out-of-state bank holding companies or savings institution companies in
states which have adopted reciprocal legislation to acquire the stock of
Connecticut holding companies or depository institutions. A bank holding company
or savings institution holding company in a state which has adopted reciprocal
legislation may charter and operate a de novo Connecticut depository institution
or holding company upon the approval of the Connecticut Banking Commissioner.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), amended the Bank Holding Company Act
of 1956 to permit a bank holding company to acquire a bank located in any state
notwithstanding otherwise prohibitive state law if the acquisition does not
result in the bank holding company controlling more than 10% of the deposits in
the United States or 30% of deposits in the state in which the bank to be
acquired is located (unless waived by the state). IBBEA permits individual
states to establish a state concentration limit of less than 30% and restrict
the acquisition of any in-state bank that has been in existence for less than
five years. Effective June 1, 1997, IBBEA will permit an adequately capitalized
bank to merge with a bank in another state and operate the target bank's offices
as branches, subject to similar national (10%) and state (30%) deposit
concentration limits and certain other conditions, if the state in which the
target bank is located does not enact legislation between September 29, 1994 and
June 1, 1997 to prohibit interstate merger transactions. IBBEA also will permit
a bank subsidiary of a bank holding company to act as agent for other depository
institutions owned by the same holding company for certain deposit and loan
functions effective as of September 29, 1995. The foregoing provisions are
expected to further increase competition within the Corporation's existing
market area.
Holding Company Regulation
General. Under the Home Owners' Loan Act, as amended (the
"HOLA"), the OTS has regulatory jurisdiction over savings and loan holding
companies. Webster, as a savings and loan holding company within the meaning of
the HOLA, is subject to regulation, supervision and examination by the OTS.
25
The HOLA prohibits a savings and loan holding company such as
Webster, directly or indirectly, or through one or more subsidiaries, from (I)
acquiring control of, or acquiring by merger or purchases of assets, another
savings institution or savings and loan holding company without the prior
written approval of the OTS; (ii) acquiring more than five percent of the issued
and outstanding shares of voting stock of another savings institution or savings
and loan holding company, subject to certain limited exceptions; or (iii)
acquiring and retaining control of a financial institution that does not have
SAIF or BIF insurance of accounts. The HOLA allows the OTS to approve
transactions that result in the creation of multiple savings and loan holding
companies controlling savings institutions located in more than one state in
both supervisory and non-supervisory transactions, subject to the requirement
that, in non-supervisory transactions, the law of the state in which the savings
institution to be acquired is located must specifically authorize the proposed
acquisition, by language to that effect and not merely by implication.
Restrictions relating to service as an officer or director of an unaffiliated
holding company or savings institution also are applicable to the directors and
officers of the Corporation and the Bank under the Depository Institutions
Management Interlocks Act, as amended. At the time of First Federal's conversion
to stock form, Webster agreed to maintain the capital of Webster Bank (as the
predecessor to the Bank), at a level consistent with regulatory requirements.
On November 1, 1995, Webster (which since March 3, 1994 had
been a multiple savings and loan holding company) became a unitary savings and
loan holding company upon the consummation of the merger of First Federal and
Bristol, renamed as Webster Bank. As a unitary savings and loan holding company,
Webster is generally not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
qualify as a qualified thrift lender. See "Bank Regulation -- Qualified Thrift
Lender Requirement."
If in the future Webster again becomes a multiple savings and
loan holding company, the Corporation and its subsidiaries would be prohibited
from engaging in any activities other than (I) furnishing or providing
management services for its savings institution subsidiaries; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or liquidating
assets owned or acquired from the institution; (iv) holding or managing
properties used or occupied by its savings institution subsidiaries; (v) acting
as trustee under deeds of trust; (vi) engaging in any other activity in which
multiple savings and loan holding companies were authorized by regulation to
engage as of March 5, 1987; and (vii) engaging in any activity that the Federal
Federal Reserve by regulation has determined to be permissible for bank holding
companies under section 4(C) of the Bank Holding Company Act of 1956, as amended
(the "BHCA"), unless the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies.
The activities in which multiple savings and loan holding
companies were authorized by regulation to engage in as of March 5, 1987
consisted of activities that generally are similar to those permitted for
service corporations of federally chartered savings institutions and include,
among other things, various types of lending activities, furnishing or
performing clerical, accounting and internal audit services primarily for
affiliates, certain real estate development and leasing activities and
underwriting credit life or credit health and accident insurance in connection
with extensions of credit by institutions or their affiliates.
The activities that the Federal Reserve by regulation has
permitted for bank holding companies under section 4(C) of the BHCA generally
consist of those activities that the Federal Reserve has found to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto, and include, among other things, various lending activities, certain
real and personal property leasing activities, certain securities brokerage
activities, acting as an investment or financial advisor subject to certain
conditions, and providing management consulting to depository institutions
subject to certain conditions. OTS regulations do not limit the extent to which
savings and loan holding companies and their non-savings institution
subsidiaries may engage in activities
26
permitted for bank holding companies pursuant to section 4(c)(8) of the BHCA,
although prior OTS approval is required to commence any such activity.
Federal Savings Bank Regulation
General. Webster Bank, as a federally chartered savings bank,
is subject to supervision and regulation by the OTS. OTS regulations generally
provide that savings institutions must be examined no less frequently than every
12 months, unless the savings institution (I) has assets of less than $250
million; (ii) is well capitalized, (iii) was found to be well-managed and its
composite condition was found to be outstanding (or good, if the savings
institution had total assets of not more than $100 million) during its last
examination; (iv) is not subject to a formal enforcement proceeding or an order
from the FDIC or another banking agency; and (v) has not undergone a change of
control during the previous 12-month period, and then it must be examined no
less frequently than every 18 months. The Bank also is subject to assessments by
the OTS to cover the costs of such examinations.
The OTS is authorized to promulgate regulations to ensure the
safe and sound operations of savings institutions and may impose various
requirements and restrictions on the activities of savings institutions. The
HOLA requires that all regulations and policies of the OTS for the safe and
sound operations of savings institutions are to be no less stringent than those
established by the Office of the Comptroller of Currency (the "OCC") for
national banks. The Bank also is subject to regulation, supervision and
examination by the FDIC, in its capacity as administrator of the BIF and the
SAIF, to ensure the safety and soundness of both the BIF and the SAIF. See
"Insurance of Deposits" below. The OTS and FDIC may revalue the assets of the
Bank based upon appraisals, and require establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value of
the assets. The OTS and FDIC also are authorized to promulgate regulations to
ensure the safe and sound operations of savings institutions and may impose
various requirements and restrictions on the activities of insured depository
institutions subject to their jurisdiction.
Capital Requirements. OTS regulations require that savings
institutions maintain (I) "core capital" in an amount of not less than 3% of
total assets, (ii) "tangible capital" in an amount not less than 1.5% of total
assets, and (iii) a level of risk-based capital equal to 8% of risk-weighted
assets. Capital standards established by the OTS for savings institutions must
generally be no less stringent than those applicable to national banks. Under
OTS regulations, the term "core capital" generally includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries less
unidentifiable intangible assets (other than certain amounts of supervisory
goodwill) and certain investments in subsidiaries plus 90% of the fair market
value of readily marketable purchased mortgage servicing rights ("PMSRs"),
subject to certain conditions. "Tangible capital" generally is defined as core
capital minus intangible assets and certain investments in subsidiaries, except
PMSRs.
In determining total risk-weighted assets for purposes of the
risk-based requirement, (I) each off-balance sheet asset must be converted to
its on-balance sheet credit equivalent amount by multiplying the face amount of
each such item by a credit conversion factor ranging from 0% to 100% (depending
upon the nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and each on-balance sheet asset must be multiplied by a
risk factor ranging from 0% to 200% (again depending upon the nature of the
asset) and (iii) the resulting amounts are added together and constitute total
risk-weighted assets. "Total capital," for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary capital (which,
as defined, includes the sum of, among other items, perpetual preferred stock
not counted as core capital, limited life preferred stock, subordinated debt,
and general loan and lease loss allowances up to
27
1.25% of risk-weighted assets) less certain deductions. The amount of
supplementary capital that may be counted towards satisfaction of the total
capital requirement may not exceed 100% of core capital, and OTS regulations
require the maintenance of a minimum ratio of core capital to total risk-
weighted assets of 4%.
OTS regulations were amended to include an interest-rate risk
component to the risk- based capital requirement. However, the OTS has delayed
implementation of this amended regulation indefinitely. Under the regulation, as
amended, an institution would be considered to have excess interest rate-risk
if, based upon a 200 basis point change in market interest rates, the market
value of an institution's capital changes by more than 2%. This new requirement
is not expected to have any material effect on the ability of the Bank to meet
the risk-based capital requirement.
Capital requirements higher than the generally applicable
minimum requirement may be established for a particular savings institution if
the OTS determines that the institution's capital was or may become inadequate
in view of its particular circumstances.
As of December 31, 1995, the Bank had a ratio of tier 1 or
core capital to adjusted total assets of 5.99%; a ratio of tier 1 or core
capital to total risk-weighted assets of 12.04%; and a ratio of total capital to
total risk-weighted assets of 13.30%. Webster's consolidated shareholders'
equity at December 31, 1995 was $210 million or 6.5% of total assets. Under the
OTS's prompt corrective action regulations, as shown above, at December 31,
1995, the Bank was classified as well capitalized based on its capital ratios.
Prompt Corrective Action. Pursuant to the FDIA, the federal
banking agencies established for each capital measure levels at which an insured
institution is deemed to be well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Federal banking agencies are required to take prompt
corrective action with respect to insured institutions that fall below minimum
capital standards. The degree of required regulatory intervention for
institutions that are not at least adequately capitalized is tied to an insured
institution's capital category, with increasing scrutiny and more stringent
restrictions, including the appointment of a receiver, being imposed as an
institution's capital declines. An insured institution that falls below the
minimum capital standards must submit a capital restoration plan and could be
subject to operating restrictions.
The prompt corrective action regulations are generally based
upon an institution's capital ratios. Under the prompt corrective action
regulation adopted by the OTS, a savings institution will be considered to be
(I) "well capitalized" if the institution has a total risk-based capital ratio
of 10% or greater, a Tier 1 or core capital to risk-weighted assets ratio of 6%
or greater, and a leverage ratio of 5% or greater (provided that the institution
is not subject to an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific capital level for
any capital measure); (ii) "adequately capitalized" if the institution has a
total risk- based capital ratio of 8% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 4% or greater, and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite 1 in its most
recent report of examination); (iii) "undercapitalized" if the institution has a
total risk-based capital ratio that is less than 8%, a Tier 1 or core capital to
risk-weighted assets ratio of less than 4%, or a leverage ratio that is less
than 4% (3% if the institution is rated composite 1 in its most recent report of
examination); (iv) "significantly undercapitalized" if the institution has a
total risk- based capital ratio that is less than 6%, a Tier 1 or core capital
to risk-weighted assets ratio that is less than 3%, or a leverage ratio that is
less than 3%; and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or equal to 2%. The
prompt corrective action regulations also permit the OTS to determine that a
savings institution should be classified in a lower category based on other
information, such as the institution's examination report, after written notice.
28
An institution that is not well capitalized is prohibited from
accepting deposits through a deposit broker. An adequately capitalized
institution , however, can apply for a waiver to accept brokered deposits.
Institutions that receive a waiver are subject to limits on the rates of
interest they may pay on brokered deposits. Undercapitalized institutions are
prohibited from offering rates of interest on insured deposits that
significantly exceed the prevailing rate in their normal market area or the area
in which the deposits would otherwise be accepted. Institutions classified as
undercapitalized are precluded from increasing their assets, acquiring other
institutions, establishing additional branches, or engaging in new lines of
business without an approved capital plan and an agency determination that such
actions are consistent with the plan. Institutions that are significantly
undercapitalized may be required to take one or more of the following actions:
(I) raise additional capital so that the institution will be adequately
capitalized; (ii) be acquired by, or combined with, another institution if
grounds exist for appointing a receiver; (iii) refrain from affiliate
transactions; (iv) limit the amount of interest paid on deposits to the
prevailing rates of interest in the region where the institution is located; (v)
further restrict asset growth; (vi) hold a new election for directors, dismiss
any director or senior executive officer who held office for more than 180 days
immediately before the institution became undercapitalized, or employ qualified
senior executive officers; (vii) stop accepting deposits from correspondent
depository institutions; and (viii) divest or liquidate any subsidiary that the
OTS determines is a significant risk to the institution.
Critically undercapitalized institutions are subject to
additional restrictions. No later than 90 days after a savings institution
becomes critically undercapitalized, the Director of the OTS is required to
appoint a conservator or receiver for the institution, unless the Director
determines, with the concurrence of the FDIC, that other action would better
achieve the purpose of prompt corrective action. The Director also must make
periodic redeterminations that the alternative action continues to be justified
no less frequently than every 90 days. The Director is required to appoint a
receiver if the institution remains critically undercapitalized nine months
later, unless the institution is in compliance with an approved capital plan and
the OTS and FDIC certify that the institution is viable.
Any company that controls an "undercapitalized" institution
must guarantee that the institution will comply with the plan and provide
appropriate assurances of performance in connection with the submission of a
capital restoration plan by the depository institution. The aggregate liability
of any such controlling company under such guaranty is limited to the lesser of
(I) 5% of the institution's assets at the time it became undercapitalized; or
(ii) the amount necessary to bring the institution into capital compliance at
the time the institution fails to comply with the terms of its capital plan.
Safety and Soundness Guidelines. The federal banking agencies
have prescribed safety and soundness guidelines relating to (I) internal
controls, information systems, and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset
growth; and (vi) compensation and benefit standards for officers, directors,
employees and principal shareholders. Such guidelines impose standards based
upon an institution's asset quality and earnings. The guidelines are intended to
set out standards that the agencies will use to identify and address problems at
institutions before capital becomes impaired. Institutions are required to
establish and maintain a system to identify problem assets and prevent
deterioration of those assets in a manner commensurate with its size and the
nature and scope of their operations. Furthermore, institutions must establish
and maintain a system to evaluate and monitor earnings and ensure that earnings
are sufficient to maintain adequate capital and reserves in a manner
commensurate with their size and the nature and scope of its operation.
Under the guidelines, an institution not meeting one or more
of the safety and soundness guidelines is required to file a compliance plan
with the appropriate federal banking agency. In the event that an institution,
such as the Bank, were to fail to submit an acceptable compliance plan or fail
in any material respect to implement an accepted compliance plan within the
29
time allowed by the agency, the institution would be required to correct the
deficiency and the appropriate federal agency would also be authorized to: (I)
restrict asset growth; (2) require the institution to increase its ratio of
tangible equity to assets; (3) restrict the rates of interest that the
institution may pay; or (4) take any other action that would better carry out
the purpose of the corrective action. The Bank was in compliance with all such
guidelines as of December 31, 1995.
Qualified Thrift Lender Requirement. The Bank is deemed to be
a "qualified thrift lender" ("QTL") as long as its "qualified thrift
investments" continue to equal or exceed 65% of its "portfolio assets" on a
monthly average basis in nine out of every 12 months. Qualified thrift
investments generally consist of (I) various housing related loans and
investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), (ii) certain obligations of the FDIC (including the Federal Savings
and Loan Insurance Corporation and the Resolution Trust Corporation), and (iii)
shares of stock issued by any FHLB, the Federal Home Loan Mortgage Corporation
or the Federal National Mortgage Corporation. In addition, the following assets
may be categorized as qualified thrift investments in an amount not to exceed
20% in the aggregate of portfolio assets: (I) 50% of the dollar amount of
residential mortgage loans originated and sold within 90 days of origination;
(ii) investments in securities of a service corporation that derives at least
80% of its income from residential housing finance; (iii) 200% of loans and
investments made to acquire, develop or construct starter homes or homes in
credit needy areas, subject to certain conditions; (iv) loans for the purchase
or construction of churches, schools, nursing homes and hospitals; and (v)
consumer loans (in an amount up to 20% of portfolio assets). For purposes of the
QTL test, the term "portfolio assets" means the savings institution's total
assets minus goodwill and other intangible assets, the value of property used by
the savings institution to conduct its business, and liquid assets held by the
savings institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings institution that
fails to meet the definition of a QTL must either convert to a bank charter,
other than a savings bank charter, or limit its future investments and
activities (including branching and payments of dividends) to those permitted
for both savings institutions and national banks. Further, within one year of
the loss of QTL status, a holding company of a savings institution that does not
convert to a bank charter must register as a bank holding company and will be
subject to all statutes applicable to bank holding companies. In order for the
Bank to exercise the powers granted to federally chartered savings institutions
and maintain full access to Federal Home Loan Bank advances, The Bank must
continue to meet the definition of a QTL. Webster Bank qualifies as a QTL under
the current test.
Insurance of Deposits. Deposit accounts at the