UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended September 30, 1998
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: 0-23513
WEBSTER PREFERRED CAPITAL CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1478208
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
145 BANK STREET, WATERBURY, CONNECTICUT 06702
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2286
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 [ ]
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is: 100 shares
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
INDEX
<TABLE>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Statements of Condition at September 30, 1998 and December 31, 1997 3
Statements of Income for the Three Months Ended September 30, 1998 and September
30, 1997 and for the Nine Months Ended September 30, 1998 and the Period from
March 17, 1997 (Date of Inception) to September 30, 1997 4
Statements of Cash Flows for the Nine Months Ended September 30, 1998 and the Period
from March 17, 1997 (Date of Inception) to September 30, 1997 5
Condensed Notes to Financial Statements 6
Management's Discussion and Analysis of Financial Statements 11
Quantitative and Qualitative Disclosures About Market Risk 17
Forward Looking Statement 17
PART II - OTHER INFORMATION 18
SIGNATURES 19
INDEX TO EXHIBITS 20
</TABLE>
2
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CONDITION (unaudited)
(Dollars in Thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 11,187 $ 26,167
Interest Bearing Deposits 525 -
Mortgage-Backed Securities Available for Sale (Note 2) 122,342 120,090
Residential Mortgage Loans, Net (Note 3) 796,777 635,634
Accrued Interest Receivable 5,466 4,525
Other Real Estate Owned - -
Prepaid Expenses and Other Assets (Note 7) 913 1,145
- --------------------------------------------------------------------------------------------------------------------
Total Assets $937,210 $ 787,561
=====================================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Accrued Dividends Payable $ 794 $ 491
Accrued Expenses and Other Liabilities 232 418
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,026 909
- --------------------------------------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Stock (Note 4)
Series A 7.375% Cumulative Redeemable Preferred Stock
liquidation preference $1,000 per share; par value $1.00 per share; 40,000
shares authorized, issued and outstanding 40,000 40,000
Shareholders' Equity (Note 5)
- --------------------------------------------------------------------------------------------------------------------
Series B 8.625% Cumulative Redeemable Preferred Stock
liquidation preference $10 per share; par value $1.00 per share; 1,000,000
shares authorized, issued and outstanding 1,000 1,000
Common Stock, par value $.01 per share:
Authorized - 1,000 shares
Issued and Outstanding - 100 shares 1 1
Paid-in Capital 888,799 745,957
Retained Earnings 4,636 -
Distributions in Excess of Accumulated Earnings - (370)
Accumulated Other Comprehensive Income 1,748 64
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 896,184 746,652
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $937,210 $ 787,561
=====================================================================================================================
</TABLE>
See accompanying condensed notes to financial statements
3
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME (unaudited)
(Dollars in Thousands, except share data)
<TABLE>
<CAPTION>
For the Period
From March 17,
Three Months Three Months Nine Months 1997 (Date of
Ended Ended Ended Inception) to
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 13,412 $11,790 $ 38,526 $ 25,403
Securities 2,746 - 7,821 -
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 16,158 11,790 46,347 25,403
- ------------------------------------------------------------------------------------------------------------------------------
Provision For Loan Losses 150 - 150 -
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income After Provision for Loan Losses 16,008 11,790 46,197 25,403
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Income:
Gain on Sale of Securities 261 - 261 -
- ------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 261 - 261 -
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest Expenses:
Advisory Fee Expense Paid to Parent 38 38 113 90
Dividends on Mandatorily Redeemable
Preferred Stock 738 - 2,213 -
Amortization of Start-Up Costs (Note 7) 137 7 396 12
Other Noninterest Expenses 20 6 83 8
- ------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 933 51 2,805 110
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 15,336 11,739 43,653 25,293
Income Taxes - - - -
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME 15,336 11,739 43,653 25,293
Preferred Stock Dividends 216 50 647 108
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholder $ 15,120 $ 11,689 $ 43,006 $ 25,185
=============================================================================================================================
Net Income Per Common Share:
Basic $ 151,200 $ 116,890 $430,060 $251,850
Diluted $ 151,200 $ 116,890 $430,060 $251,850
=============================================================================================================================
</TABLE>
See accompanying condensed notes to financial statements
4
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Period from
March 17, 1997
Nine Months Ended (Date of Inception) to
September 30, 1998 September 30, 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $43,653 $25,293
Adjustments to Reconcile Net Cash Provided (Used) by
Operating Activities:
Provision for Loan Losses 150 -
Accretion of Securities Discount (1,558) -
Amortization of Deferred Fees and Premiums 1,048 242
Gains on Sale of Securities (261) -
Increase in Accrued Interest Receivable (941) (3,935)
Increase in Accrued Liabilities 2,026 284
Increase (Decrease) in Prepaid Expenses and Other Assets 232 (101)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 44,349 21,783
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of Securities (51,682) -
Principal Collected on Securities 3,852 -
Proceeds from Sales of Securities 49,083 -
Increase in Interest Bearing Deposits (525) -
Purchase of Loans (306,332) (60,330)
Principal Repayments of Loans, Net 143,990 51,488
- ---------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (161,614) (8,842)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends Paid on Common and Preferred Stock (40,556) -
Contributions from Webster Bank 142,841 1
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 102,285 1
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (14,980) 12,942
Cash and Cash Equivalents at Beginning of Period 26,167 -
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $11,187 $12,942
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ - $ -
Interest Paid - -
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITY:
Transfer of Residential Mortgage Loans to Other
Real Estate Owned - -
Contribution of Mortgage Assets, net by Webster Bank in
exchange for 100 shares of common stock and 2,000 Shares
of 10% Cumulative Non-Convertible Preferred Stock - 617,022
</TABLE>
See accompanying condensed notes to financial statements
5
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements include all adjustments which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented. All adjustments were of a normal recurring nature.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results which may be expected for
the year as a whole. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Webster
Preferred Capital Corporation 1997 Annual Report to shareholders.
NOTE 2 - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
In November 1997 and March 1998, Webster Bank contributed $120.4 million and
$51.8 million, respectively, in cash to Webster Preferred Capital Corporation
(the "Company"), which was used to purchase Government National Mortgage
Association ("GNMA") mortgage-backed securities and Fannie Mae mortgage-backed
securities. The following table sets forth certain information regarding
mortgage-backed securities:
<TABLE>
<CAPTION>
(In Thousands) Mortgage-Backed Securities
- --------------------------------------------------------------------------------------
Recorded Unrealized Unrealized Estimated
September 30, 1998 Value Gains Losses Fair Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio $ 120,594 $ 1,748 $ - $ 122,342
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Recorded Unrealized Unrealized Estimated
December 31, 1997 Value Gains Losses Fair Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio $ 120,026 $ 64 $ - $ 120,090
- --------------------------------------------------------------------------------------
</TABLE>
All mortgage-backed securities have a contractual maturity of over 10 years. The
weighted average yield at September 30, 1998 is 6.73%. Although the stated final
maturity of these obligations are long-term, the weighted average life is much
shorter due to scheduled repayments and prepayments. Gains and losses on the
sales of securities are recorded using the specific identification method.
6
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 3 - RESIDENTIAL MORTGAGE LOANS, Net
A summary of the Company's residential mortgage loans, net, follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------
Carrying Carrying
(In Thousands) Amount Amount
- -------------------------------------------------------------------------------------
<S> <C> <C>
Fixed-Rate Loans:
Fixed Rate 15 yr. Loans $106,570 $59,631
Fixed Rate 20 yr. Loans 1,969 1,636
Fixed Rate 25 yr. Loans 1,301 813
Fixed Rate 30 yr. Loans 181,724 161,884
- -------------------------------------------------------------------------------------
Total Fixed-Rate Loans 291,564 223,964
- -------------------------------------------------------------------------------------
Variable-Rate Loans:
Variable Rate 15 yr. Loans 5,750 4,896
Variable Rate 20 yr. Loans 4,808 4,004
Variable Rate 25 yr. Loans 8,403 8,553
Variable Rate 30 yr. Loans 484,370 393,924
- -------------------------------------------------------------------------------------
Total Variable-Rate Loans 503,331 411,377
- -------------------------------------------------------------------------------------
Total Residential Mortgage Loans $794,895 $635,341
- -------------------------------------------------------------------------------------
Premiums and Deferred Fees on Loans, Net 3,414 1,831
Less Allowance for Loan Losses (1,532) (1,538)
- -------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $796,777 $635,634
- -------------------------------------------------------------------------------------
</TABLE>
In March 1997, Webster Bank contributed approximately $617.0 million of mortgage
assets, net as part of the formation of the Company. The $617.0 million
consisted of $215.8 million of fixed rate loans, $401.3 million of variable rate
loans, net of premiums, deferred fees on loans and an allowance for loan losses.
In April 1998 and May 1998, Webster Bank contributed $50 million and $41
million, respectively, to the Company, which was used to purchase additional
residential mortgage loans.
NOTE 4 - MANDATORILY REDEEMABLE PREFERRED STOCK
On December 24, 1997, the Company raised $40 million, less expenses, in a public
offering of 40,000 shares of its Series A 7.375% cumulative redeemable preferred
stock, liquidation preference $1,000 per share.
The Company is required to redeem all outstanding Series A Preferred Shares on
January 15, 2001 at a redemption price of $1,000 per share, plus accrued and
unpaid dividends.
7
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
The Series A Preferred Shares are not redeemable prior to January 15, 1999
except upon the occurrence of a tax event. A tax event can occur when a change
in existing laws and regulations results in a substantial risk that dividends
paid by the Company will no longer be fully deductible for federal income tax
purposes or that dividends paid by the Company to Webster Bank will no longer be
fully deductible for state income tax purposes. Upon the occurrence of a tax
event, and at any time on and after January 15, 1999 through January 14, 2001,
the Series A Preferred Shares may be redeemed at the option of the Company.
NOTE 5 - CAPITAL STRUCTURE
All of the Company's common stock is owned by Webster Bank, which has
contributed $880.2 million of capital.
On December 24, 1997, the Company raised $10 million, less expenses, in a public
offering of 1,000,000 shares of its Series B 8.625% cumulative redeemable
preferred stock, liquidation preference $10 per share.
Dividends on the Series B Stock are payable at the rate of 8.625% per annum (an
amount equal to $.8625 per annum per share), in all cases if, when and as
declared by the Board of Directors of the Company. Dividends on the preferred
shares are cumulative and, if declared, payable on January 15, April 15, July 15
and October 15 in each year.
See also Note 4 as to the Company's Series A Preferred Shares.
8
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 6 - COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting Standard
("SFAS") No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS
No. 130, establishes standards for the reporting and display of comprehensive
income and its components ( such as changes in net unrealized securities gains
and losses). Comprehensive income includes net income and any changes in equity
from non-owner sources that bypass the income statement. The purpose of
reporting comprehensive income is to report a measure of all changes in equity
of an enterprise that result from recognized transactions and other economic
events of the period other than transactions with owners in their capacity as
owners. Application of SFAS No. 130 will not impact amounts previously reported
for net income or affect the comparability of previously issued financial
statements.
The following table summarizes comprehensive income for the three months ended
September 30, 1998 and September 30, 1997 and the nine months ended September
30, 1998 and for the period from March 17, 1997 (date of inception) to September
30, 1997:
<TABLE>
<CAPTION>
(In Thousands) For the Period
from March 17,
Three Months Three Months Nine Months 1997 (Date of
Ended Ended Ended Inception) to
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $15,336 $11,739 $43,653 $25,293
Other Comprehensive Income:
Unrealized gains on securities 990 - 1,945 -
Less reclassification adjustment for
gains included in net income 261 - 261
- ---------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income 729 - 1,684
- ---------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $16,065 $11,739 $45,337 $25,293
===========================================================================================================================
</TABLE>
9
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 7 - ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the method in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports issued to shareholders. This statement
requires that public business enterprises report quantitative and qualitative
information about its reportable segments, including profit or loss, certain
specific revenue and expense items and segment assets. This SFAS does not apply
to the Company since the Company has only one reportable operating segment.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities ("SOP
98-5"). SOP 98-5 is applicable to all non-governmental entities and requires
that costs of start-up activities, including organization costs, be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Restatement of previously issued financial
statements is not permitted. Initial application of the SOP should be as of the
beginning of the fiscal year in which the SOP is first adopted and the
unamortized portion of previously capitalized start-up costs should be written
off and reported as the cumulative effect of a change in accounting principle.
The Company will write off on or about January 1, 1999, approximately $774,000
due to the adoption of SOP 98-5.
10
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
GENERAL
Webster Preferred Capital Corporation (the "Company") is a subsidiary of Webster
Bank and was incorporated in March 1997 to provide a cost-effective means of
raising funds, including capital, on a consolidated basis for Webster Bank. In
March 1997, Webster Bank contributed approximately $617.0 million of mortgage
assets, net as part of the formation of the Company. In November 1997, March
1998, April 1998, and May 1998, Webster Bank contributed approximately $120.4
million, $51.8 million, $50 million, and $41 million, respectively, in cash
which the Company used to purchase mortgage-backed securities and residential
mortgage loans. Total assets at September 30, 1998 were $937.2 million,
consisting primarily of residential mortgage loans and mortgage-backed
securities.
The Company has elected to be treated as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986 (the "Code"), and will generally not be
subject to federal income tax for as long as it maintains its qualifications as
a REIT, requiring among other things, that it currently distribute to
stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of noncash income). The following discussion of the
Company's financial condition and results of operations should be read in
conjunction with the Company's financial statements and other financial data
included elsewhere herein.
During the second quarter, the Board of Directors of the Company authorized
management of the Company to pursue a voluntary dissolution. In November 1998,
prior to any action having been taken in that regard, the Board of Directors of
the Company determined that a dissolution of the Company was not advisable.
In May 1998, legislation was passed in Connecticut that allows financial
institutions to establish Mortgage Passive Investment Company ("PIC")
subsidiaries beginning in 1999. The use of a PIC subsidiary by Connecticut-based
financial institutions such as Webster Bank, can significantly reduce or
eliminate state income tax expense of such financial institutions. Webster Bank
is evaluating the benefits, if any, of the establishment of a PIC. The ability
to form a PIC is an alternative to Webster Bank increasing or maintaining its
investment in the Company.
CHANGES IN FINANCIAL CONDITION
Total assets were $937.2 million at September 30, 1998, an increase of $149.6
million from $787.6 million at December 31, 1997. The increase in total assets
is primarily attributable to the purchase of additional mortgage-backed
securities of $51.7 million, offset by the sale of mortgage-backed securities of
$49 million, and to the purchase of additional residential mortgage loans of
$303.7 million, offset by loan repayments of $143.9 million. The increases were
funded by contributions from Webster Bank and net earnings. Shareholders' equity
was $896.1 million at September 30, 1998 and $746.7 million at December 31,
1997.
ASSET QUALITY
The Company maintains asset quality by acquiring residential real estate loans
that have been conservatively underwritten, aggressively managing nonaccrual
assets and maintaining adequate reserve coverage. At September 30, 1998,
residential real estate loans comprised the entire loan portfolio. The Company
also invests in highly rated mortgage-backed securities.
11
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
The aggregate amount of nonaccrual loans was $807,906 at September 30, 1998. The
following table details the Company's nonaccrual assets:
At September 30, At December 31,
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed-Rate Loans $ 71 $ 158
Residential Variable-Rate Loans 737 1,145
- --------------------------------------------------------------------------------
Total Nonaccrual Loans 808 1,303
Residential Foreclosed Properties - -
- --------------------------------------------------------------------------------
Total Nonaccrual Assets $ 808 $ 1,303
================================================================================
At September 30, 1998 the allowance for loan losses was $1.5 million, or 189% of
total nonaccrual assets. Management believes that the allowance for loan losses
is adequate to cover expected losses in the portfolio.
The net decrease in nonaccrual assets of $495,000 at September 30, 1998 as
compared to the December 31, 1997 balance is due to the reduction of nonaccrual
loans through a sale of such loans.
A detail of the change in the allowance for loan losses for the nine months
ended September 30, 1998 follows:
(In Thousands) At September 30, 1998
- ----------------------------------------------------------------------
Balance at Beginning of Period $ 1,538
Provisions Charged to Operations 150
Charge-offs (157)
Recoveries 1
- ----------------------------------------------------------------------
Balance at End of Period $ 1,532
======================================================================
ASSET/LIABILITY MANAGEMENT
The goal of the Company's asset/liability management policy is to manage
interest-rate risk so as to maximize net interest income over time in changing
interest-rate environments while maintaining acceptable levels of risk. The
Company must provide for sufficient liquidity for daily operations. The Company
prepares estimates of the level of prepayments and the effect of such
prepayments on the level of future earnings due to reinvestment of funds at
rates different than those that currently exist. The Company is unable to
predict future fluctuations in interest rates and as such the market values of
certain of the Company's financial assets are sensitive to fluctuations in
market interest rates. Changes in interest rates can affect the value of its
loans and other interest-earning assets. At September 30, 1998, 63.3% of the
Company's residential mortgage loans were variable rate loans. The Company
believes these residential mortgage loans are less likely to incur prepayments
of principal.
12
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for the Company are net cash flows from
operating activities, investing activities and financing activities. Net cash
flows from operating activities primarily include net income, net changes in
prepaid expenses and other assets, accrued interest receivable and adjustments
for noncash items such as amortization of deferred fees and premiums, and
mortgage-backed securities net amortization and accretion. Net cash flows from
investing activities primarily include the purchase and repayments of
residential real estate loans and mortgage backed securities that are classified
as available for sale. Net cash flows from financing activities primarily
include net changes in capital generally related to stock issuances,
contributions from Webster Bank and dividend payments.
While scheduled loan amortization, maturing securities, short term investments
and securities repayments are predictable sources of funds, loan and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition. One of the inherent risks of
investing in loans and mortgage-backed securities is the ability of such
instruments to incur prepayments of principal prior to maturity at prepayment
rates different than those estimated at the time of purchase. This generally
occurs because of changes in market interest rates. The market values of
fixed-rate loans and mortgage-backed securities are sensitive to fluctuations in
market interest rates, declining in value as interest rates rise. If interest
rates decrease, the market value of loans generally will tend to increase with
the level of prepayments also normally increasing.
Dividends on the Series A Stock are payable at the rate of 7.375% per annum (an
amount equal to $73.75 per annum per share), and the dividends on the Series B
Stock are payable at the rate of 8.625% per annum (an amount equal to $.8625 per
annum per share), in all cases if, when and as declared by the Board of
Directors of the Company. Dividends on the preferred shares are cumulative and,
if declared, payable on January 15, April 15, July 15 and October 15 in each
year.
13
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
GENERAL
The net income available to common shareholders reported by the Company for the
three and nine months period ended September 30, 1998 was $15.1 million and
$43.0 million, respectively, or $151,200 and $430,060, respectively, per common
share on a diluted basis, compared to net income available to common
shareholders for the three months ended September 30, 1997 and for the period
from March 17, 1997 (date of inception) to September 30, 1997 which amounted to
$11.7 million and $25.2 million, respectively, or $116,890 and $251,850,
respectively, per common share on a diluted basis.
NET INTEREST INCOME
Total interest income for the three and nine months ended September 30, 1998 was
$16.2 million, and $46.3 million respectively, compared to the income for the
three months ended September 30, 1997 and for the period from March 17, 1997
(date of inception) to September 30, 1997 which amounted to $11.8 million, and
$25.4 million, respectively. The following table shows the major categories of
average interest-earning assets, their respective interest income and the rates
earned by the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, 1998 THREE MONTHS ENDED SEPT. 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
(In Thousands) Balance Income Yield Balance Income Yield
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans $783,696 $13,412 6.85% $623,527 $11,790 7.56%
Mortgage-Backed Securities 150,367 2,516 6.69% - - -
Interest Bearing Deposits 20,066 229 4.57% - - -
- ----------------------------------------------------------------------------------------------------------------------
Total $954,129 $16,157 6.77% $623,527 $11,790 7.56%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THE PERIOD FROM MARCH 17, 1997 (DATE
NINE MONTHS ENDED SEPT. 30, 1998 OF INCEPTION) TO SEPT. 30, 1997
- ----------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average
(In Thousands) Balance Income Yield Balance Income Yield
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans $732,197 $38,526 7.02% $451,918 $25,403 7.49%
Mortgage-Backed Securities 149,845 7,521 6.69% - - -
Interest Bearing Deposits 8,667 300 4.58% - - -
- ----------------------------------------------------------------------------------------------------------------------
Total $890,709 $46,347 6.94% $451,918 $25,403 7.49%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
There were $150,000 in provisions for loan losses for the three and nine months
ended September 30, 1998. The provision for loan losses reflects the sizable
increase in the company's total residential mortgage loan portfolio and related
credit risks. There were no provisions for the three months ended September 30,
1997 or for the period from March 17, 1997 (date of inception) to September 30,
1997.
NONINTEREST EXPENSES
Noninterest expenses for the three and nine months ended September 30, 1998
amounted to $933,000 and $2,805,000, respectively, compared to the noninterest
expenses for the three months ended September 30, 1997 and the period from March
17, 1997 (date of inception) to September 30, 1997 which amounted to $51,000 and
$110,000, respectively. Noninterest expenses included advisory fees, dividends
on Series A Preferred Stock, and amortization of start-up costs.
INCOME TAXES
No income tax expense was recorded for the three or nine months ended September
30, 1998 nor for the three months ended September 1997 or the period from March
17, 1997 (date of inception) to September 30, 1997. The Company has elected to
be treated as a REIT under Section 856 through 860 under the Internal Revenue
Code, commencing with its taxable year ending December 31, 1997. As a REIT, the
Company generally will not be subject to federal income tax on net income and
capital gains that it distributes to the holders of its Common Stock and
Preferred Stock.
YEAR 2000
The "Year 2000" issue refers to the potential impact of the failure of computer
programs and equipment to give proper recognition of dates beyond December 31,
1999 and other issues related to the Year 2000 century date change.
I. THE COMPANY'S STATE OF READINESS
The Company has assessed the issues regarding Year 2000 and since the Company
depends on Webster Bank as Advisor and Servicer, as agreed upon in the Advisory
Service Agreement and the Master Service Agreement, the Company will be reliant
on Webster Bank and its parent company, Webster Financial Corporation
("Webster"), to ensure proper date recognition. The Company has reviewed
documentation provided by Webster and has determined that Webster is taking the
appropriate steps to become Year 2000 compliant.
II. THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company currently pays a monthly servicing and managerial fee to Webster as
agreed upon in the Advisory Service Agreement and the Master Service Agreement.
The Company should not incur any costs associated with Year 2000 issues that are
not covered under the Advisory Service Agreement and the Master Service
Agreement. The Advisory Service Agreement and the Master Service Agreement
include technical support, and administrative services, in which Webster
monitors and supervises the performance of all parties who have contracts to
perform services for the Company.
15
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
III. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company is in the process of identifying and evaluating potential Year 2000
related worst case scenarios that could result from 1) Webster's failure to
identify, test, and validate all critical date dependent applications and
embedded microchips that affect core business processes and 2) the failure of
external forces, such as third party vendors, and utilities, to have properly
remediated their systems.
Potential worst case scenarios being addressed, include: extended electrical
power outage, extended telephone communication outage, and excessive media hype
and community fear.
The Company is unable to estimate lost revenue related to Year 2000 issues due
to the uncertainties of the impact and effects of external forces and their
potential extended disruptions.
IV. THE COMPANY'S CONTINGENCY PLANS
A contingency plan is being drafted by the Company to address each identified
potential worst case scenario. Alternative solutions for business resumption and
approaches to minimize the impact of each scenario are being formulated.
Proposed approaches to address potential scenarios include: designating
alternate offices as emergency locations with alternate power sources and
identifying alternate communication methods.
AVAILABILITY OF WEBSTER'S DISCLOSURE
Webster's Year 2000 disclosures are available in detail in its September 30,
1998, Form 10-Q.
16
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table summarizes the estimated market value of the Company's
interest-sensitive assets and interest- sensitive liabilities at September 30,
1998, and the projected change to market values if interest rates
instantaneously increase or decrease by 100 basis points.
<TABLE>
<CAPTION>
Estimated Market
Value Impact
Book Market -------------------------
(In Thousands) Value Value -100 BP +100 BP
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-Sensitive Assets:
Mortgage-Backed Securities $120,594 $122,342 $1,017 $(2,951)
Variable-Rate Residential Mortgage 503,331 520,909 4,834 (6,063)
Loans
Fixed-Rate Residential Mortgage Loans 291,564 301,850 1,950 (6,766)
Interest-Sensitive Liabilities:
Series A Preferred Stock 40,000 40,686 118 (510)
- ------------------------------------------------------------------------------------------------
</TABLE>
FORWARD LOOKING STATEMENTS
- --------------------------------------------------------------------------------
Statements in Management's Discussion and Analysis in the section captioned
"Year 2000" and in "Quantitative and Qualitative Disclosures about Market Risk"
are forward-looking statements within the meaning of the Securities Exchange Act
of 1934, as amended. Actual results, performance or developments may differ
materially from those expressed or implied by such forward-looking statements as
a result of market uncertainties and other factors. Some important factors that
would cause actual results that differ from those in any forward-looking
statements include changes in interest rates and general economics in the
Connecticut market area where a substantial portion of the real estate securing
the Company's loans is located. Such developments could have an adverse impact
on the Company's financial position and results of operations.
17
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - Not Applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- Not Applicable
Item 5. OTHER INFORMATION - Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
18
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBSTER PREFERRED CAPITAL CORPORATION
-------------------------------------
Registrant
Date: November 13, 1998 By: /s/ Peter J. Swiatek
-----------------------
Peter J. Swiatek
Vice President and Treasurer
Principal Financial Officer
Principal Accounting Officer
19
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
27 Financial Data Schedule
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,187
<SECURITIES> 122,342
<RECEIVABLES> 798,309
<ALLOWANCES> (1,532)
<INVENTORY> 0
<CURRENT-ASSETS> 6,379
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 937,210
<CURRENT-LIABILITIES> 1,026
<BONDS> 0
40,000
1,000
<COMMON> 1
<OTHER-SE> 895,183
<TOTAL-LIABILITY-AND-EQUITY> 937,210
<SALES> 46,608
<TOTAL-REVENUES> 46,608
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,805
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 43,653
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,653
<EPS-PRIMARY> 430,060
<EPS-DILUTED> 430,060
</TABLE>
