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, 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 Number)
145 BANK STREET, WATERBURY, CONNECTICUT 06702
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2286
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $1 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the voting common stock held by
non-affiliates of the registrant is not applicable.
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
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business........................................................ 3
General.................................................... 3
Changes in Financial Condition............................. 3
Asset Quality ............................................. 3
Nonaccrual Assets.......................................... 4
Residential Mortgage Loans................................. 4
Allowance for Loan Losses.................................. 5
Investment Activities...................................... 5
Liquidity and Capital Resources............................ 6
Regulation................................................. 6
Taxation................................................... 7
ITEM 2. Properties...................................................... 8
ITEM 3. Legal Proceedings............................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders............. 8
PART II
ITEM 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................... 9
ITEM 6. Selected Financial Data......................................... 10
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 11
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ..... 15
ITEM 8. Financial Statements and Supplementary Data..................... 16
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................ 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............. 28
ITEM 11. Executive Compensation.......................................... 29
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management................................................ 30
ITEM 13. Certain Relationships and Related Transactions.................. 30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................ 31
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Webster Preferred Capital Corporation (the "Company") is a Connecticut
corporation incorporated in March 1997. The Company was formed by Webster Bank
to provide a cost-effective means of raising funds, including capital, on a
consolidated basis for Webster Bank. The Company's strategy is to acquire, hold
and manage real estate mortgage assets ("Mortgage Assets"), including but not
limited to residential mortgage loans, mortgage-backed securities and commercial
mortgage loans. In March 1997, Webster Bank contributed $617.0 million, net, of
Mortgage Assets, as part of the formation of the Company. In November 1997 and
during 1998, Webster Bank contributed approximately $120.4 million and $182.8
million, respectively, of cash which the Company used to purchase residential
mortgage loans and mortgage-backed securities. As of December 31, 1998 and 1997,
the Mortgage Assets owned by the Company were comprised of residential mortgage
loans and mortgage-backed securities. Although the Company may acquire and hold
a variety of Mortgage Assets, its present intention is to acquire only
residential mortgage loans and mortgage-backed securities. The Company intends
to hold such assets to generate net income for distribution to its shareholders
based on the spread between the interest income earned on the Mortgage Assets
and the cost of its capital and operations. The Company may invest up to 5% of
the total value of its portfolio in assets other than residential mortgage loans
and mortgage-backed securities eligible to be held by real estate investment
trusts ("REITs"). As of December 31, 1998, approximately 38.2% of the Company's
residential mortgage loans are fixed-rate loans and 61.8% are adjustable-rate
loans.
All of the Company's common stock is owned by Webster Bank. Webster Bank
has indicated to the Company that, for as long as any of the Company's preferred
shares are outstanding, Webster Bank intends to maintain direct ownership of
100% of the outstanding common stock of the Company. Pursuant to the Company's
Certificate of Incorporation, the Company cannot redeem, or make any other
payments or distributions in respect of, shares of its common stock to the
extent such redemptions, payments or distributions would cause the Company's
total shareholders' equity (as determined in accordance with generally accepted
accounting principles) to be less than 250% of the aggregate liquidation value
of the issued and outstanding preferred shares. The preferred shares are not
exchangeable into capital stock or other securities of Webster Bank or Webster
Financial Corporation ("Webster"), the parent company of Webster Bank, and do
not constitute regulatory capital of either Webster Bank or Webster.
The Company has elected to be treated as a REIT under the Internal Revenue
Code (the "Code"). The Company will generally not be subject to federal and
Connecticut State income tax to the extent that it distributes its earnings to
its shareholders and maintains its qualification as a REIT. Furthermore, the
Company and Webster Bank will benefit significantly from federal and state tax
treatment of dividends paid by the Company as a result of its qualification as a
REIT. The dividends paid on the preferred shares will be deductible for federal
income tax purposes as a result of the Company's qualification as a REIT.
CHANGES IN FINANCIAL CONDITION
Total assets were $971.0 million at December 31, 1998, an increase of
$183.4 million from $787.6 million at December 31, 1997. The increase in total
assets was due primarily to additional capital contributions by Webster Bank.
Shareholder's equity was $929.7 million at December 31, 1998 and $746.7 million
at December 31, 1997.
ASSET QUALITY
The Company maintains high asset quality by acquiring residential real
estate loans that have been conservatively underwritten, aggressively managing
nonaccrual assets and maintaining adequate reserve coverage. At December 31,
1998, residential real estate loans comprised the entire loan portfolio. The
Company also invests in highly rated mortgage-backed securities.
3
<PAGE>
NONACCRUAL ASSETS
The aggregate amount of nonaccrual assets was approximately $1.3 million at
December 31, 1998 and 1997. The following table details the Company's nonaccrual
assets at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1998 1997
- ---------------------------- ------------------------------------------------------------
<S> <C> <C>
Nonaccrual Assets:
Residential Fixed-Rate Loans $ 71 $ 158
Residential Variable-Rate Loans 1,206 1,145
- -----------------------------------------------------------------------------------------
Total $ 1,277 $ 1,303
=========================================================================================
</TABLE>
At December 31, 1998 and 1997 the allowance for loan losses was approximately
$1.6 million and $1.5 million, or 121% and 118%, respectively, of nonaccrual
assets, and .19% and .24%, respectively, of total mortgage loans, net.
Management believes that the allowance for loan losses is adequate to cover
expected losses in the portfolio.
RESIDENTIAL MORTGAGE LOANS
A summary of the Company's carrying amount of residential mortgage loans at
December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed-Rate Loans:
15 yr. Loans $ 114,924 $ 59,631
20 yr. Loans 3,213 1,636
25 yr. Loans 1,849 813
30 yr. Loans 192,490 161,884
- --------------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 312,476 223,964
- --------------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 5,222 4,896
20 yr. Loans 6,504 4,004
25 yr. Loans 8,578 8,553
30 yr. Loans 484,824 393,924
- --------------------------------------------------------------------------------------------------
Total Variable-Rate Loans 505,128 411,377
- --------------------------------------------------------------------------------------------------
Total Residential Mortgage Loans $ 817,604 $ 635,341
Premiums and Deferred Fees on Loans, Net 3,585 1,831
Less: Allowance for Loan Losses (1,555) (1,538)
- --------------------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $ 819,634 $ 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, and $401.3 million of
variable-rate loans, net of premiums, deferred fees on loans and an allowance
for loan losses. During 1998, Webster Bank contributed $182.8 million of cash to
the Company, of which $131.0 million was used to purchase additional residential
mortgage loans.
4
<PAGE>
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses.
Management believes that the allowance for loan losses is adequate. While
management believes it uses the best available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process of Webster Bank, periodically may review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on judgments
different from those of management.
A detail of the change in the allowance for loan losses for the periods
indicated follows:
<TABLE>
<CAPTION>
For the Period from
March 17, 1997 (Date
Year Ended of Inception) to
(In Thousands) December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $ 1,538 $ --
Allowance for Loan Losses on Acquired Loans -- 1,544
Provision Charged to Operations 300 --
Charge-offs (284) (6)
Recoveries 1 --
- -------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,555 $ 1,538
=================================================================================================
</TABLE>
INVESTMENT ACTIVITIES
RESIDENTIAL MORTGAGE LOANS. The Company may from time to time acquire both
conforming and nonconforming residential mortgage loans. Conventional conforming
residential mortgage loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the Federal Home Loan Mortgage Corporation
("FHLMC") or Fannie Mae. Nonconforming residential mortgage loans do not qualify
in one or more respects for purchase by Fannie Mae or FHLMC under their standard
programs. The nonconforming residential mortgage loans that the Company
purchases generally have original principal balances which exceed the limits for
FHLMC or Fannie Mae programs. The Company's nonconforming residential mortgage
loans are expected to meet the requirements for sale to national private
mortgage conduit programs or other investors in the secondary mortgage market.
Each residential mortgage loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on a single family (one to four unit) residential
property, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties underlying
residential mortgage loans consist of individual dwelling units, individual
cooperative apartment units, individual condominium units, two- to four-family
dwelling units, planned unit developments and townhouses.
MORTGAGE-BACKED SECURITIES. The Company may from time to time acquire
fixed-rate or adjustable-rate mortgage-backed securities representing interests
in pools of residential mortgage loans. A portion of any of the mortgage-backed
securities that the Company purchases may have been originated by Webster Bank
by exchanging pools of mortgage loans for the mortgage-backed securities. The
mortgage loans underlying the mortgage-backed securities are secured by single
family residential properties located throughout the United States.
The Company intends to acquire only investment-grade mortgage-backed
securities issued or guaranteed by Fannie Mae, FHLMC and Government National
Mortgage Association ("GNMA"). The Company does not intend to acquire any
interest-only, principal-only or high-risk mortgage-backed securities. Further,
the Company does not intend to acquire any residual interests in real estate
mortgage conduits or any interests, other than as a creditor, in any taxable
mortgage pools.
5
<PAGE>
OTHER REAL ESTATE ASSETS. Although the Company presently intends to invest
only in residential mortgage loans and mortgage-backed securities, the Company
may invest up to 5% of the total value of its portfolio in assets other than
residential mortgage loans and mortgage-backed securities eligible to be held by
REITs. In addition to commercial mortgage loans, such assets could include cash
and cash equivalents. The Company does not intend to invest in securities or
interests of persons primarily engaged in real estate activities. At December
31, 1998 and 1997, the Company did not hold any commercial mortgage loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund dividends on
outstanding capital stock. The Company does not anticipate that it will have any
other material capital expenditures. The Company believes that cash generated
from the payment of interest and principal on its Mortgage Assets will provide
sufficient funds to meet its operating requirements and to pay dividends in
accordance with the requirements to be taxed as a REIT for the foreseeable
future. To the extent that the Company accumulates cash in order to meet its
dividend requirements, it may invest such cash in short-term securities or
money-market instruments.
REGULATION
Webster Bank, which owns 100% of the Company's common stock, is subject to
supervision and regulation by, among others, the Office of Thrift Supervision
(the "OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). Because
the Company is a subsidiary of Webster Bank, such federal banking regulatory
authorities have the right to examine the Company and its activities. If Webster
Bank becomes "undercapitalized" under "prompt corrective action" initiatives of
the federal bank regulators, such regulatory authorities have the authority to
require, among other things, Webster Bank or the Company to alter, reduce or
terminate any activity that the regulator determines poses an excessive risk to
Webster Bank. The Company does not believe that its activities presently do, or
in the future will, pose a risk to Webster Bank; however there can be no
assurance in that regard. The regulators also could restrict transactions
between Webster Bank and the Company including the transfer of assets; require
Webster Bank to divest or liquidate the Company; or require that Webster Bank be
sold. Webster Bank could further be directed to take any other action that the
regulatory agency determines will better carry out the purpose of prompt
corrective action. Webster Bank could be subject to these prompt corrective
action restrictions if federal regulators determined that Webster Bank was in an
unsafe or unsound condition or engaging in an unsafe or unsound practice. In
light of Webster Bank's control of the Company, as well as the Company's
dependence and reliance upon the skill and diligence of Webster Bank officers
and employees, some or all of the foregoing actions and restrictions could have
an adverse effect on the operations of the Company, including causing the
Company's failure to qualify as a REIT.
Pursuant to OTS regulations and the Company's Certificate of Incorporation,
the Company is required to maintain a separate corporate existence from Webster
Bank, notwithstanding that Webster Bank owns all of the common stock and all of
the directors and officers of the Company are Webster Bank employees. In the
event Webster Bank should be placed into receivership by federal bank
regulators, such federal bank regulators would be in control of Webster Bank.
There can be no assurance that they would not cause Webster Bank, as sole holder
of the common stock, to take action adverse to holders of preferred shares.
6
<PAGE>
TAXATION
The Company elected to be treated as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ended December 31, 1997. As a
REIT, the Company generally will not be subject to federal and Connecticut state
income tax on net income and capital gains that it distributes to the holders of
its common stock and preferred stock.
To maintain REIT status, an entity must meet a number of organizational and
operational requirements, including a requirement that it currently distribute
to stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of non-cash income). If the Company fails to qualify as
a REIT in any taxable year, it will be subject to federal and Connecticut state
income tax at regular corporate rates. Notwithstanding qualification for
taxation as a REIT, the Company may be subject to federal, state and/or local
tax, on undistributed REIT taxable income and net income from prohibited
transactions.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company intends
to operate so as to qualify as a REIT under the Code, commencing with its
taxable year ended December 31, 1997. Although the Company believes that it is
owned, organized and operates in such a manner as to qualify as a REIT, no
assurance can be given as to the Company's ability to remain qualified as a
REIT. Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters and
circumstances, not entirely within the Company's control, may affect the
Company's ability to qualify as a REIT. Although the Company is not aware of any
proposal in Congress to amend the tax laws in a manner that would materially and
adversely affect the Company's ability to operate as a REIT, no assurance can be
given that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
its federal taxable income and would be subject to federal and Connecticut state
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. As a result, the amount available for
distribution to the Company's stockholders would be reduced for the year or
years involved. In addition, unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost. A
failure of the Company to qualify as a REIT would not by itself give the Company
the right to redeem the preferred shares, nor would it give the holders of the
preferred shares the right to have their shares redeemed.
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its common stock and preferred stock
to revoke the REIT election. The tax law prohibits the Company from electing
treatment as a REIT for the four taxable years following the year of such
revocation.
In the event that the Company has insufficient available cash on hand or is
otherwise precluded from making dividend distributions in amounts sufficient to
maintain its status as a REIT or to avoid imposition of an excise tax, the
Company may avail itself of consent dividend procedures. A consent dividend is a
hypothetical dividend, as opposed to an actual dividend, declared by the Company
and treated for U.S. federal tax purposes as though it had actually been paid to
stockholders who were the owners of shares on the last day of the year and who
executed the required consent form, and then recontributed by those stockholders
to the Company. The Company would use the consent dividend procedures only with
respect to its common stock.
7
<PAGE>
ITEM 2. PROPERTIES
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
1998 to security holders for a vote.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's common stock is owned by Webster Bank, and
consequently there is no market for such securities. The 2000 shares of
preferred stock issued to Webster Bank, as part of the Company's formation were
redeemed on December 22, 1997. The Company's Series A 7.375% Cumulative
Redeemable Preferred Stock (the "Series A Preferred Stock") is not listed on any
exchange or approved for quotation on the NASDAQ Stock Market. The Company's
Series B 8.625% Cumulative Redeemable Preferred Stock (the "Series B Preferred
Stock") is traded over-the-counter and quoted on the NASDAQ Stock Market's
National Market Tier under the symbol "WBSTP."
Dividends declared and paid on the common stock in 1998 and 1997 totaled
$58.2 million and $38.0 million, respectively. Dividends declared and paid on
the 2,000 preferred shares held by Webster Bank totaled $149,192 in 1997.
Dividends declared on the Series A Preferred Stock in 1998 and 1997 totaled $3.0
million and $65,556, respectively. Dividends declared on Series B Preferred
Stock in 1998 and 1997 totaled $862,500 and $19,167, respectively. The dividend
calculation in 1997 for the Series A Preferred Stock and the Series B Preferred
Stock was based on eight days, December 24, 1997 (date of delivery of preferred
shares) through December 31, 1997.
The market price for Series B Preferred Stock averaged $10.597 for the year
ended December 31, 1998. Series B Preferred Stock reached a low of $10.125 and a
high of $11, during the year ended December 31, 1998. The market price for the
Series B Preferred Stock remained unchanged at $10 from December 24, 1997 (the
date of issuance) to December 31, 1997.
Dividends will be declared at the discretion of the Board of Directors
after considering the Company's distributable funds, financial requirements, tax
considerations and other factors. The Company's distributable funds will consist
primarily of interest and principal payments on the Mortgage Assets held by it,
and the Company anticipates that a significant portion of such assets will bear
interest at adjustable rates. Accordingly, if there is a decline in interest
rates, the Company may experience a decrease in income available to be
distributed to its shareholders. However, the Company currently expects that
both its cash available for distribution and its "REIT taxable income" will
exceed the amount needed to pay dividends on the Preferred Shares, even in the
event of a significant decline in interest rate levels, because (i) the
Company's Mortgage Assets are interest-bearing, (ii) the Series A and Series B
Preferred Stock are not expected to exceed 15% of the Company's capitalization,
and (iii) the Company does not anticipate incurring any indebtedness.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below is based upon and should be
read in conjunction with the Company's audited financial statements and notes
thereto appearing elsewhere herein.
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
BALANCE SHEET DATA At December 31,
---------------------------------------------
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale Securities, at Fair Value $ 118,262 $ 120,090
Residential Mortgage Loans, Net 819,634 635,634
Total Assets 970,961 787,561
Total Liabilities 1,243 909
Mandatorily Redeemable Preferred Stock 40,000 40,000
Total Shareholders' Equity 929,718 746,652
===========================================================================================
<CAPTION>
For the Period from
March 17, 1997
INCOME STATEMENT DATA For Year Ended (Date of Inception) to
(In Thousands) December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Total Interest Income $ 62,134 $ 38,065
Provision for Loan Losses 300 -
Gain on Sale of Securities 261 -
Noninterest Expenses 3,836 220
- -------------------------------------------------------------------------------------------
Income Before Taxes 58,259 37,845
Income Taxes - -
- -------------------------------------------------------------------------------------------
Net Income 58,259 37,845
Preferred Stock Dividends 862 168
===========================================================================================
Net Income Available to Common Shareholders $ 57,397 $ 37,677
===========================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------
For the Period from
March 17, 1997
For Year Ended (Date of Inception)
SIGNIFICANT STATISTICAL DATA* December 31, 1998 to December 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income per Common Share
Basic $ 573,970.00 $ 376,770.00
Diluted $ 573,970.00 $ 376,770.00
Dividends Declared per Common Share $ 582,250.00 $ 380,470.00
===========================================================================================
</TABLE>
*No ratio of earnings to fixed charges is presented because the Company has no
fixed charges.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, and during 1998, Webster Bank contributed
approximately $120.4 million, and $182.8 million, respectively, of cash which
the Company used to purchase mortgage-backed securities and residential mortgage
loans. Total assets at December 31, 1998 and December 31,1997 were $971.0
million and $787.6 million, respectively, consisting primarily of residential
mortgage loans and mortgage-backed securities.
The Company has elected to be treated as a REIT under the Code and will
generally not be subject to federal income tax for as long as it maintains its
qualification 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 Company and
Webster Bank will also benefit significantly from federal and state tax
treatment of dividends paid by the Company as a result of its qualification as a
REIT. 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.
PUBLIC OFFERING
On December 24, 1997, the Company completed an offering of 40,000 shares of
Series A Preferred Stock, liquidation preference $1,000 per share, and 1,000,000
shares of Series B Preferred Stock, liquidation preference $10 per share. The
total net proceeds from the offering amounted to $48.5 million.
ASSET QUALITY
The Company maintains high asset quality by acquiring residential real
estate loans that have been conservatively underwritten, aggressively managing
nonaccrual assets and maintaining adequate reserve coverage. At December 31,
1998 and 1997, residential real estate loans comprised the entire loan
portfolio. The Company also invests in highly rated mortgage-backed securities.
NONACCRUAL ASSETS
The aggregate amount of nonaccrual assets at December 31, 1998 and December
31, 1997 was approximately $1.3 million. The following table details the
Company's nonaccrual assets at December 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
NONACCRUAL ASSETS:
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed-Rate Loans $ 71 $ 158
Residential Variable-Rate Loans 1,206 1,145
- ----------------------------------------------------------------------------------------
Total $ 1,277 $ 1,303
========================================================================================
</TABLE>
At December 31, 1998 and December 31, 1997 the allowance for loan losses
was approximately $1.6 million and $1.5 million, or 121% and 118%,
respectively, of nonaccrual assets. Management believes that the allowance for
loan losses is adequate to cover expected losses in the portfolio.
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 on 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
11
<PAGE>
include net changes in capital generally related to stock issuances, capital
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 Preferred 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 Preferred 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, commencing January 15, 1998.
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 December 31, 1998, 61.8% of the
Company's residential mortgage loans were variable-rate loans. The Company's
management believes these residential mortgage loans are less likely to incur
prepayments of principal.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Company reported net income of
$58.3 million, or $573,970 per common share on a diluted basis. From March 17,
1997 (date of inception) to December 31, 1997, the Company reported net income
of $37.8 million, or $376,770 per common share on a diluted basis.
Total interest income for 1998 amounted to $62.1 million, net of servicing
fees, an increase of $24.0 million from $38.1 million, net of servicing fees, in
1997. The average balance of total mortgage loans, net, for the year ended
December 31, 1998 and for the period of March 17, 1997 (date of inception) to
December 31, 1997 was $755.7 million and $624.5 million, respectively, and the
yield was 6.95% and 7.52%, respectively.
The provision for loan losses for the year ended December 31, 1998,
amounted to $300,000. There was no provision for loan losses for the period of
March 17, 1997 (date of inception) to December 31, 1997. The provision for loan
losses reflects the increase in the total residential mortgage loan portfolio.
Noninterest expenses for the year ended December 31, 1998 and for the
period of March 17, 1997 (date of inception) to December 31, 1997 amounted to
$3.8 million and $220,000, respectively, and included advisory fees, dividends
on Series A Preferred Stock and amortization of start-up costs. No income tax
expense was recorded for either period.
12
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a real estate investment trust are monetary in nature. As a
result, interest rates have a more significant impact on a real estate
corporation's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services. In the current interest rate
environment, the maturity structure of the Company's assets are critical to the
maintenance of acceptable performance levels.
RECENT FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the method in which public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to shareholders. This statement requires that public business
enterprises report quantitative and qualitative information about its reportable
segments, including profit or loss, certain specific revenue and expense items
and segment assets. This SFAS does not apply to the Company since the Company
has only one reportable operating segment.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Under this
statement, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. This SFAS is not expected to
impact the Company since the Company does not engage in hedging activities or
utilize derivative instruments.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Cost of Start-up Activities ("SOP
98-5"). SOP 98-5 is applicable to all non-government 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 SOP 98-5 should be as of the
beginning of the fiscal year in which the SOP 98-5 is first adopted and the
unamortized portion of previously capitalized start-up cost should be written
off. The Company wrote off the remaining amount of organizational costs of
$114,330 in December 1998 due to the adoption of SOP 98-5.
13
<PAGE>
YEAR 2000 READINESS DISCLOSURE STATEMENT
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, 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 is not expected to 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.
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 speculation 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 Readiness Disclosure Statement is available in detail
in its December 31, 1998, Form 10-K.
14
<PAGE>
ITEM 7A. 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 December 31,
1998 and December 31, 1997, and the projected change to market values if
interest rates instantaneously increase or decrease by 100 basis points.
<TABLE>
<CAPTION>
Estimated Market Value Impact
-----------------------------------
(In Thousands) Book Value Market Value -100 BP +100 BP
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998
Interest Sensitive Assets:
Mortgage-Backed Securities $ 117,146 $ 118,262 $ 1,734 $ (3,169)
Variable-Rate Residential Loans 505,128 521,221 5,472 (7,572)
Fixed-Rate Residential Loans 312,476 320,623 4,285 (9,575)
Interest-Sensitive Liabilities:
Series A Preferred Stock 40,000 40,000 348 (3,638)
- ---------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997
Interest-Sensitive Assets:
Mortgage-Backed Securities $ 120,026 $ 120,090 $ 1,478 $ (2,765)
Variable-Rate Residential Loans 411,377 423,140 3,776 (5,932)
Fixed-Rate Residential Loans 223,964 229,150 4,421 (8,152)
Interest-Sensitive Liabilities:
Series A Preferred Stock 40,000 40,000 1,179 (2,534)
===============================================================================================================
</TABLE>
FORWARD LOOKING STATEMENTS
Statements in Management's Discussion and Analysis in the section captioned
"Year 2000 Readiness Disclosure Statement" 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.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Webster Preferred Capital Corporation
Waterbury, Connecticut
We have audited the accompanying statements of condition of Webster Preferred
Capital Corporation (a subsidiary of Webster Bank) as of December 31, 1998 and
1997, and the related statements of income, shareholders' equity, and cash flows
for the year ended December 31, 1998 and the period of March 17, 1997 (date of
inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Webster Preferred Capital
Corporation as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended December 31, 1998 and the period of March
17, 1997 (date of inception) to December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
- ---------------------
Hartford, Connecticut
January 21, 1999
16
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 26,964 $ 26,167
Mortgage-Backed Securities Available for Sale, at Fair Value (Note 2) 118,262 120,090
Residential Mortgage Loans, Net (Note 3) 819,634 635,634
Accrued Interest Receivable 5,422 4,525
Prepaid Expenses and Other Assets 679 1,145
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 970,961 $ 787,561
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Dividends Payable $ 1,019 $ 491
Accrued Expenses and Other Liabilities 224 418
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,243 909
- ------------------------------------------------------------------------------------------------------------------
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 928,799 745,957
Distributions in Excess of Accumulated Earnings (1,198) (370)
Accumulated Other Comprehensive Income 1,116 64
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 929,718 746,652
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 970,961 $ 787,561
==================================================================================================================
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
For the Period from
March 17, 1997 (Date
For the Year Ended of Inception) to
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Loans $ 52,486 $ 37,177
Securities 9,648 888
- -------------------------------------------------------------------------------------------------------------
Total Interest Income 62,134 38,065
Provision for Loan Losses (Note 3) 300 -
- -------------------------------------------------------------------------------------------------------------
Interest Income After Provision for Loan Losses 61,834 38,065
Noninterest Income:
Gain on Sale of Securities 261 -
Noninterest Expenses:
Advisory Fee Expense Paid to Parent (Note 7) 150 127
Dividends on Mandatorily Redeemable Preferred Stock 2,950 66
Amortization of Start-up Costs 630 17
Other Noninterest Expenses 106 10
- -------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 3,836 220
Income Before Taxes 58,259 37,845
Income Taxes (Note 8) - -
- -------------------------------------------------------------------------------------------------------------
NET INCOME 58,259 37,845
Preferred Stock Dividends 862 168
- -------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 57,397 $ 37,677
=============================================================================================================
Net Income Per Common Share
Basic $ 573,970 $ 376,770
Diluted $ 573,970 $ 376,770
=============================================================================================================
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Distributions Accumulated
in Excess of Other
Preferred Common Paid-In Accumulated Comprehensive
Stock Stock Capital Earnings Income Total
- -------------------------------------------------- ----------- ---------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 17, 1997
(date of inception) $ - $ - $ - $ - $ - $ -
Comprehensive Income:
Net Income for 1997 - - - 37,845 - 37,845
Net unrealized gains on Available
for Sale Securities, net of
reclassification adjustments 64 64
--------------
Total Comprehensive Income 37,909
--------------
Contributions by Webster Bank 2,000 1 735,382 - - 737,383
Preferred Stock Redeemed (2,000) 2,000 - - -
Net Proceeds from Sale of Preferred
Stock Series B 1,000 - 8,575 - - 9,575
Dividends Paid or Accrued:
Common Stock ($380,470 per share) - - - (38,047) - (38,047)
Preferred Stock ($74.60 per share) - - - (149) - (149)
Preferred Stock Series B
($0.019 per share) - - - (19) - (19)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 1,000 $ 1 $ 745,957 $ (370) $ 64 $ 746,652
========================================================================================================================
Comprehensive Income:
Net Income for 1998 - - - 58,259 - 58,259
Net unrealized gains on Available
for Sale Securities, net of
reclassification adjustments 1,052 1,052
--------------
Total Comprehensive Income 59,311
--------------
Contributions by Webster Bank - - 182,842 - - 182,842
Dividends Paid or Accrued:
Common Stock ($582,250 per share) - - - (58,225) - (58,225)
Preferred Stock Series B
($0.8625 per share) - - - (862) - (862)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 1,000 $ 1 $ 928,799 $ (1,198) $ 1,116 $ 929,718
========================================================================================================================
</TABLE>
See accompanying notes to financial statements
19
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the Period from
March 17, 1997
For the Year Ended (Date of Inception)
December 31, 1998 to December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 58,259 $ 37,845
Adjustments to Reconcile Net Cash Provided by Operating Activities:
Provision for Loan Losses 300 -
Accretion of Securities Discount (1,493) (215)
Amortization of Deferred Loan Fees and Premiums 1,467 444
Gain on Sale of Securities (261) -
Increase in Accrued Interest Receivable (897) (4,525)
Increase in Accrued Liabilities 2,756 909
Increase (Decrease) in Prepaid Expenses and Other Assets 466 (129)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 60,597 34,329
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (51,682) (119,971)
Principal Collected on Mortgage-Backed Securities 7,233 160
Proceeds from Sales of Mortgage-Backed Securities 49,083 -
Purchase of Loans (389,123) (98,835)
Principal Repayments of Loans, Net 203,356 79,776
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (181,133) (138,870)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends Paid on Common and Preferred Stock (61,509) (38,215)
Net Proceeds from Issuance of Preferred Stock - 48,562
Contributions from Parent 182,842 120,361
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 121,333 130,708
- ----------------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 797 26,167
Cash and Cash Equivalents at Beginning of Year 26,167 -
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 26,964 $ 26,167
======================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ - $ -
Interest Paid $ - $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITY:
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
On December 22, 1997, the Company redeemed from Webster
Bank 2,000 shares of preferred stock; Webster Bank
concurrently contributed the proceeds to the Company as
additional paid-in capital $ - $ 2,000
</TABLE>
See accompanying notes to financial statements
20
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) BUSINESS
Webster Preferred Capital Corporation (the "Company") is a Connecticut
corporation incorporated in March 1997 and a subsidiary of Webster Bank, which
is a wholly-owned subsidiary of Webster Financial Corporation. The Company was
organized to provide a cost-effective means of raising funds, including equity
capital, on a consolidated basis for Webster Bank. The Company acquires, holds
and manages real estate mortgage assets ("mortgage assets"). In March 1997,
Webster Bank contributed approximately $617.0 million of mortgage assets, net as
part of the formation of the Company. As of December 31, 1998, the mortgage
assets owned by the Company consisted of whole loans secured by first mortgages
or deeds of trusts on single family (one- to- four unit) residential real estate
properties ("residential mortgage loans"), located primarily in Connecticut 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, as amended (the "Code"), and
will generally not be subject to federal income tax to the extent that it
distributes its earnings to its stockholders and maintains its qualification as
a REIT. All of the shares of the Company's common stock, par value $0.01 per
share, are owned by Webster Bank, which is a federally-chartered and
federally-insured savings bank. Webster Bank has indicated to the Company that,
for as long as any of the Company's preferred shares are outstanding, Webster
Bank intends to maintain direct ownership of 100% of the outstanding common
stock of the Company.
B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheets
and revenues and expenses for the periods presented. The actual results of the
Company could differ from those estimates. A material estimate that is
susceptible to near-term changes includes the allowance for loan losses.
C) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses.
Management believes that the allowance for loan losses is adequate. While
management believes it uses the best available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process of Webster Bank, periodically may review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on judgments
different from those of management.
D) FORECLOSED PROPERTIES
Foreclosed properties consist of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Foreclosed
properties are reported at the lower of fair value less estimated selling
expenses or cost with an allowance for losses to provide for declines in value.
Operating expenses are charged to current period earnings and gains and losses
upon disposition are reflected in the statement of income when realized. As of
December 31, 1998 and 1997, there was no foreclosed property owned by the
Company.
21
<PAGE>
E) LOANS
Loans are stated at the principal amounts outstanding. Interest on loans is
credited to income as earned based on the rate applied to principal amounts
outstanding. Interest which is more than 90 days past due is not accrued. Such
interest ultimately collected, if any, is credited to income in the period
received. Loan origination fees, premiums and discounts on loans purchased are
recognized in interest income over the lives of the loans using a method
approximating the interest method.
The Company's residential mortgage loans are exempt from the disclosure
provisions of the Statement of Financial Accounting Standard ("SFAS") No.114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.118,
since the Company's loans are comprised of large groups of smaller balance loans
which are collectively evaluated for impairment.
F) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are U.S. government agency securities and are
classified as Available for Sale. Available for Sale securities are carried at
fair value with unrealized gains and losses recorded as adjustments to
shareholders' equity. The adjustment to shareholders' equity is not tax-effected
as the Company is generally not subject to federal and state income tax.
Management intends to hold these securities for indefinite periods of time as
part of its asset/liability strategy and may sell the securities in response to
changes in interest rates, changes in prepayment risk or other similar factors.
One of the risks inherent when investing in mortgage-backed securities is the
ability of such instruments to incur prepayments of principal prior to maturity.
Because of prepayments, the weighted-average yield of these securities may also
change, which could affect earnings. Gains and losses on the sales of securities
are recorded using the specific identification method.
G) NET INCOME PER COMMON SHARE
Basic net income per common share is calculated by dividing net income
available to common shareholders by the weighted-average number of shares of
common stock outstanding. Diluted net income per common share is calculated by
dividing adjusted net income by the weighted-average diluted common shares. The
Company has no dilutive items. The weighted-average number of shares used in the
computation of basic and diluted earnings per common share for the years ended
December 31, 1998 and 1997 was 100.
H) STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers cash on
hand and in banks to be cash equivalents.
I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of securities (Note 2) is estimated based on prices
published in financial newspapers or quotations received from securities dealers
or pricing services.
In estimating the fair value of residential mortgage loans (Note 3), the
portfolio was classified into two categories, fixed-rate mortgage loans and
variable-rate mortgage loans. The categories were further segmented into 15, 20,
25, and 30 year contractual maturities. The fair value of each category is
calculated by discounting scheduled cash flows through estimated maturity using
market discount rates.
The calculation of fair value estimates of financial instruments is
dependent upon certain subjective assumptions and involves significant
uncertainties, resulting in variability in estimates with changes in
assumptions. Potential taxes and other expenses that would be incurred in an
actual sale or settlement are not reflected in the amounts disclosed. Fair value
estimates are not intended to reflect the liquidation value of the financial
instruments.
J) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 130. "Reporting Comprehensive Income" on 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 for 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.
22
<PAGE>
Applications of SFAS No. 130 will not impact amounts previously reported for net
income or affect the comparability of previously issued financial statements.
K) RECLASSIFICATION
Certain financial statement balances as previously reported have been
reclassified to conform to the 1998 Financial Statement Presentation.
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 the Company, which was used to
purchase Government National Mortgage Association ("GNMA") mortgage-backed
securities. The following table sets forth certain information regarding the
mortgage-backed securities:
<TABLE>
<CAPTION>
(In Thousands) Mortgage-Backed Securities
- ----------------------------------------------------------------------------------------------------------------------
Recorded Value Unrealized Gains Unrealized Estimated
December 31, 1998 Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio: $ 117,146 $ 1,116 $ - $ 118,262
======================================================================================================================
<CAPTION>
Recorded Value Unrealized Gains Unrealized Estimated
December 31, 1997 Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio: $ 120,026 $ 64 $ - $ 120,090
======================================================================================================================
</TABLE>
During 1998, the Company sold $48.8 million of mortgage-backed securities
which resulted in a gain of $261,431. There were no sales of mortgage-backed
securities during the period ended December 31, 1997.
All mortgage-backed securities have a contractual maturity of over 10
years. The weighted average yield at December 31, 1998 is 6.75%. Although the
stated final maturity of these obligations are long-term, the weighted average
life is much shorter due to scheduled repayments and prepayments.
23
<PAGE>
NOTE 3: RESIDENTIAL MORTGAGE LOANS, NET
A summary of the carrying amount and fair market value of residential mortgage
loans, net follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997
------------------------------------------------------------------
Carrying Amount Fair Market Carrying Fair Market
(In Thousands) Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
15 yr. Loans $ 114,924 $ 117,278 $ 59,631 $ 60,794
20 yr. Loans 3,213 3,315 1,636 1,679
25 yr. Loans 1,849 1,906 813 830
30 yr. Loans 192,490 198,124 161,884 165,847
- ---------------------------------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 312,476 320,623 223,964 229,150
- ---------------------------------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 5,222 5,367 4,896 5,011
20 yr. Loans 6,504 6,716 4,004 4,102
25 yr. Loans 8,578 8,820 8,553 8,750
30 yr. Loans 484,824 500,318 393,924 405,277
- ---------------------------------------------------------------------------------------------------------------------
Total Variable-Rate Loans 505,128 521,221 411,377 423,140
- ---------------------------------------------------------------------------------------------------------------------
Total Residential Mortgage Loans $ 817,604 $ 841,844 $635,341 $652,290
Premiums and Deferred Fees on Loans, Net 3,585 1,831
Less: Allowance for Loan Losses (1,555) (1,538)
- ---------------------------------------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $ 819,634 $ 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, and $401.3 million of
variable-rate loans, net of premiums, deferred fees on loans and an allowance
for loan losses. During 1998, Webster Bank contributed $182.8 million of cash,
to the Company, of which $131.0 million was used to purchase additional
residential loans. As of December 31, 1998, approximately 38.2% of the Company's
residential mortgage loans are fixed-rate loans and approximately 61.8% are
adjustable-rate loans.
A detail of the change in the allowance for loan losses, for the periods
indicated follows:
<TABLE>
<CAPTION>
For the Period from
March 17, 1997 (Date
Year Ended of Inception) to
(In Thousands) December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at Beginning of Period $ 1,538 $ --
Allowance for Loan Losses on Acquired Loans -- 1,544
Provision Charged to Operations 300 --
Charge-offs (284) (6)
Recoveries 1 --
- ---------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,555 $ 1,538
===================================================================================================
</TABLE>
24
<PAGE>
NOTE 4: MANDATORILY REDEEMABLE PREFERRED STOCK
On December 24, 1997, the Company raised $40.0 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.
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 such tax
event, during the period beginning January 15, 1999 through January 14, 2001,
the Series A Preferred Shares may be redeemed at the option of the Company.
NOTE 5: SHAREHOLDERS' EQUITY
On March 17, 1997, the Company's date of inception, Webster Bank contributed
$617.0 million of mortgage assets, net in exchange for 100 shares of $.01 par
value common stock and 2,000 shares of $.01 par value ($1,000 stated value) 10%
cumulative nonconvertible preferred stock.
On November 24, 1997, Webster Bank contributed approximately $120.4 million in
cash to the Company, which was used by the Company to purchase GNMA
mortgage-backed securities (Note 2).
On December 15, 1997, Webster Bank redeemed all 2,000 shares of $.01 par value
($1,000 stated value) 10% cumulative nonconvertible preferred stock and
concurrently contributed the proceeds to the Company as additional paid-in
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. The Series B Preferred
Shares may be redeemed at the option of the Company on or after January 15,
2003.
During 1998, Webster Bank contributed $182.8 million, of cash to the Company,
which was used to purchase additional mortgage-backed securities and residential
mortgage loans.
NOTE 6: SERVICING
The mortgage loans owned by the Company are serviced by Webster Bank pursuant to
the terms of a servicing agreement. Webster Bank in its role as Servicer under
the terms of the servicing agreement is herein referred to as the "Servicer".
The Servicer receives fees at an annual rate of (i) 8 basis points for
fixed-rate loan servicing and collection, (ii) 8 basis points for variable-rate
loan servicing and collection and (iii) 5 basis points for all other services to
be provided, as needed, in each case based on the daily outstanding balances of
all the Company's loans for which the Servicer is responsible.
The Servicer is entitled to retain any late payment charges, prepayment fees,
penalties and assumption fees collected in connection with mortgage loans
serviced by it. The Servicer receives the benefit, if any, derived from interest
earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and from interest earned on
tax and insurance impound funds with respect to mortgage loans serviced by it.
At the end of each calendar month, the Servicer is required to invoice the
Company for all fees and charges due to the Servicer.
25
<PAGE>
NOTE 7: ADVISORY SERVICES
Advisory services are being provided pursuant to an agreement with Webster Bank
to provide the Company with the following types of services: administer the
day-to-day operations, monitor the credit quality of the real estate mortgage
assets, advise with respect to the acquisition, management, financing, and
disposition of real estate mortgage assets and provide the necessary executive
administration, human resource, accounting and control, technical support,
record keeping, copying, telephone, mailing and distribution, investment and
funds management services. Webster Bank is entitled to receive an annual fee of
$150,000 with respect to the advisory services provided to the Company.
Operating expenses outside the scope of the advisory agreement are paid directly
by the Company. Such expenses include but are not limited to the following: fees
for third party consultants, attorneys, and external auditors and any other
expenses incurred that are not directly related to the advisory agreement.
NOTE 8: INCOME TAXES
The Company has elected to be treated as a REIT under Sections 856 through 860
of the Code, and believes that its organization and method of operation meet the
requirements for qualification as a REIT. 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. Therefore,
no provision for federal income taxes has been included in the accompanying
financial statements.
To maintain REIT status, an entity must meet a number of organizational and
operational requirements, including a requirement that it currently distributes
to stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of non-cash income). If the Company fails to qualify as
a REIT in any taxable year, it will be subject to federal income tax at regular
corporate rates.
NOTE 9: OTHER COMPREHENSIVE INCOME
The following table summarizes reclassification adjustments for other
comprehensive income and the related tax effects for the years ended December
31, 1998 and 1997:
<TABLE>
<CAPTION>
BEFORE INCOME TAX
TAX (EXPENSE) NET-OF-TAX
(In Thousands) AMOUNT OR BENEFIT AMOUNT
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain on available for sale securities:
Unrealized holding gains arise during the period $ 1,313 - $ 1,313
Less: Reclassification adjustment for gains
Realized during the period 261 - 261
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income at December 31, 1998 $ 1,052 - $ 1,052
=======================================================================================================================
Unrealized gain on available for sale securities:
Unrealized holding gains arise during the period $ 64 - $ 64
Less: Reclassification adjustment for gains
Realized during the period - - -
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income at December 31, 1997 $ 64 - $ 64
=======================================================================================================================
</TABLE>
26
<PAGE>
NOTE 10: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
(In Thousands, Except Share Data) First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Interest Income $ 14,154 $ 16,035 $ 16,158 $ 15,787
Provision for Loan Losses - - 150 150
Gain on Sale of Securities - - 261 -
Noninterest Expenses 925 946 933 1,032
=========================================================================
NET INCOME 13,229 15,089 15,336 14,605
Preferred Dividends 216 216 216 214
-------------------------------------------------------------------------
Net Income Available to Common
Shareholders $ 13,013 $ 14,873 $ 15,120 $ 14,391
=========================================================================
Net Income Per Common Share
Basic $ 130,130 $ 148,730 $ 151,200 $ 143,908
=========================================================================
Diluted $ 130,130 $ 148,730 $ 151,200 $ 143,908
=========================================================================
<CAPTION>
1997
(In Thousands, Except Share Data) First Quarter* Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Interest Income $ 1,852 $ 11,785 $ 11,766 $ 12,662
Noninterest Expenses 13 45 51 45
-------------------------------------------------------------------------
NET INCOME 1,839 11,740 11,715 12,617
Preferred Dividends 8 50 50 126
-------------------------------------------------------------------------
Net Income Available to Common
Shareholders $ 1,831 $ 11,690 $ 11,665 $ 12,491
=========================================================================
Net Income Per Common Share
Basic $ 18,310 $ 116,900 $ 116,650 $124,910
=========================================================================
Diluted $ 18,310 $ 116,900 $ 116,650 $124,910
=========================================================================
</TABLE>
* First Quarter information is for the period of March 17, 1997 (date of
inception) through March 31, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors currently consists of three members.
Directors are elected for a one-year term. The Company currently has four
officers. The Company has no other employees.
The persons who are current directors and executive officers of the Company
are as follows:
NAME AGE POSITION AND OFFICES HELD
- ---- --- -------------------------
John V. Brennan 46 President and Director
Ross M. Strickland 49 Director
Harriet Munrett Wolfe 45 Director
Gregory S. Madar 36 Vice President and Assistant Secretary
Peter J. Swiatek 40 Vice President and Treasurer
John D. Benjamin 51 Secretary
The following is a summary of the experience of the executive officers and
directors of the Company:
John V. Brennan is the President and a director of the Company. He is also
the Executive Vice President, Chief Financial Officer and Treasurer of Webster
and Webster Bank. Mr. Brennan, a certified public accountant, joined Webster
Bank in 1986 as Senior Vice President and Treasurer. He was elected Chief
Financial Officer in 1990 and Executive Vice President in 1991. Prior to joining
Webster Bank, he was a senior manager with the accounting firm of KPMG LLP.
Ross M. Strickland is a director of the Company. He is also the Executive
Vice President -- Mortgage Banking of Webster and Webster Bank, positions he has
held since his employment in 1991. Prior to joining Webster Bank, he was
Executive Vice President of Residential Lending with the former Northeast
Savings, F.A., Hartford, Connecticut, from 1988 to 1991. Prior to joining
Northeast Savings, he was National Sales Manager, Credit Resources Group, for
Shearson Lehman Brothers.
Harriet Munrett Wolfe is a director of the Company. She is also the Senior
Vice President, Counsel and Secretary of Webster and Webster Bank. Ms. Wolfe
joined Webster and Webster Bank in March 1997 as Senior Vice President and
Counsel, and was appointed Secretary in June 1997. Prior to joining Webster and
Webster Bank, she was in private practice. From November 1990 to January 1996,
she was Vice President and Senior Counsel of Shawmut Bank Connecticut, N.A.,
Hartford, Connecticut. Prior to joining Shawmut, she was Associate Legal Counsel
and Assistant Secretary of the former Citytrust, Bridgeport, Connecticut.
Gregory S. Madar is the Vice President and Assistant Secretary of the
Company. He served as the Secretary of the Company from March 1997 to March
1999. He is also Vice President and Tax Manager of Webster Bank. Mr. Madar, a
certified public accountant, joined Webster Bank in 1995. Prior to joining
Webster Bank, he was Controller of Millane Nurseries, Inc. from 1993 to 1995.
Prior to joining Millane Nurseries, he was a tax manager with KPMG LLP ("KPMG")
in Hartford. He was associated with KPMG from 1987 to 1993.
Peter J. Swiatek is the Vice President and Treasurer of the Company. He is
also Senior Vice President and Controller of Webster Bank and Controller of
Webster. Mr. Swiatek joined Webster in 1990 as Vice President of Accounting. He
was elected Controller of Webster and Webster Bank in 1992 and Senior Vice
President of Webster Bank in 1993. Prior to joining Webster Bank, Mr. Swiatek
was the Controller of the former The Bank of Hartford.
28
<PAGE>
John D. Benjamin has served as Secretary of the Company since March 1999.
He is also Assistant Secretary and Senior Compliance Officer of Webster and
Senior Vice President, Assistant Secretary and Senior Compliance Officer of
Webster Bank, positions he has held since 1996. Mr. Benjamin joined Webster
Bank's predecessor, First Federal Savings and Loan Association of Waterbury, in
1970. He has served various management positions and was elected Vice President
in 1984 and Senior Vice President in 1991.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers and persons who own more than 10% of its
Series A Preferred Stock or Series B Preferred Stock to file with the SEC
initial reports of ownership of the Company's equity securities and to file
subsequent reports when there are changes in such ownership. Based on a review
of reports submitted to the Company, the Company believes that during the fiscal
year ended December 31, 1998, all Section 16(a) filing requirements applicable
to the Company's officers, directors and more than 10% owners were compiled with
on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The Company currently has four officers, none of whom receive separate
compensation as employees of the Company. The Company has retained an Advisor to
perform certain functions pursuant to an Advisory Agreement described below
under "The Advisor." Each officer of the Company currently is also an officer of
Webster Bank. The Company will maintain corporate records and audited financial
statements that are separate from those of Webster Bank and any of Webster
Bank's affiliates.
It is not currently anticipated that the officers, directors or employees
of the Company will have any pecuniary interest in any Mortgage Asset to be
acquired or disposed of by the Company or in any transaction in which the
Company has an interest.
The Company does not intend to pay the directors of the Company fees for
their services as directors. Although no direct compensation will be paid by the
Company, under the Advisory Services Agreement, the Company will reimburse
Webster Bank for its proportionate share of the salaries of such person for
services rendered.
THE ADVISOR
The Company has entered into an Advisory Service Agreement (the "Advisory
Agreement") with Webster Bank to administer the day-to-day operations of the
Company. Webster Bank in its role as advisor under the terms of the Advisory
Agreement is herein referred to as the "Advisor." The Advisor is responsible for
(i) monitoring the credit quality of the Mortgage Assets held by the Company,
(ii) advising the Company with respect to the acquisition, management, financing
and disposition of the Company's Mortgage Assets, and (iii) maintaining custody
of the documents related to the Company's Mortgage Assets. The Advisor may at
any time subcontract all or a portion of its obligations under the Advisory
Agreement to one or more of its affiliates involved in the business of managing
Mortgage Assets. If no affiliate of the Advisor is engaged in the business of
managing Mortgage Assets, the Advisor may, with the approval of a majority of
the Board of Directors, subcontract all or a portion of its obligations under
the Advisory Agreement to unrelated third parties. The Advisor may assign its
rights or obligations under the Advisory Agreement to any affiliate of the
Company. The Advisor will not, in connection with the subcontracting of any of
its obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement.
The Advisory Agreement has an initial term of two years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered by either party to the other party. The Advisory
Agreement may be terminated by the Company at any time upon 90 days' prior
written notice. The Advisor will be entitled to receive an advisory fee equal to
$150,000 per year with respect to the advisory services provided by it to the
Company. The fee may be revised to reflect changes in the actual costs incurred
by the Advisor in providing services.
29
<PAGE>
The Advisory Agreement provides that the liability of the Advisor to the
Company for any loss due to the Advisor's performing or failing to perform the
services under the Advisory Agreement shall be limited to those losses sustained
by the Company which are a direct result of the Advisor's negligence or willful
misconduct. It also provides that under no circumstances shall the Advisor be
liable for any consequential or special damages and that in no event shall the
Advisor's total combined liability to the Company for all claims arising under
or in connection with the Advisory Agreement be more than the total amount of
all fees payable by the Company to the Advisor under the Advisory Agreement
during the year immediately proceeding the year in which the first claim giving
rise to such liability arises. The Advisory Agreement also provides that to the
xtent that third parties make claims against the Advisor arising out of the
services provided thereunder, the Company will indemnify the Advisor against all
loss arising therefrom.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The executive officers and directors of the Company do not own any shares
of stock in the Company or Webster Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is organized as a subsidiary of Webster Bank, and is controlled
by and, through advisory and servicing agreements, totally reliant on Webster
Bank. The Company's Board of Directors consists entirely of Webster Bank
employees and, through the advisory and servicing agreements, Webster Bank and
its affiliates are involved in every aspect of the Company's existence. Webster
Bank administers the day-to-day activities of the Company in its role as Advisor
under the Advisory Agreement, and acts as Servicer of the Company's Mortgage
Loans under the Servicing Agreement. In addition, all of the officers of the
Company are also officers of Webster Bank. As the holder of all of the
outstanding voting stock of the Company, Webster Bank generally will have the
right to elect all of the directors of the Company. For a description of the
fees Webster Bank is entitled to receive under the advisory and servicing
agreements, see Notes 6 and 7 to the Company's Financial Statements included as
part of Item 8.
DEPENDENCE UPON WEBSTER BANK AS ADVISOR AND SERVICER
The Company is dependent on the diligence and skill of the officers and
employees of Webster Bank as its Advisor for the selection, structuring and
monitoring of the Company's mortgage assets. In addition, the Company is
dependent upon the expertise of Webster Bank as its Servicer for the servicing
of the Mortgage Loans. The personnel deemed most essential to the Company's
operations are Webster Bank's loan servicing and administration personnel, and
the staff of its finance department. The loan servicing and administration
personnel will advise the Company in the selection of Mortgage Assets, and
provide loan servicing oversight. The finance department will assist in the
administrative operations of the Company. The Advisor may subcontract all or a
portion of its obligations under the Advisory Agreement to one or more
affiliates, and under certain conditions to non-affiliates, involved in the
business of managing Mortgage Assets. The Advisor may assign its rights or
obligations under the Advisory Agreement, and the Servicer may assign its rights
and obligations under the Servicing Agreement, to any affiliate of the Company
involved in the business of managing real estate mortgage assets. Under the
Advisory Agreement, the Advisor may subcontract its obligations to unrelated
third parties with the approval of the Board of Directors of the Company. In the
event the Advisor or the Servicer subcontracts or assigns its rights or
obligations in such a manner, the Company will be dependent upon the
subcontractor or affiliate to provide services. Although Webster Bank has
indicated to the Company that it has no plans in this regard, if Webster Bank
were to subcontract all of its loan servicing to an outside third party, it also
would do so with respect to Mortgage Assets under the Servicing Agreement. Under
such circumstances, there may be additional risks as to the costs of such
services and the ability to identify a subcontractor suitable to the Company.
The Servicer does not believe it would subcontract those duties unless it could
not perform such duties efficiently and economically itself.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed as a part of this Report:
Statements of Condition at December 31, 1998 and 1997
Statements of Income for year ended December 31, 1998 and the period
from March 17, 1997 (date of inception) to December 31, 1997
Statements of Shareholders' Equity for year ended December 31, 1998
and the period from March 17, 1997 (date of inception) to December 31,
1997
Statements of Cash Flows for year ended December 31, 1998 and the
period from March 17, 1997 (date of inception) to December 31, 1997
Notes to Financial Statements
Independent Auditors' Report
(a)(2) There are no financial statement schedules which are required to be
filed as part of this form.
(a)(3) See (c) below for all exhibits filed herewith and the Index to
Exhibits.
(b) Reports on Form 8-K. Not applicable.
(c) Exhibits.
The following exhibits either are filed as a part of this Report or
are incorporated herein by reference:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation of Webster
Preferred Capital Corporation (the "Company") (incorporated
herein by reference from Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.2 Certificate of Amendment for the Series A 7.375% Cumulative
Redeemable Preferred Stock of the Company (incorporated
herein by reference from Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.3 Certificate of Amendment for the Series B 8.625% Cumulative
Redeemable Preferred Stock of the Company (incorporated
herein by reference from Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.4 Amended and Restated By-Laws of the Company (incorporated
herein by reference from Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
4.1 Specimen of certificate representing the Series A 7.375%
Cumulative Redeemable Preferred Stock of the Company
(incorporated herein by reference from Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
31
<PAGE>
4.2 Specimen of certificate representing the Series B 8.625%
Cumulative Redeemable Preferred Stock of the Company
(incorporated herein by reference from Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.1 Mortgage Assignment Agreement, made as of March 17, 1997, by
and between Webster Bank and the Company (incorporated
herein by reference from Exhibit 10.1 to the Company's
Registration Statement on Form S-11 (File No. 333-38685)
filed with the Securities and Exchange Commission (the
"SEC") on October 24, 1997).
10.2 Master Service Agreement, dated March 17, 1997, between
Webster Bank and the Company (incorporated herein by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-11 (File No. 333-38685) filed with the
SEC on October 24, 1997).
10.3 Advisory Service Agreement, made as of October 20, 1997, by
and between Webster Bank and the Company (incorporated
herein by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
21 Subsidiaries of the Company (incorporated herein by
reference from Exhibit 21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
27 Financial Data Schedule.
(d) There are no financial statements and financial statement schedules which
were excluded from this Report which are required to be included herein.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WEBSTER PREFERRED CAPITAL CORPORATION Registrant
BY: /s/ John V. Brennan
---------------------------------------------
John V. Brennan, President and Director
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 30, 1999.
By: /s/ John V. Brennan
--------------------------------------------
John V. Brennan, President and Director
(Principal Executive Officer)
By: /s/ Peter J. Swiatek
--------------------------------------------
Peter J. Swiatek, Vice President and
Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
By: /s/ Ross M. Strickland
--------------------------------------------
Ross M. Strickland, Director
By: /s/ Harriet Munrett Wolfe
--------------------------------------------
Harriet Munrett Wolfe, Director
33
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation of Webster
Preferred Capital Corporation (the "Company") (incorporated
herein by reference from Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.2 Certificate of Amendment for the Series A 7.375% Cumulative
Redeemable Preferred Stock of the Company (incorporated
herein by reference from Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.3 Certificate of Amendment for the Series B 8.625% Cumulative
Redeemable Preferred Stock of the Company (incorporated
herein by reference from Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
3.4 Amended and Restated By-Laws of the Company (incorporated
herein by reference from Exhibit 3.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).
4.1 Specimen of certificate representing the Series A 7.375%
Cumulative Redeemable Preferred Stock of the Company
(incorporated herein by reference from Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
4.2 Specimen of certificate representing the Series B 8.625%
Cumulative Redeemable Preferred Stock of the Company
(incorporated herein by reference from Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.1 Mortgage Assignment Agreement, made as of March 17, 1997, by
and between Webster Bank and the Company (incorporated
herein by reference from Exhibit 10.1 to the Company's
Registration Statement on Form S-11 (File No. 333-38685)
filed with the Securities and Exchange Commission (the
"SEC") on October 24, 1997).
10.2 Master Service Agreement, dated March 17, 1997, between
Webster Bank and the Company (incorporated herein by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-11 (File No. 333-38685) filed with the
SEC on October 24, 1997).
10.3 Advisory Service Agreement, made as of October 20, 1997, by
and between Webster Bank and the Company (incorporated
herein by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
21 Subsidiaries of the Company (incorporated herein by
reference from Exhibit 21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
27 Financial Data Schedule.
34
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 26,964
<SECURITIES> 118,262
<RECEIVABLES> 821,189
<ALLOWANCES> (1,555)
<INVENTORY> 0
<CURRENT-ASSETS> 6,101
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 970,961
<CURRENT-LIABILITIES> 1,243
<BONDS> 0
40,000
1,000
<COMMON> 1
<OTHER-SE> 928,717
<TOTAL-LIABILITY-AND-EQUITY> 970,961
<SALES> 62,395
<TOTAL-REVENUES> 62,395
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,836
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 58,259
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> 573,970
<EPS-DILUTED> 573,970
</TABLE>
