UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended September 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 0-23513
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
----- -----
The number of shares outstanding of the registrant's common stock as of
October 31, 1999 is 100 shares.
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Condensed Statements of Condition at September 30, 1999 and December 31, 1998................................ 3
Condensed Statements of Income for the Three and Nine Months Ended September 30, 1999
and September 30, 1998 ...................................................................................... 4
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1999
and September 30, 1998....................................................................................... 5
Notes to the Condensed Financial Statements.................................................................. 6
Management's Discussion and Analysis of Financial Statements................................................. 9
Quantitative and Qualitative Disclosures About Market Risk................................................... 13
Forward Looking Statements................................................................................... 13
PART II - OTHER INFORMATION.................................................................................. 14
SIGNATURES................................................................................................... 15
INDEX TO EXHIBITS ........................................................................................... 16
</TABLE>
2
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED STATEMENTS OF CONDITION (unaudited)
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 16,453 $ 26,964
Mortgage-Backed Securities Available for Sale, at Fair Value (Note 2) 98,766 118,262
Residential Mortgage Loans, Net (Note 3) 876,825 819,634
Accrued Interest Receivable 5,447 5,422
Other Real Estate Owned 26 -
Prepaid Expenses and Other Assets 425 679
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $ 997,942 $ 970,961
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Accrued Dividends Payable $ 794 $ 1,019
Accrued Expenses and Other Liabilities 481 224
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,275 1,243
- -----------------------------------------------------------------------------------------------------------------------
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
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 928,799 928,799
Distributions in Excess of Accumulated Earnings - (1,198)
Retained Earnings 28,040 -
Accumulated Other Comprehensive Income (Loss) (Note 5) (1,173) 1,116
- -----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 956,667 929,718
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 997,942 $ 970,961
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed financial statements
3
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED STATEMENTS OF INCOME (unaudited)
(Dollars In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 14,367 $ 13,412 $ 42,411 $ 38,526
Securities 1,813 2,746 5,475 7,821
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Income 16,180 16,158 47,886 46,347
Provision for Loan Losses (Note 3) 120 150 360 150
- ----------------------------------------------------------------------------------------------------------------------
Interest Income After Provision for Loan Losses 16,060 16,008 47,526 46,197
Noninterest Income:
Gain on Sale of Securities - 261 - 261
- ----------------------------------------------------------------------------------------------------------------------
Total Noninterest Income - 261 - 261
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Expenses:
Advisory Fee Expense Paid to Parent 38 38 113 113
Dividends on Mandatorily Redeemable Preferred Stock 737 738 2,212 2,213
Start-up Costs - 137 - 396
Other Noninterest Expenses 107 20 316 83
- ----------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 882 933 2,641 2,805
Income Before Taxes 15,178 15,336 44,885 43,653
Income Taxes - - - -
- ----------------------------------------------------------------------------------------------------------------------
Net Income 15,178 15,336 44,885 43,653
Preferred Stock Dividends 216 216 647 647
- ----------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholder $ 14,962 $ 15,120 $ 44,238 $ 43,006
- ----------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 149,620 $ 151,200 $442,380 $430,060
Diluted $ 149,620 $ 151,200 $442,380 $430,060
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the condensed financial statements
4
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net Income $ 44,885 $ 43,653
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for Loan Losses 360 150
Accretion of Securities Discount (34) (1,558)
Amortization of Deferred Loan Costs and Premiums 942 1,048
Gain on Sale of Securities - (261)
Increase in Accrued Interest Receivable (25) (941)
Increase in Accrued Liabilities 257 2,026
Decrease in Prepaid Expenses and Other Assets 254 232
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 46,639 44,349
- ----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of Mortgage-Backed Securities - (51,682)
Principal Collected on Mortgage-Backed Securities 17,241 3,852
Proceeds from Sales of Mortgage-Backed Securities - 49,083
Increase in Interest Bearing Deposits - (525)
Purchase of Loans (194,929) (306,332)
Principal Repayments of Loans, Net 136,410 143,990
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (41,278) (161,614)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Dividends Paid on Common and Preferred Stock (15,872) (40,556)
Contributions from Parent - 142,841
- ----------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (15,872) 102,285
- ----------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (10,511) (14,980)
Cash and Cash Equivalents at Beginning of Period 26,964 26,167
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 16,453 $ 11,187
- ----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Income Taxes Paid $ - $ -
Interest Paid $ - $ -
Supplemental Schedule of Non-Cash Financing Activity:
Transfer of Residential Mortgage Loans to Other Real Estate
Owned $ 26 $ -
</TABLE>
See accompanying notes to the condensed financial statements
5
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
The Company is a subsidiary of Webster Bank (see Note 1 to 1998 Annual Report).
The Company has elected to be treated as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986 (the "Code"), and will generally not be
subject to federal income tax for as long as it maintains its 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.
The accompanying condensed financial statements include all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented. All adjustments were of a normal
recurring nature. The results of operations for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the results which may
be expected for the year as a whole. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Webster Preferred Capital Corporation 1998 Annual Report to shareholders.
NOTE 2: MORTGAGE-BACKED SECURITIES
The following table sets forth certain information regarding the mortgage-backed
securities, which are classified as available for sale:
<TABLE>
<CAPTION>
(In Thousands) Mortgage-Backed Securities
- -----------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated Fair
September 30, 1999 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio $ 99,939 $ 502 $ (1,675) $ 98,766
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated Fair
December 31, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio $ 117,146 $ 1,116 $ - $ 118,262
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
All mortgage-backed securities have a contractual maturity of over 10 years. The
weighted average yield at September 30, 1999 is 6.78%. Although the stated final
maturity of these obligations are long-term, the weighted average life is much
shorter due to scheduled repayments and prepayments. Gains and losses on the
sales of securities are recorded using the specific identification method.
6
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 3: RESIDENTIAL MORTGAGE LOANS, NET
A summary of the Company's residential mortgage loans, net, follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------
Carrying Carrying
(In Thousands) Amount Amount
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Fixed-Rate Loans:
15 yr. Loans $ 117,703 $ 114,924
20 yr. Loans 5,559 3,213
25 yr. Loans 3,026 1,849
30 yr. Loans 231,691 192,490
- ------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 357,979 312,476
- ------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 6,386 5,222
20 yr. Loans 8,226 6,504
25 yr. Loans 7,025 8,578
30 yr. Loans 495,024 484,824
- ------------------------------------------------------------------------------------------
Total Variable-Rate Loans 516,661 505,128
- ------------------------------------------------------------------------------------------
Total Residential Mortgage Loans $ 874,640 $817,604
Premiums and Deferred Costs on Loans, Net 3,976 3,585
Less: Allowance for Loan Losses (1,791) (1,555)
- ------------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $876,825 $ 819,634
- ------------------------------------------------------------------------------------------
</TABLE>
During 1998, Webster Bank contributed $182.8 million of cash to the Company, of
which $142.8 million was contributed during the nine months ended September 30,
1998. Of the $182.8 million in cash, $131.0 million was used to purchase
additional residential loans. As of September 30, 1999, approximately 40.9% of
the Company's residential mortgage loans are fixed-rate loans and approximately
59.1% are adjustable-rate loans.
A detail of the change in the allowance for loan losses, for the periods
indicated follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands) September 30, September 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 1,742 $ 1,382 $ 1,555 $ 1,538
Provision Charged to Operations 120 150 360 150
Charge-offs (71) - (124) (157)
Recoveries - - - 1
- ----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,791 $ 1,532 $ 1,791 $ 1,532
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 4: MANDATORILY REDEEMABLE PREFERRED STOCK
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 may be redeemed at the option of the Company at
any time on and after January 15, 1999 through January 14, 2001.
NOTE 5: OTHER COMPREHENSIVE INCOME
The following table summarizes reclassification adjustments for other
comprehensive income and the related tax effects:
<TABLE>
<CAPTION>
Before Income tax
Three months ended September 30, 1999 and 1998 Tax (expense) Net-of-tax
(In Thousands) Amount or benefit Amount
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized loss on available for sale securities:
Unrealized holding losses arising during the period $ (394) - $ (394)
Less: Reclassification adjustment for gains
Realized during the period - - -
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss at September 30, 1999 $ (394) - $ (394)
-----------------------------------------------------------------------------------------------------------------------
Unrealized gain on available for sale securities:
Unrealized holding gains arising during the period $ 990 - $ 990
Less: Reclassification adjustment for gains
realized during the period 261 - 261
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income at September 30, 1998 $ 729 - $ 729
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Before Income tax
Nine months ended September 30, 1999 and 1998 Tax (expense) Net-of-tax
(In Thousands) Amount or benefit Amount
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized loss on available for sale securities:
Unrealized holding losses arising during the period $ (2,289) - $ (2,289)
Less: Reclassification adjustment for gains
Realized during the period - - -
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss at September 30, 1999 $ (2,289) - $ (2,289)
-----------------------------------------------------------------------------------------------------------------------
Unrealized gain on available for sale securities:
Unrealized holding gains arising during the period $ 1,945 - $ 1,945
Less: Reclassification adjustment for gains
Realized during the period 261 - 261
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income at September 30, 1998 $ 1,684 - $ 1,684
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets, consisting primarily of residential mortgage loans and
mortgage-backed securities, were $997.9 million at September 30, 1999, an
increase of $26.9 million from $971.0 million at December 31, 1998. The increase
in total assets is primarily attributable to the purchase from Webster Bank of
residential mortgage loans of $194.9 million, offset by loan repayments of
$136.4 million and principal collected on mortgage-backed securities of $17.2
million. Shareholders' equity was $956.7 million at September 30, 1999 and
$929.7 million at December 31, 1998.
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 September 30,
1999, residential real estate loans comprised the entire loan portfolio. The
Company also invests in highly rated mortgage-backed securities.
The aggregate amount of nonaccrual loans was $1.5 million at September 30, 1999.
The following table details the Company's nonaccrual loans at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed-Rate Loans $ 191 $ 71
Residential Variable-Rate Loans 1,319 1,206
- ----------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans $ 1,510 $ 1,277
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1999 the allowance for loan losses was approximately $1.8
million, or 119% of nonaccrual assets. Management believes that the allowance
for loan losses is adequate to cover losses inherent in the portfolio.
9
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary sources of liquidity for the Company are net cash flows from
operating activities, investing activities and financing activities. Net cash
flows from operating activities primarily include net income, net changes in
prepaid expenses and other assets, accrued interest receivable and adjustments
for noncash items such as amortization on deferred costs and premiums, and
mortgage-backed securities net amortization and accretion. Net cash flows from
investing activities primarily include the purchase and repayments of
residential real estate loans and mortgage backed securities that are classified
as available for sale. Net cash flows from financing activities primarily
include net changes in capital generally related to stock issuances, 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, generally 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 payable on January 15, April 15, July 15 and October 15 in each
year, if declared.
ASSET/LIABILITY MANAGEMENT
- --------------------------
The goal of the Company's asset/liability management policy is to manage
interest-rate risk, so as to maximize net interest income over time in changing
interest-rate environments while maintaining acceptable levels of risk. The
Company must provide for sufficient liquidity for daily operations. The Company
prepares estimates of the level of prepayments and the effect of such
prepayments on the level of future earnings due to reinvestment of funds at
rates different than those that currently exist. The Company is unable to
predict future fluctuations in interest rates and as such the market values of
certain of the Company's financial assets are sensitive to fluctuations in
market interest rates. Changes in interest rates can affect the value of its
loans and other interest-earning assets. At September 30, 1999, 59.1% of the
Company's residential mortgage loans were variable-rate loans. The Company
believes these residential mortgage loans are less likely to incur prepayments
of principal.
10
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
For the three and nine months ended September 30, 1999, the Company reported net
income of $15.2 million and $44.9 million, respectively, or $149,620 and
$442,380, respectively, per common share on a diluted basis, compared to the
three and nine months ended September 30, 1998 which amounted to $15.3 million
and $43.7 million, respectively, or $151,200 and $430,060, respectively, per
common share on a diluted basis.
Total interest income for the three and nine months ended September 30, 1999
amounted to $16.2 million and $47.9 million, respectively, net of servicing
fees, compared to the three and nine months ended September 30, 1998 which
amounted to $16.2 million and $46.3 million, respectively. The following table
shows the major categories of average interest-earning assets, their respective
interest income and the yields earned by the Company:
<TABLE>
<CAPTION>
Three Months Ended September 30, Three Months Ended September 30,
1999 1998
Average Interest Average Average Interest Average
(In Thousands) Balance Income Yield Balance Income Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans $ 862,179 $ 14,367 6.67% $ 783,696 $ 13,412 6.85%
Mortgage-Backed Securities 101,852 1,596 6.27% 150,367 2,517 6.69%
Interest Bearing Deposits 15,275 217 5.68% 20,066 229 4.57%
- -----------------------------------------------------------------------------------------------------------------------
Total $ 979,306 $ 16,180 6.61% $ 954,129 $ 16,158 6.77%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, Nine Months Ended September 30,
1999 1998
Average Interest Average Average Interest Average
(In Thousands) Balance Income Yield Balance Income Yield
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans $ 844,091 $ 42,411 6.70% $ 732,197 $ 38,526 7.02%
Mortgage-Backed Securities 107,460 5,064 6.28% 149,845 7,521 6.69%
Interest Bearing Deposits 11,542 411 4.74% 8,667 300 4.58%
- -----------------------------------------------------------------------------------------------------------------------
Total $ 963,093 $ 47,886 6.63% $ 890,709 $ 46,347 6.94%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses for the three and nine months ended September 30,
1999, amounted to $120,000 and $360,000, respectively. The provision for loan
losses for both the three and nine months ended September 30, 1998, amounted to
$150,000. The provision for loan losses reflects the increase in the total
residential mortgage loan portfolio.
Noninterest expenses for the three and nine months ended September 30, 1999
amounted to $882,000 and $2.6 million, respectively, compared to the noninterest
expenses for the three and nine months ended September 30, 1998 which amounted
to $933,000 and $2.8 million, respectively. Noninterest expenses included
advisory fees and dividends on Series A Preferred Stock. The reduction in
noninterest expenses for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998 of $164,000 is due primarily to the
write-off of remaining start-up costs in the fourth quarter of 1998. No income
tax expense was recorded for either period.
RECENT FINANCIAL ACCOUNTING STANDARDS
- -------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement, as amended, is effective for fiscal
years beginning after June 15, 2000, 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. This statement is not expected to impact the Company since
the Company does not engage in hedging activities or utilize derivative
instruments.
11
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
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 Financial Corporation
("Webster"), to ensure proper date recognition.
The Company has reviewed documentation provided by Webster and has determined
that Webster is taking the appropriate steps to become Year 2000 compliant.
II. The Costs To Address The Company's Year 2000 Issues
- --------------------------------------------------------
The Company currently pays a monthly servicing and managerial fee to Webster as
agreed upon in the Advisory Service Agreement and the Master Service Agreement.
The Company 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, pursuant to 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 has completed 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 addressed, included: 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 has been completed 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 have been formulated.
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 Annual Report on Form 10-K and subsequent Quarterly Reports on
Form 10-Q.
12
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following table summarizes the estimated market value of the Company's
interest-sensitive assets and interest-sensitive liabilities at September 30,
1999 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 September 30, 1999
Interest Sensitive Assets:
Mortgage-Backed Securities $ 99,939 $ 98,766 $ 2,201 $ (3,065)
Variable-Rate Residential Loans 516,661 517,466 10,083 (12,498)
Fixed-Rate Residential Loans 357,979 356,312 10,847 (14,108)
Interest-Sensitive Liabilities:
Series A Preferred Stock 40,000 40,000 2,269 (2,850)
- ----------------------------------------------------------------------------------------------------------------------
</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 to differ from
those in any forward-looking statements include changes in interest rates and
the general economy in the Connecticut market area where a substantial portion
of the real estate securing the Company's loans are located. Such developments
could have an adverse impact on the Company's financial position and results of
operations.
13
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Numbers Description
--------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEBSTER PREFERRED CAPITAL CORPORATION
-------------------------------------
Registrant
BY: /s/ Peter J. Swiatek
----------------------------------
Peter J. Swiatek,
Vice President & Treasurer
Principal Financial Officer
Principal Accounting Officer
Date: November 9, 1999
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US-DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 16,453
<SECURITIES> 98,766
<RECEIVABLES> 878,616
<ALLOWANCES> (1,791)
<INVENTORY> 0
<CURRENT-ASSETS> 5,898
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 997,942
<CURRENT-LIABILITIES> 1,275
<BONDS> 0
40,000
1,000
<COMMON> 1
<OTHER-SE> 955,666
<TOTAL-LIABILITY-AND-EQUITY> 997,942
<SALES> 47,886
<TOTAL-REVENUES> 47,886
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,641
<LOSS-PROVISION> 360
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 44,885
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,885
<EPS-BASIC> 442,380
<EPS-DILUTED> 442,380
</TABLE>
