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, 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
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2286
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
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I
<S> <C> <C>
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 ..................................... 14
Item 8. Financial Statements and Supplementary Data..................................................... 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................................ 26
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 27
Item 11. Executive Compensation.......................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................................ 29
Item 13. Certain Relationships and Related Transactions.................................................. 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................................................ 30
</TABLE>
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, in cash which the Company used to purchase residential
mortgage loans and mortgage-backed securities. During 1999, Webster Bank made no
contributions to the Company. As of December 31, 1999 and 1998, 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, 1999, approximately 41.3% of the Company's
residential mortgage loans are fixed-rate loans and 58.7% 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 with respect to 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, as amended (the "Code"). The Company generally will 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 $967.2 million at December 31, 1999, a decrease of
$3.8 million from $971.0 million at December 31, 1998. Shareholder's equity was
$926.2 million at December 31, 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 December 31,
1999, 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 $1.1
million, $1.3 million and $1.3 million, respectively at December 31, 1999, 1998
and 1997. The following table details the Company's nonaccrual assets at
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Assets:
Residential Fixed-Rate Loans $ 319 $ 71 $ 158
Residential Variable-Rate Loans 830 1,206 1,145
- ----------------------------------------------------------------------------------------------------------
Total $ 1,149 $ 1,277 $ 1,303
==========================================================================================================
</TABLE>
At December 31, 1999, 1998 and 1997 the allowance for loan losses were
approximately $1.9 million, $1.6 million, and $1.5 million or 166%, 121% and
118%, respectively, of nonaccrual assets, and .23%, .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, 1999 and 1998 follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998
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<S> <C> <C>
Fixed-Rate Loans:
15 yr. Loans $ 113,950 $ 114,924
20 yr. Loans 5,322 3,213
25 yr. Loans 2,758 1,849
30 yr. Loans 227,977 192,490
- ----------------------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 350,007 312,476
- ----------------------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 6,108 5,222
20 yr. Loans 7,839 6,504
25 yr. Loans 6,759 8,578
30 yr. Loans 476,647 484,824
- ----------------------------------------------------------------------------------------------------------
Total Variable-Rate Loans 497,353 505,128
- ----------------------------------------------------------------------------------------------------------
Total Residential Mortgage Loans $ 847,360 $ 817,604
Premiums and Deferred Fees on Loans, Net 3,762 3,585
Less: Allowance for Loan Losses (1,911) (1,555)
- ----------------------------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $ 849,209 $ 819,634
==========================================================================================================
</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. During 1999, Webster Bank made no contributions to the Company.
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
For Year Ended December 31, (Date of Inception)
(In Thousands) 1999 1998 to December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 1,555 $ 1,538 $ -
Allowance for Loan Losses on Acquired Loans - - 1,544
Provision Charged to Operations 480 300 -
Charge-offs (124) (284) (6)
Recoveries - 1 -
- ---------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,911 $ 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
Corp. ("Freddie Mac") or Fannie Mae. Nonconforming residential mortgage loans do
not qualify in one or more respects for purchase by Fannie Mae or Freddie Mac
under their standard programs. The nonconforming residential mortgage loans that
the Company purchases generally have original principal balances which exceed
the limits for Freddie Mac 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, Freddie Mac 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
5
<PAGE>
estate mortgage conduits or any interests, other than as a creditor, in any
taxable mortgage pools.
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, 1999 and 1998, the Company did not hold any commercial mortgage
loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity needs 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). For taxable years
beginning after December 31, 2000, this requirement will be relaxed, but the
Company still will be required to distribute 90% of its "REIT taxable 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
1999 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 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 1999 and 1998
totaled $60.3 million and $58.2 million, respectively. Dividends declared on the
Series A Preferred Stock in 1999 and 1998 totaled $3.0 million for each year.
Dividends declared on the Series B Preferred Stock in 1999 and 1998 totaled
$862,500 for each year.
The market price for the Series B Preferred Stock averaged $10.247 and
$10.597 for the years ending December 31, 1999 and 1998, respectively. The
Series B Preferred Stock reached a low of $9.125 and a high of $11, during the
year ended December 31, 1999. The Series B Preferred Stock reached a low of
$10.125 and a high of $11, during the year ended December 31, 1998.
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 in this document.
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
BALANCE SHEET DATA At December 31,
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale Securities, at Fair Value $95,647 $118,262
Residential Mortgage Loans, Net 849,210 819,634
Total Assets 967,209 970,961
Total Liabilities 982 1,243
Mandatorily Redeemable Preferred Stock 40,000 40,000
Total Shareholders' Equity 926,227 929,718
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Period from
March 17, 1997
INCOME STATEMENT DATA For Year Ended December 31, (Date of Inception) to
(In Thousands) 1999 1998 D0ecember 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Interest Income $64,219 $62,134 $38,065
Provision for Loan Losses 480 300 -
Gain on Sale of Securities - 261 -
Noninterest Expenses 3,522 3,836 220
- ----------------------------------------------------------------------------------------------------------------------
Income Before Taxes 60,217 58,259 37,845
Income Taxes - - -
- ----------------------------------------------------------------------------------------------------------------------
Net Income 60,217 58,259 37,845
Preferred Stock Dividends 862 862 168
- ----------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $59,355 $57,397 $37,677
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Period from
March 17, 1997
For Year Ended December 31, (Date of Inception)
SIGNIFICANT STATISTICAL DATA* 1999 1998 to December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income per Common Share
Basic $593,550 $573,970 $376,770
Diluted $593,550 $573,970 $376,770
Dividends Declared per Common Share $602,910 $582,250 $380,470
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*No ratio of earnings to fixed charges is presented because the Company has no
fixed charges.
10
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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. During 1999, Webster Bank made no contributions to
the Company. Total assets at December 31, 1999 and December 31, 1998 were $967
million and $971 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). For taxable years
beginning after December 31, 2000, this requirement will be relaxed, but the
Company still will be required to distribute 90% of its "REIT taxable 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.
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,
1999 and 1998, 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, 1999, 1998
and 1997 were approximately $1.1 million, $1.3 million and $1.3 million,
respectively. The following table details the Company's nonaccrual assets at
December 31, 1999, 1998 and 1997:
NONACCRUAL ASSETS:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed-Rate Loans $ 319 $ 71 $ 158
Residential Variable-Rate Loans 830 1,206 1,145
- -----------------------------------------------------------------------------------------------------------------------
Total $ 1,149 $ 1,277 $ 1,303
=======================================================================================================================
</TABLE>
At December 31, 1999, 1998 and 1997, the allowances for loan losses
were approximately $1.9 million, $1.6 million and $1.5 million, or 166%, 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 include net changes in capital generally related to stock issuances,
capital contributions from Webster Bank and dividend payments.
11
<PAGE>
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, 1999, 58.7% 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 years ended December 31, 1999 and 1998, the Company reported
net income of $60.2 million and $58.3 million, respectively or $593,550 and
$573,970, respectively, 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 1999 amounted to $64.2 million, net of
servicing fees, an increase of $2.1 million from $62.1 million, net of servicing
fees, in 1998. The average balance of total mortgage loans, net, for the years
ended December 31, 1999 and December 31, 1998 was $849.8 million and $755.7
million, respectively, and the yield was 6.72% and 6.95%, respectively.
The provision for loan losses for the years ended December 31, 1999 and
1998, amounted to $480,000 and $300,000, respectively. 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 years ended December 31, 1999 and 1998 and
for the period of March 17, 1997 (date of inception) to December 31, 1997
amounted to $3.5 million, $3.8 million and $220,000, respectively, and included
advisory fees, dividends on Series A Preferred Stock and amortized start-up
costs. No income tax expense was recorded for any of the periods.
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 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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.
Those methods must be consistent with the entities approach to managing risk.
SFAS No. 133 amended, is now effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 is not expected to impact the
Company since it 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.
YEAR 2000 READINESS DISCLOSURE STATEMENT
There has been no disruption to the company's operations since January
1, 2000 and any further disruption is not expected. The company will continue to
monitor its position.
13
<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, 1999 and 1998, and the projected change to market values if
interest rates instantaneously increase or decrease by 100 basis points.
<TABLE>
<CAPTION>
Estimated Market Value Impact
(In Thousands) Book Value Market Value -100 BP +100 BP
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
Interest Sensitive Assets:
Mortgage-Backed Securities $ 97,086 $ 95,647 $ 2,617 $ (3,276)
Variable-Rate Residential Loans 497,353 492,946 10,570 (12,670)
Fixed-Rate Residential Loans 350,007 343,634 11,533 (14,017)
Interest-Sensitive Liabilities:
Series A Preferred Stock 40,000 40,000 2,667 (3,084)
- ----------------------------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------------------------
</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.
14
<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, 1999 and
1998, and the related statements of income, shareholders' equity, and cash flows
for each of the years in the two-year period ended December 31, 1999 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 1999 and the period of March 17, 1997 (date of inception) to December 31,
1997 in conformity with generally accepted accounting principles.
- ---------------
KPMG LLP
Hartford, Connecticut
January 28, 2000
15
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 16,667 $ 26,964
Mortgage-Backed Securities Available for Sale at Fair Value (Note 2) 95,647 118,262
Residential Mortgage Loans, Net (Note 3) 849,210 819,634
Accrued Interest Receivable 5,285 5,422
Other Real Estate Owned 60 -
Prepaid Expenses and Other Assets 340 679
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 967,209 $ 970,961
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Dividends Payable $ 885 $ 1,019
Accrued Expenses and Other Liabilities 97 224
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 982 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 (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 928,799 928,799
Distributions in Excess of Accumulated Earnings (2,134) (1,198)
Accumulated Other Comprehensive (Loss) Income (1,439) 1,116
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 926,227 929,718
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 967,209 $ 970,961
======================================================================================================================
</TABLE>
See accompanying notes to financial statements
16
<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 December 31, of Inception) to
----------------------------------- December 31, 1997
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 57,105 $ 52,486 $ 37,177
Securities 7,114 9,648 888
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Income 64,219 62,134 38,065
Provision for Loan Losses (Note 3) 480 300 -
- ----------------------------------------------------------------------------------------------------------------------
Interest Income After Provision for Loan Losses 63,739 61,834 38,065
Noninterest Income:
Gain on Sale of Securities - 261 -
Noninterest Expenses:
Advisory Fee Expense Paid to Parent (Note 7) 150 150 127
Dividends on Mandatorily Redeemable Preferred Stock 2,950 2,950 66
Amortization of Start-up Costs - 291 17
Other Noninterest Expenses 422 445 10
- ----------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 3,522 3,836 220
Income Before Taxes 60,217 58,259 37,845
Income Taxes (Note 8) - - -
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME 60,217 58,259 37,845
Preferred Stock Dividends 862 862 168
- ----------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders $ 59,355 $ 57,397 $ 37,677
======================================================================================================================
Net Income Per Common Share
Basic $ 593,550 $ 573,970 $ 376,770
Diluted $ 593,550 $ 573,970 $ 376,770
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
17
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Distributions Accumulated
in Excess of Other
Preferred Common Paid-In Accumulated Comprehensive
Stock Stock Capital Earnings Income (Loss) 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 Declared:
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 Declared:
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
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income for 1999 - - - 60,217 - 60,217
Net unrealized losses on Available
for Sale Securities, net of
reclassification adjustments - - - - (2,555) (2,555)
--------------
Total Comprehensive Income 57,662
--------------
Dividends Declared:
Common Stock ($602,910 per share) - - - (60,291) - (60,291)
Preferred Stock Series B
($0.8625 per share) - - - (862) - (862)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 1,000 $ 1 $ 928,799 $ (2,134) $ (1,439) $ 926,227
=============================================================================================================================
</TABLE>
See accompanying notes to financial statements
18
<PAGE>
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the Year Ended For the Period from
December 31, March 17, 1997
-------------------------- (Date of Inception)
1999 1998 to December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 60,217 $ 58,259 $ 37,845
Adjustments to Reconcile Net Cash Provided by Operating
Activities:
Provision for Loan Losses 480 300 -
Accretion of Securities Discount (36) (1,493) (215)
Amortization of Deferred Loan Fees and Premiums 1,157 1,467 444
Gain on Sale of Securities - (261) -
Decrease (Increase) in Accrued Interest Receivable 137 (897) (4,525)
Decrease (Increase) in Prepaid Expenses and Other Assets 339 466 (129)
(Decrease) Increase in Accrued Liabilities (261) 334 909
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 62,033 58,175 34,329
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities - (51,682) (119,971)
Principal Collected on Mortgage-Backed Securities 20,096 7,233 160
Proceeds from Sales of Mortgage-Backed Securities - 49,083 -
Purchase of Loans (194,929) (389,123) (98,835)
Principal Repayments of Loans, Net 163,656 203,356 79,776
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (11,177) (181,133) (138,870)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends Declared on Common and Preferred Stock (61,153) (59,087) (38,215)
Net Proceeds from Issuance of Preferred Stock - - 48,562
Contributions from Parent - 182,842 120,361
- ----------------------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (61,153) 123,755 130,708
- ----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in Cash and Cash Equivalents (10,297) 797 26,167
Cash and Cash Equivalents at Beginning of Period 26,964 26,167 -
- ----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 16,667 $ 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
19
<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, 1999, 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, and disclosure of contingent assets
and liabilities, as of the date of the financial statements 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, 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) OTHER REAL ESTATE OWNED
Other real estate owned consists of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other
real estate owned is 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, 1999, there was $59,857 in other real estate owned by the Company.
As of December 31, 1998, there was no other real estate owned by the Company.
20
<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 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. Realized gains and losses on the sales of
securities are recorded using the specific identification method. Unrealized
losses on Securities are charged to earnings when the decline in fair value of a
mortgage backed security is judged to be other than temporary.
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, 1999, 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 and 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 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
21
<PAGE>
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. Applications of SFAS No.
130 will not have an impact on the 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 1999 Financial Statement Presentation.
NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
In March 1998, Webster Bank contributed $51.8 million in cash to the
Company which was used to purchase Government National Mortgage Association
("GNMA") mortgage-backed securities. During 1999, Webster Bank did not make any
contributions to the Company. The following table sets forth certain information
regarding the mortgage-backed securities:
<TABLE>
<CAPTION>
(In Thousands) Mortgage-Backed Securities
- ----------------------------------------------------------------------------------------------------------------------
Recorded Unrealized Unrealized Estimated
December 31, 1999 Value Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Portfolio: $ 97,086 $ 989 $ (2,428) $ 95,647
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Recorded Unrealized Unrealized Estimated
December 31, 1998 Value Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for Sale Portfolio: $ 117,146 $ 1,116 $ - $ 118,262
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no sales of mortgage-backed securities for the year ending
December 31, 1999. During 1998, the Company sold $48.8 million of
mortgage-backed securities which resulted in a gain of $261,431.
All mortgage-backed securities have a contractual maturity of over 10
years. The weighted average yield at December 31, 1999 is 6.79%. Although the
stated final maturity of these obligations are long-term, the weighted average
life is much shorter due to scheduled repayments and prepayments.
22
<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,
------------------------------------------------------------------
1999 1998
------------------------------------------------------------------
Carrying Fair Market Carrying Fair Market
(In Thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
15 yr. Loans $ 113,950 $ 112,123 $ 114,924 $ 117,278
20 yr. Loans 5,322 5,229 3,213 3,315
25 yr. Loans 2,758 2,679 1,849 1,906
30 yr. Loans 227,977 223,603 192,490 198,124
- -------------------------------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 350,007 343,634 312,476 320,623
- -------------------------------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 6,108 6,059 5,222 5,367
20 yr. Loans 7,839 7,927 6,504 6,716
25 yr. Loans 6,759 6,624 8,578 8,820
30 yr. Loans 476,647 472,336 484,824 500,318
- -------------------------------------------------------------------------------------------------------------------
Total Variable-Rate Loans 497,353 492,946 505,128 521,221
- -------------------------------------------------------------------------------------------------------------------
Total Residential Mortgage Loans $ 847,360 $ 836,580 $ 817,604 $ 841,844
Premiums and Deferred Fees on Loans, Net 3,761 3,585
Less: Allowance for Loan Losses (1,912) (1,555)
- -------------------------------------------------------------------------------------------------------------------
Residential Mortgage Loans, Net $ 849,210 $ 819,634
===================================================================================================================
</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, 1999, approximately 41.3% of the Company's
residential mortgage loans are fixed-rate loans and approximately 58.7% 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
Year Ended December 31, (Date of Inception)
(In Thousands) 1999 1998 to December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at Beginning of Period $ 1,555 $ 1,538 $ -
Allowance for Loan Losses on Acquired Loans - - 1,544
Provision Charged to Operations 480 300 -
Charge-offs (123) (284) (6)
Recoveries - 1 -
- ---------------------------------------------------------------------------------------------------------------------
Balance at End of Period $ 1,912 $ 1,555 $ 1 ,538
=====================================================================================================================
</TABLE>
23
<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.
During 1999, there were no additional contributions of cash from Webster Bank to
the Company.
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.
24
<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). For the taxable years beginning
after December 31, 2000, the requirement will be relaxed but the Company still
will be required to distribute 90% of its "REIT taxable 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
BEFORE INCOME TAX
TAX (EXPENSE) NET-OF-TAX
(In Thousands) AMOUNT OR BENEFIT AMOUNT
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized net loss on available for sale securities:
Unrealized net holding loss arising during the period $ (2,555) - $ (2,555)
Less: Reclassification adjustment for gains
realized during the period - - -
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss at December 31, 1999 $(2,555) - $(2,555)
-----------------------------------------------------------------------------------------------------------------------
Unrealized gain on available for sale securities:
Unrealized holding gains arising 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 arising during the period $ 64 - $ 64
Less: Reclassification adjustment for gains
realized during the period - - -
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income at December 31, 1997 $ 64 - $ 64
=======================================================================================================================
</TABLE>
25
<PAGE>
NOTE 10: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999
(In Thousands, Except Share Data) First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Interest Income $ 15,506 $ 16,200 $ 16,180 $ 16,333
Provision for Loan Losses 120 120 120 120
Gain on Sale of Securities - - - -
Noninterest Expenses 876 883 882 881
----------------------------------------------------------------------------
NET INCOME 14,510 15,197 15,178 15,332
Preferred Dividends 216 215 216 215
----------------------------------------------------------------------------
Net Income Available to Common
Shareholders $ 14,294 $ 14,982 $ 14,962 $ 15,117
============================================================================
Net Income Per Common Share
Basic $ 142,940 $ 149,820 $ 149,620 $ 151,170
============================================================================
Diluted $ 142,940 $ 149,820 $ 149,620 $ 151,170
============================================================================
</TABLE>
<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
============================================================================
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
26
<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:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ---- --- -------------------------
<S> <C> <C>
Ross M. Strickland 50 President and Director
Harriet Munrett Wolfe 46 Director
Gregory S. Madar 37 Vice President and Assistant Secretary
Peter J. Swiatek 41 Treasurer and Director
John D. Benjamin 52 Secretary
</TABLE>
The following is a summary of the experience of the officers and
directors of the Company:
Ross M. Strickland is the President and 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, General Counsel and Secretary of Webster and Webster
Bank. Ms. Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice
President and Counsel, was appointed Secretary in June 1997 and General Counsel
in September 1999. 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 Senior Vice President and Assistant Controller of Webster Bank.
Mr. Madar, a Certified Public Accountant, joined Webster Bank in 1995 as Vice
President and Tax Manager and was elected Senior Vice President and Assistant
Controller in January 2000. 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 Treasurer and a director 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.
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 in various management positions and was elected Vice
President in 1984 and Senior Vice President in 1991.
27
<PAGE>
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, 1999, all Section 16(a) filing requirements applicable
to the Company's officers, directors and more than 10% owners were complied 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 Service 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.
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
28
<PAGE>
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 extent 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, is controlled
by and through advisory and servicing agreements, and is 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.
29
<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, 1999 and 1998
Statements of Income for years ended December 31, 1999, 1998 and the
period from March 17, 1997 (date of inception) to December 31, 1997
Statements of Shareholders' Equity for years ended December 31, 1999,
1998 and the period from March 17, 1997 (date of inception) to December
31, 1997
Statements of Cash Flows for years ended December 31, 1999, 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
30
<PAGE>
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.
(d) There are no financial statements and financial statement schedules
which were excluded from this Report which are required to be included
herein.
31
<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:
--------------------------------------------
Ross M. Strickland, President and Director
Date: March 22, 2000
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 22, 2000.
By:
----------------------------------------------
Ross M. Strickland President and Director
(Principal Executive Officer)
By:
----------------------------------------------
Peter J. Swiatek, Treasurer and Director
(Principal Financial Officer and Principal
Accounting Officer)
By:
----------------------------------------------
Harriet Munrett Wolfe, Director
32
<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.
33
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001047865
<NAME> Webster Preferred Capital Corporation
<MULTIPLIER> 1000
<CURRENCY> US-dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 16,667
<SECURITIES> 0
<RECEIVABLES> 851,121
<ALLOWANCES> (1,911)
<INVENTORY> 0
<CURRENT-ASSETS> 5,685
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 967,209
<CURRENT-LIABILITIES> 982
<BONDS> 0
40,000
1,000
<COMMON> 1
<OTHER-SE> 925,226
<TOTAL-LIABILITY-AND-EQUITY> 967,209
<SALES> 64,219
<TOTAL-REVENUES> 64,219
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,522
<LOSS-PROVISION> 480
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 60,217
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,217
<EPS-BASIC> 593,550
<EPS-DILUTED> 593,550
</TABLE>
