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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997 OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___ to __________
Commission File Number: 0-23513
WEBSTER PREFERRED CAPITAL CORPORATION
-------------------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1478208
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
145 BANK STREET, WATERBURY, CONNECTICUT 06702
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2286
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $1 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-
The aggregate market value of the voting 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
WEBSTER PREFERRED CAPITAL CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business....................................................... 3
General................................................... 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
2
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, Webster Bank contributed approximately $120.4
million in cash to the Company, which was used to purchase mortgage-backed
securities. As of December 31, 1997, the Mortgage Assets owned by the Company
were comprised of residential mortgage loans and mortgage-backed securities.
Although the Company may acquire and hold a variety of Mortgage Assets, its
present intention is to acquire only residential mortgage loans and
mortgage-backed securities. The Company intends to hold such assets primarily
for income, thereby seeking to generate net income for distribution to its
stockholders based on the spread between the interest income 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, 1997, approximately 35.3% of the
Company's residential mortgage loans are fixed rate loans and 64.7% 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 in respect of, shares of its common stock to the
extent such redemptions, payments or distributions would cause the Company's
total stockholders' 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 will
not constitute regulatory capital of either Webster Bank or Webster.
The Company elected to be treated as a REIT under the Internal Revenue Code
(the "Code"). The Company will generally not be subject to federal and
Connecticut state income tax to the extent that it distributes its earnings to
its stockholders 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 payable on the preferred shares will be deductible for
federal income tax purposes as a result of the Company's qualification as a
REIT.
ASSET QUALITY
The Company maintains asset quality by acquiring residential real estate
loans that have been conservatively underwritten, aggressively managing
nonaccrual assets and maintaining adequate reserve coverage. At December 31,
1997, residential real estate loans comprised 100% of the total loan portfolio.
3
NONACCRUAL ASSETS
The aggregate amount of nonaccrual assets was $1.3 million at December 31, 1997.
The following table details the Company's nonaccrual assets at December 31,
1997:
(In Thousands) At December 31, 1997
- --------------------------------------------------------------------------------
Nonaccrual Assets:
Residential Fixed Rate Loans $ 158
Residential Variable Rate Loans 1,145
- --------------------------------------------------------------------------------
Total $1,303
- --------------------------------------------------------------------------------
At December 31, 1997 the allowance for loan losses was $1.5 million, or 118% of
nonaccrual assets and .24% 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 and fair market value of residential
mortgage loans at December 31, 1997 follows:
Carrying
(In Thousands) Amount
- --------------------------------------------------------------------------------
Fixed-Rate Loans:
Fixed-Rate 15 yr Loans $59,631
Fixed-Rate 20 yr Loans 1,636
Fixed-Rate 25 yr Loans 813
Fixed-Rate 30 yr Loans 161,884
- -------------------------------------------------------------------------------
Total Fixed-Rate Loans 223,964
- -------------------------------------------------------------------------------
Variable-Rate Loans:
Variable-Rate 15 yr Loans 4,896
Variable-Rate 20 yr Loans 4,004
Variable-Rate 25 yr Loans 8,553
Variable-Rate 30 yr Loans 393,924
- -------------------------------------------------------------------------------
Total Variable-Rate Loans 411,377
- -------------------------------------------------------------------------------
Total Residential Mortgage Loans $635,341
Premiums and Deferred Fees on Loans, Net 1,831
Less Allowance for Loan Losses (1,538)
- -------------------------------------------------------------------------------
Residential Mortgage Loans, Net $635,634
- -------------------------------------------------------------------------------
In March 1997, Webster Bank contributed approximately $617.0 million of Mortgage
Assets, net as part of the formation of the Company. The $617.0 million
consisted of $215.8 million of fixed rate loans, $401.3 million of variable rate
loans, net of premiums, deferred fees on loans and an allowance for loan losses.
4
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 period
ending December 31, 1997 follows:
For the Period from
March 17, 1997
(Date of Inception)
(In Thousands) to December 31, 1997
- --------------------------------------------------------------------------------
Balance at Beginning of Period $ -
Allowance for Loan Losses on Acquired Loans 1,544
Provisions Charged to Operations -
Charge-offs (6)
Recoveries -
- --------------------------------------------------------------------------------
Balance at End of Period $1,538
- --------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
RESIDENTIAL MORTGAGE LOANS. The Company may from time to time acquire both
conforming and nonconforming residential mortgage loans. Conventional conforming
residential mortgage loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the Federal Home Loan Mortgage Corporation
("FHLMC") or Fannie Mae. Under current guidelines, effective January 1, 1998,
the maximum principal balance allowed on conforming residential mortgage loans
ranges from $227,150 ($340,725 for residential mortgage loans secured by
mortgaged properties located in either Alaska or Hawaii) for one-unit
residential loans to $436,600 ($654,900 for residential mortgage loans secured
by mortgaged properties located in either Alaska or Hawaii) for four- unit
residential loans. Nonconforming residential mortgage loans do not qualify in
one or more respects for purchase by Fannie Mae or FHLMC under their standard
programs. The nonconforming residential mortgage loans that the Company
purchases generally have original principal balances which exceed the limits for
FHLMC or Fannie Mae programs. The Company's nonconforming residential mortgage
loans are expected to meet the requirements for sale to national private
mortgage conduit programs or other investors in the secondary mortgage market.
At December 31, 1997, less than 1% of the Company's residential mortgage loans
were nonconforming.
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.
5
The Company intends to acquire only investment-grade mortgage-backed
securities issued or guaranteed by Fannie Mae, FHLMC and Government National
Mortgage Association ("GNMA"). The Company does not intend to acquire any
interest-only, principal-only or high-risk mortgage-backed securities. Further,
the Company does not intend to acquire any residual interests in real estate
mortgage conduits or any interests, other than as a creditor, in any taxable
mortgage pools.
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, 1997 the Company did not hold any commercial mortgage loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition of
additional Mortgage Assets to replace such assets that are repaid and to fund
dividends on outstanding capital stock. The acquisition of additional Mortgage
Assets will be funded with the proceeds of interest and principal repayments on
the Company's portfolio of Mortgage Assets. 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 FDIC. Because the Company is a subsidiary of Webster Bank,
such federal banking regulatory authorities will 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
TAXATION
The Company elected to be treated as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ended December 31, 1997. As a
REIT, the Company generally will not be subject to federal and Connecticut state
income tax on net income and capital gains that it distributes to the holders of
its common stock and preferred stock.
To maintain REIT status, an entity must meet a number of organizational and
operational requirements, including a requirement that it currently distribute
to stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of non-cash income). If the Company fails to qualify as
a REIT in any taxable year, it will be subject to federal and Connecticut state
income tax at regular corporate rates. Notwithstanding qualification for
taxation as a REIT, the Company may be subject to federal, state and/or local
tax, on undistributed REIT taxable income and net income from prohibited
transactions.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT. The Company intends
to operate so as to qualify as a REIT under the Code, commencing with its
taxable year ended December 31, 1997. Although the Company believes that it will
be owned, organized and will operate in such a manner as to qualify as a REIT,
no assurance can be given as to the Company's ability to qualify as a REIT or
remain so qualified. 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
ITEM 2. PROPERTIES
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
At December 31, 1997, there were no legal proceedings to which the
Company was a party or to which any of its property was the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1997, the sole common shareholder of the Company, acting by
written consent dated December 17, 1997, approved the amended and restated
certificate of incorporation of the Company.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's common stock is owned by Webster Bank, and
consequently there is no market for such securities. The 2000 shares of
preferred stock issued to Webster Bank, as part of the Company's formation were
redeemed on December 22, 1997. The Company's Series A 7.375% Cumulative
Redeemable Preferred Stock ("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 ("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 for the year ended
1997 in December 1997 totaled $38,047,000.00. Dividends declared and paid
on the 2,000 preferred shares held by Webster Bank totaled $149,192.00 for
the period March 17, 1997 through December 22, 1997. Dividends declared on
the Series A Preferred Stock for the fourth quarter of 1997 totaled
$65,555.55 Dividends declared on Series B Preferred Stock for the fourth
quarter of 1997 totaled $19,166.67. The dividend calculation for the fourth
quarter for the Series A Preferred Stock and the Series B Preferred Stock
was based on eight days, December 24, 1997 (date of delivery of preferred
shares) through December 31, 1997.
The market price for the Series A Preferred Shares and Series B
Preferred Shares remained unchanged at $999.35 and $10, respectively, from
December 24, 1997 to December 31, 1997, the eight days of the fourth quarter for
which the stocks were outstanding.
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 stockholders. 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 Preferred Shares are
not expected to exceed 15% of the Company's capitalization, and (iii) the
Company does not anticipate incurring any indebtedness.
The Company's Registration Statement on Form S-11, as amended (File No.
333-38685) was declared effective by the Securities and Exchange Commission (the
"SEC") on December 18, 1997, and Post-Effective Amendment No. 1 thereto was
delcared effective on December 19, 1997. The date of the Company's initial
public offering of Series A Preferred Shares and Series B Preferred Shares was
December 24, 1997. The Company registered 40,000 shares of Series A Preferred
Stock and 1,000,000 shares of Series B Preferred Stock. The offering terminated
after all such shares were sold. The managing underwriter was Merrill Lynch &
Co. The aggregate price to the public of the Series A and Series B Preferred
Shares offered was $49,974,000.
From December 19, 1997 to December 31, 1997, the amount of expenses
incurred for the Company's account in connection with the issuance and
distribution of the Series A and Series B Preferred Shares registered for
underwriting discounts was $865,000, other expenses (including legal,
accounting, printing, registration, and miscellaneous) were $600,000 and total
expenses were $1,465,000. No such payments were direct or indirect payments to
directors, officers, general partners of the Company or their associates,
persons owning 10% or more of any of the Company's classes of equity securities
or to affiliates of the Company. The net offering proceeds to the Company after
deducting the total expenses described above were $48.5 million. Approximately
$38.4 million of net proceeds of its initial public offering were used to fund
payments to Webster bank of cash dividends of the Company's 1997 net income and
the remaining net proceeds were used to fund operations and to purchase
additional Mortgage Assets.
9
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 financial statements and notes thereto
appearing elsewhere herein. The Company's financial statements for the year
ended December 31, 1997 have been audited by the Company's independent
accountants.
FINANCIAL CONDITION DATA:
BALANCE SHEET DATA
(In Thousands) At December 31, 1997
- --------------------------------------------------------------------------------
Available for Sale Securities 120,090
Total Mortgage Loans, Net 635,634
Total Assets 787,561
Total Liabilities 909
Mandatorily Redeemable Preferred Stock 40,000
Total Shareholders' Equity 746,652
- --------------------------------------------------------------------------------
INCOME STATEMENT DATA: For the Period from
March 17, 1997
(Date of Inception)
(In Thousands) to December 31, 1997
- --------------------------------------------------------------------------------
Net Interest Income $ 38,065
Provision for Loan Losses -
---------------
Net Interest Income After
Provision for Loan Losses 38,065
Noninterest Expenses 220
---------------
Income Before Taxes 37,845
Income Taxes -
---------------
Net Income 37,845
Preferred Stock Dividends 168
---------------
Net Income Available to Common Shareholder $ 37,677
===============
- --------------------------------------------------------------------------------
10
SIGNIFICANT STATISTICAL DATA*
- --------------------------------------------------------------------------------
Net Income per Common Share:
Basic $ 376,770.00
Diluted $ 376,770.00
Dividends Declared per Common Share $ 380,470.00
- --------------------------------------------------------------------------------
* No ratio of earnings to fixed charges is presented because the Company has no
fixed charges.
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, Webster contributed approximately
$120.4 million in cash which the Company used to purchase mortgage-backed
securities. Total assets at December 31, 1997 were $787.6 million, consisting
primarily of residential mortgage loans and mortgage-backed securities.
The Company has elected to be treated as a REIT under the Code and
generally is not subject to federal income tax to the extent that it distributes
its earnings to its stockholders and maintains its qualification as a REIT. The
Company and Webster Bank will also benefit significantly from federal and state
tax treatment of dividends paid by the Company as a result of its qualification
as a REIT. The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements and other financial data included elsewhere herein.
PUBLIC OFFERING
On December 24, 1997, the Company completed an offering of 40,000
shares of Series A Preferred Stock, liquidation preference $1,000 per share, and
1,000,000 shares of Series B Preferred Stock, liquidation preference $10 per
share. The total net proceeds from the offering amounted to $48.5 million.
ASSET QUALITY
The Company maintains 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,
1997, residential real estate loans comprised the entire loan portfolio. The
Company also invests in highly rated mortgage-backed securities.
11
NONACCRUAL ASSETS
The aggregate amount of nonaccrual assets was $1.3 million at December
31, 1997. The following table details the Company's nonaccural assets at
December 31, 1997:
NONACCRUAL ASSETS:
- --------------------------------------------------------------------------------
(In Thousands) At December 31, 1997
- --------------------------------------------------------------------------------
Loans Accounted for on a Nonaccrual Basis:
Residential Fixed-Rate Loans $ 158
Residential Variable-Rate Loans 1,145
- --------------------------------------------------------------------------------
Total $1,303
- --------------------------------------------------------------------------------
At December 31, 1997 the allowance for loan losses was $1.5 million, or
118% 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
and dividend payments.
While scheduled loan amortization, maturing securities, short-term
investments and securities repayments are predictable sources of funds, loan and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition. One of the inherent risks of
investing in loans and mortgage-backed securities is the ability of such
instruments to incur prepayments of principal prior to maturity at prepayment
rates different than those estimated at the time of purchase. This generally
occurs because of changes in market interest rates. The market values of
fixed-rate loans and mortgage-backed securities are sensitive to fluctuations in
market interest rates, declining in value as interest rates rise. If interest
rates decrease, the market value of loans generally will tend to increase with
the level of prepayments also normally increasing.
Dividends on the Series A Preferred Stock are payable at the rate of
7.375% per annum (an amount equal to $73.75 per annum per share), and the
dividends on the Series B Preferred Stock are payable at the rate of 8.625% per
annum (an amount equal to $.8625 per annum per share), in all cases if, when and
as declared by the Board of Directors of the Company. Dividends on the preferred
shares are cumulative and, if declared, payable on January 15, April 15, July 15
and October 15 in each year, commencing January 15, 1998.
12
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, 1997, 64.7% 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.
The following table summarizes the estimated market value of the
Company's interest- sensitive assets and interest-sensitive liabilities at
December 31, 1997, and the projected change to market values if interest rates
instantaneously increase or decrease by 100 basis points.
Estimated Market Value
Impact
-----------------------------
(In Thousands) Book Value Market Value -100 BP +100 BP
- ----------------------------------------------------------------------------------------------------------------
Interest Sensitive Assets:
Mortgage-Backed Securities $ 120,026 $ 120,090 $ 1,478 $(2,765)
Variable Rate Residential Loans 411,377 423,140 3,776 (5,932)
Fixed Rate Residential Loans 223,964 229,150 4,421 (8,152)
Interest Sensitive Liabilities:
Series A Preferred Stock 40,000 40,000 1,179 (2,534)
- ----- ----------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
From March 17, 1997 (date of inception) to December 31, 1997, the
Company reported net income of $37.9 million, or $376,770 per common share on a
diluted basis. Because the Company was formed in March 1997, there are no
comparable results from previous periods. Total interest income for the period
amounted to $38.1 million, net of servicing fees. The average balance of total
mortgage loans, net for the period was $624.5 million, and the average yield was
7.52%. There were no provisions for loan losses for the period. Noninterest
expenses amounted to $220,000 and included advisory fees, dividends on Series A
Stock and amortization of start-up costs. No income tax expense was recorded for
the period.
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.
13
RECENT FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the method in which public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports issued to shareholders. This statement requires that public business
enterprises report quantitative and qualitative information about its reportable
segments, including profit or loss, certain specific revenue and expense items
and segment assets. This SFAS does not apply to the Company since the Company
has only one reportable operating segment.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of this statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. Comprehensive
income is the total of net income and all other non-owner changes in equity.
This statement is effective for fiscal years beginning after December 15, 1997
and reclassification of financial statements of earlier periods for comparative
purposes is required.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This statement establishes standards for
disclosing information about an entity's capital structure. This statement is
effective for financial statements issued for periods ending after December 15,
1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
This statement simplifies the standards for computing and presenting earnings
per share previously found in APB Opinion No. 15 and makes them comparable to
international standards. It replaces the presentation of primary earnings per
share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods.
YEAR 2000 IMPACT
The "Year 2000" issue refers to the potential impact of the failure of
computer programs and equipment to give proper recognition of dates beyond
December 31, 1999 and other issues related to the Year 2000 century date change.
Since the Company depends on Webster Bank as Advisor and Servicer, the Company
will be reliant on Webster Bank and its parent company, Webster Financial
Corporation ("Webster"), to ensure proper date recognition.
Webster Bank reports that it has completed its assessment of Year 2000
issues and has developed and begun implementing a plan to modify or replace
software and hardware systems to ensure proper date recognition. Webster Bank is
utilizing internal and external resources for this purpose.
Webster Bank has initiated formal communications with all significant
vendors to determine the extent to which vendors will be Year 2000 compliant.
Webster Bank requires compliance as a condition of future business. Contingency
plans for vendors' failure to comply are incorporated in Webster Bank's Year
2000 plan. There can be no guarantee that the systems on which the Company
relies will be in compliance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
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 statement of condition of Webster Preferred
Capital Corporation (a subsidiary of Webster Bank) as of December 31, 1997, and
the related statements of income, shareholders' equity, and cash flows for the
period 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of its operations and its
cash flows for the period March 17, 1997 (date of inception) to December 31,
1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 20, 1998
Hartford, Connecticut
15
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CONDITION
(Dollars in thousands, except per share data) December 31, 1997
----------------------------
ASSETS
Cash $26,167
Mortgage-Backed Securities Available for Sale (Note 2) 120,090
Residential Mortgage Loans, Net (Note 3) 635,634
Accrued Interest Receivable 4,525
Prepaid Expenses and Other Assets 1,145
----------------
TOTAL ASSETS $787,561
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Dividends Payable 491
Accrued Expenses and Other Liabilities 418
-----------------
TOTAL LIABILITIES 909
----------------
MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 4):
Series A 7.375% Cumulative Redeemable Preferred Stock,
liquidation preference $1,000 per share, par value $1.00 par
share; 40,000 shares authorized, issued and outstanding 40,000
SHAREHOLDERS' EQUITY (NOTE 5):
Common Stock, par value $.01 per share:
Authorized - 1,000 shares
Issued and Outstanding - 100 shares 1
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
Paid-In Capital 745,957
Distributions in Excess of Accumulated Earnings (370)
Unrealized Gains on Securities, Net 64
------------------
TOTAL SHAREHOLDERS' EQUITY 746,652
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $787,561
==================
See accompanying notes to financial statements
16
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
(In Thousands, Except Share Data)
For the Period from
March 17, 1997
(Date of Inception)
to December 31,1997
----------------------------
Interest Income:
Loans (Note 6) $37,177
Securities 888
-------------
Total Interest Income 38,065
Provision For Loan Losses -
-------------
Interest Income After Provision
for Loan Losses 38,065
--------------
Noninterest Expenses:
Advisory Fee Expense Paid to Parent (Note 7) 127
Dividends on Mandatorily Redeemable Preferred Stock 66
Amortization of Start-up Costs 17
Other Noninterest Expenses 10
-------------
Total Noninterest Expenses 220
Income Before Taxes 37,845
Income Taxes (Note 8) -
-------------
NET INCOME 37,845
Preferred Stock Dividends 168
-------------
Net Income Available to Common Shareholder $37,677
=============
Net Income Per Common Share:
Basic $376,770
==============
Diluted $376,770
==============
See accompanying notes to financial statements
17
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
Preferred Common Paid-In
Stock Stock Capital
------------- ------------- ---------------
Balance, March 17, 1997 $ - $ - $ -
Contributions by Webster Bank 2,000 1 735,382
Net Income - - -
Preferred Stock Redeemed (2,000) - 2,000
Net Proceeds from Sale of
Preferred Stock Series B 1,000 - 8,575
Dividends Paid or Accrued:
Common Stock ($380,470 per share) - - -
Preferred Stock ($74.60 per share) - - -
Preferred Stock Series B ($0.019 per share) - - -
Unrealized Gain on
Securities Available for Sale - - -
--------------------------------------------
Balance, December 31, 1997 $ 1,000 $ 1 $ 745,957
============================================
Distributions in
Excess of Unrealized
Accumulated Gains on
Earnings Securities, Net Total
----------------- -------------- ------------------
Balance, March 17, 1997 $ - $ - $ -
Contributions by Webster Bank - - 737,383
Net Income 37,845 - 37,845
Preferred Stock Redeemed - - -
Net Proceeds from Sale of
Preferred Stock Series B - - 9,575
Dividends Paid or Accrued:
Common Stock ($380,470 per share) (38,047) - (38,047)
Preferred Stock ($74.60 per share) (149) - (149)
Preferred Stock Series B ($0.019 per share) (19) - (19)
Unrealized Gain on
Securities Available for Sale - 64 64
----------------------------------------------------
Balance, December 31, 1997 $ (370) $ 64 $746,652
====================================================
See accompanying notes to financial statements
18
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(In Thousands)
For the Period from
March 17, 1997
(Date of Inception)
to December 31, 1997
----------------------------
Operating Activities:
Net Income $37,845
Adjustments to Reconcile Net Cash Provided (Used) by
Operating Activities:
Accretion of Securities Discount (215)
Amortization of Deferred Fees and Premiums 444
Increase in Accrued Interest Receivable (4,525)
Increase in Accrued Liabilities 909
Increase in Prepaid Expenses and Other Assets (129)
----------------
Net Cash Provided by Operating Activities 34,329
----------------
Investing Activities:
Purchase of Securities (119,971)
Principal Collected on Securities 160
Purchase of Loans (98,835)
Principal Repayments of Loans 79,776
----------------
Net Cash Used by Investing Activities (138,870)
----------------
Financing Activities:
Dividends Paid on Common and Preferred Stock (38,215)
Net Proceeds from Issuance of Preferred Stock 48,562
Contributions from Webster Bank 120,361
----------------
Net Cash Provided by Financing Activities 130,708
----------------
Increase in Cash and Cash Equivalents 26,167
Cash and Cash Equivalents at Beginning of Period -
----------------
Cash and Cash Equivalents at End of Period $26,167
================
19
SUPPLEMENTAL DISCLOSURES
(In Thousands):
Income Taxes Paid $ 0
Interest Paid $ 0
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
See accompanying notes to financial statements
20
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, 1997, 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. Although the Company may acquire and hold a variety
of mortgage assets, its present intention is to acquire only residential
mortgage loans and certain mortgage-backed securities.
The Company has elected to be treated as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code"), and will
generally not be subject to federal income tax to the extent that it distributes
its earnings to its stockholders and maintains its qualification as a REIT. All
of the shares of the Company's common stock, par value $0.01 per share, are
owned by Webster Bank, which is a federally-chartered and federally-insured
savings bank. Webster Bank has indicated to the Company that, for as long as any
of the Company's preferred shares are outstanding, Webster Bank intends to
maintain direct ownership of 100% of the outstanding common stock of the
Company.
B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amount of assets and liabilities as of
the date of the balance sheets and revenues and expenses for the periods
presented. The actual results of the Company could differ from those estimates.
A material estimate that is susceptible to near-term changes includes the
determination of the allowance for loan losses.
C) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is established based upon a review of the loan
portfolio, loss experience, specific problem loans, current and anticipated
economic conditions and other pertinent factors which, in management's judgment,
deserve current recognition in estimating loan losses.
Management believes that the allowance for loan losses is adequate. While
management believes it uses the best available information to recognize losses
on loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process of Webster Bank, periodically may review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance for loan losses based on judgments
different from those of management.
D) FORECLOSED PROPERTIES
Foreclosed properties consist of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Foreclosed
properties are reported at the lower of fair value less estimated selling
expenses or cost with an allowance for losses to provide for declines in value.
Operating expenses are charged to current period earnings and gains and losses
upon disposition are reflected in the statement of income when realized.
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.
21
The Company's Residential Mortgage Loans are exempt from the disclosure
provisions of the Statement of Financial Accounting Standard ("SFAS") No.114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.118,
since the Company's loans are comprised of large groups of smaller balance loans
which are collectively evaluated for impairment.
F) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are U.S. government agency securities and are
classified as Available for Sale. Available for Sale securities are carried at
fair value with unrealized gains and losses recorded as adjustments to
shareholders' equity. The adjustment to shareholders' equity is not tax effected
as the Company is generally not subject to federal and state income tax.
Management intends to hold these securities for indefinite periods of time as
part of its asset/liability strategy and may sell the securities in response to
changes in interest rates, changes in prepayment risk or other similar factors.
One of the risks inherent when investing in mortgage-backed securities is the
ability of such instruments to incur prepayments of principal prior to maturity.
Because of prepayments, the weighted-average yield of these securities may also
change, which could affect earnings.
G) PREPAID EXPENSES
Prepaid expenses are primarily organization costs which were incurred during the
formation of the Company. These expenses are being amortized over periods of
either 3 or 5 years.
H) STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers cash on hand
and in banks to be cash equivalents.
I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of securities (Note 2) is estimated based on prices published in
financial newspapers or quotations received from securities dealers or pricing
services.
In estimating the fair value of residential mortgage loans (Note 3), the
portfolio was classified into two categories, fixed-rate mortgage loans and
variable-rate mortgage loans. The categories were further segmented into 15, 20,
25, and 30 year contractual maturities. The fair value of each category is
calculated by discounting scheduled cash flows through estimated maturity using
market discount rates.
The calculation of fair value estimates of financial instruments is dependent
upon certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or settlement
are not reflected in the amounts disclosed. Fair value estimates are not
intended to reflect the liquidation value of the financial instruments.
NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
In November 1997, Webster Bank contributed $120.4 million in cash to the
Company, which was used to purchase Government National Mortgage Association
("GNMA") mortgage-backed securities. The following table sets forth certain
information regarding the mortgage-backed securities at December 31, 1997:
Mortgage-Backed Securities
- -----------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
(In Thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------
Available for Sale Portfolio: $ 120,026 $ 64 $ - $ 120,090
-----------------------------------------------------------------------------------------------
All mortgage-backed securities have a contractual maturity of over 10 years. The
weighted average yield at December 31, 1997 is 6.93% and the average remaining
life is less than 11 years. Although the stated final maturity of these
obligations are long-term, the weighted average life generally is much shorter
due to prepayments. There were no sales of mortgage-backed securities from March
17, 1997 (date of inception) through the period ended December 31, 1997.
22
NOTE 3: RESIDENTIAL MORTGAGE LOANS
A summary of the Company's carrying amount and fair market value of residential
mortgage loans at December 31, 1997 follows:
Carrying Fair Market
(In Thousands) Amount Value
- --------------------------------------------------------------------------------
Fixed-Rate Loans:
Fixed-Rate 15 yr Loans $ 59,631 $ 60,794
Fixed-Rate 20 yr Loans 1,636 1,679
Fixed-Rate 25 yr Loans 813 830
Fixed-Rate 30 yr Loans 161,884 165,847
- -----------------------------------------------------------------------------
Total Fixed-Rate Loans 223,964 229,150
- -----------------------------------------------------------------------------
Variable-Rate Loans:
Variable-Rate 15 yr Loans 4,896 5,011
Variable-Rate 20 yr Loans 4,004 4,102
Variable-Rate 25 yr Loans 8,553 8,750
Variable-Rate 30 yr Loans 393,924 405,277
- -----------------------------------------------------------------------------
Total Variable-Rate Loans 411,377 423,140
- -----------------------------------------------------------------------------
Total Residential Mortgage Loans $ 635,341 $ 652,290
- -----------------------------------------------------------------------------
Premiums and Deferred Fees on Loans, Net 1,831
Less Allowance for Loan Losses (1,538)
- -----------------------------------------------------------------
Residential Mortgage Loans, Net $635,634
- -----------------------------------------------------------------
In March 1997, Webster Bank contributed approximately $617.0 million, of
mortgage assets, net as part of the formation of the Company. The $617.0 million
consisted of $215.8 million of fixed rate loans, $401.3 million of variable rate
loans, net of premiums, deferred fees on loans and an allowance for loan losses.
As of December 31, 1997, approximately 35.3% of the Company's residential
mortgage loans are fixed-rate loans and approximately 64.7% are adjustable-rate
loans.
The following table sets forth certain information regarding the Company's loans
accounted for on a nonaccrual basis at December 31, 1997.
(In Thousands) At December 31, 1997
- --------------------------------------------------------------------------------
Residential mortgage loans accounted
for on a nonaccrual basis $1,303
Real estate acquired through foreclosure -
- --------------------------------------------------------------------------------
Total $1,303
- --------------------------------------------------------------------------------
23
A detail of the change in the allowance for loan losses for the period ending
December 31, 1997 follows:
For the Period from March
17, 1997
(Date of Inception)
(In Thousands) to December 31, 1997
- --------------------------------------------------------------------------------
Balance at Beginning of Period $ -
Allowance for Loan Losses on Acquired Loans 1,544
Provisions Charged to Operations -
Charge-offs (6)
Recoveries -
- --------------------------------------------------------------------------------
Balance at End of Period $1,538
- --------------------------------------------------------------------------------
NOTE 4: MANDATORILY REDEEMABLE PREFERRED STOCK
On December 24, 1997, the Company raised $40 million, less expenses in a public
offering of 40,000 shares of its Series A 7.375% cumulative redeemable preferred
stock, liquidation preference $1,000 per share.
The Company is required to redeem all outstanding Series A Preferred Shares on
January 15, 2001 at a redemption price of $1,000 per share, plus accrued and
unpaid dividends.
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 January 15, 1999 through January 14, 2001, the Series A
Preferred Shares may be redeemed at the option of the Company.
NOTE 5: SHAREHOLDER'S 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.
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 will receive fees at an annual rate of (i) 8 basis points for fixed
rate loan servicing and
24
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.
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 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, commencing with its taxable year ending December 31, 1997, and
believes that its organization and proposed method of operation will enable it
to meet the requirements for qualification as a REIT. As a REIT, the Company
generally will not be subject to federal income tax on net income and capital
gains that it distributes to the holders of its Common Stock and Preferred
Stock. Therefore, no provision for federal income taxes has been included in the
accompanying financial statements.
To maintain REIT status, an entity must meet a number of organizational and
operational requirements, including a requirement that it currently distributes
to stockholders at least 95% of its "REIT taxable income" (not including capital
gains and certain items of non-cash income). If the Company fails to qualify as
a REIT in any taxable year, it will be subject to federal income tax at regular
corporate rates.
25
NOTE 9: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
(In Thousands, Except Share Data) First Quarter* Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $1,852 $11,785 $11,766 $12,662
Noninterest Expense 13 45 51 45
------------------------------------------------------------------------------------
NET INCOME 1,839 11,740 11,715 12,617
Preferred Dividends 8 50 50 126
------------------------------------------------------------------------------------
Net Income for Common Shareholders $1,831 $11,690 $11,665 $12,491
------------------------------------------------------------------------------------
Earnings Per Share:
Basic $18,310 $116,900 $116,650 $124,910
------------------------------------------------------------------------------------
Diluted $18,310 $116,900 $116,650 $124,910
------------------------------------------------------------------------------------
* First Quarter information is for the period of March 17, 1997
(date of inception) through March 31, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
26
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 three
officers. The Company has no other employees.
The persons who are current directors and executive officers of the Company
are as follows:
NAME AGE POSITION AND OFFICES HELD
- ---- --- -------------------------
John V. Brennan 45 President and Director
Ross M. Strickland 48 Director
Harriet Munrett Wolfe 44 Director
Gregory S. Madar 35 Vice President and Secretary
Peter J. Swiatek 39 Vice President and Treasurer
The following is a summary of the experience of the executive officers
and directors of the Company:
John V. Brennan is the President and a director of the Company. He is
also the Executive Vice President, Chief Financial Officer and Treasurer of
Webster and Webster Bank. Mr. Brennan, a certified public accountant, joined
Webster Bank in 1986 as Senior Vice President and Treasurer. He was elected
Chief Financial Officer in 1990 and Executive Vice President in 1991. Prior to
joining Webster Bank, he was a senior manager with the accounting firm of KPMG
Peat Marwick LLP.
Ross M. Strickland is a director of the Company. He is also the
Executive Vice President -- Mortgage Banking of Webster and Webster Bank,
positions he has held since his employment in 1991. Prior to joining Webster
Bank, he was Executive Vice President of Residential Lending with the former
Northeast Savings, F.A., Hartford, Connecticut, from 1988 to 1991. Prior to
joining Northeast Savings, he was National Sales Manager, Credit Resources
Group, for Shearson Lehman Brothers.
Harriet Munrett Wolfe is a director of the Company. She is also the
Senior Vice President, Counsel and Secretary of Webster and Webster Bank. Ms.
Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice President and
Counsel, and was appointed Secretary in June 1997. Prior to joining Webster and
Webster Bank, she was in private practice. From November 1990 to January 1996,
she was Vice President and Senior Counsel of Shawmut Bank Connecticut, N.A.,
Hartford, Connecticut. Prior to joining Shawmut, she was Associate Legal Counsel
and Assistant Secretary of the former Citytrust, Bridgeport, Connecticut.
Gregory S. Madar is the Vice President and Secretary of the Company.
He is also Vice President and Tax Manager of Webster Bank. Mr. Madar, a
certified public accountant, joined Webster Bank in 1995. Prior to joining
Webster Bank, he was Controller of Millane Nurseries, Inc. from 1993 to 1995.
Prior to joining Millane Nurseries, he was a tax manager with KPMG Peat Marwick
LLP in Hartford. He was associated with KPMG from 1987 to 1993.
Peter J. Swiatek is the Vice President and Treasurer of the Company.
He is also Senior Vice President and Controller of Webster Bank and Controller
of Webster. Mr. Swiatek joined Webster in 1990 as Vice President of Accounting.
He was elected Controller in 1992 and Senior Vice President in 1993. Prior to
joining Webster Bank, Mr.Swiatek was the Controller of the former The Bank of
Hartford.
27
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 Decmeber 31, 1997, all Section 16(a) filing requirements applicable
to the Company's officers, directors and more than 10% owners were compiled with
on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The Company currently has three officers, none of whom receive separate
compensation as employees of the Company. The Company has retained an Advisor to
perform certain functions pursuant to an Advisory Agreement described below
under "The Advisor." Each officer of the Company currently is also an officer of
Webster Bank. The Company will maintain corporate records and audited financial
statements that are separate from those of Webster Bank and any of Webster
Bank's affiliates.
It is not currently anticipated that the officers, directors or
employees of the Company will have any pecuniary interest in any Mortgage Asset
to be acquired or disposed of by the Company or in any transaction in which the
Company has an interest.
The Company does not intend to pay the directors of the Company fees
for their services as directors. Although no direct compensation will be paid by
the Company, under the Advisory Services Agreement, the Company will reimburse
Webster Bank for its proportionate share of the salaries of such person for
services rendered.
THE ADVISOR
The Company has entered into an Advisory Service Agreement (the
"Advisory Agreement") with Webster Bank to administer the day-to-day operations
of the Company. Webster Bank in its role as advisor under the terms of the
Advisory Agreement is herein referred to as the "Advisor." The Advisor is
responsible for (i) monitoring the credit quality of the Mortgage Assets held by
the Company, (ii) advising the Company with respect to the acquisition,
management, financing and disposition of the Company's Mortgage Assets, and
(iii) maintaining custody of the documents related to the Company's Mortgage
Assets. The Advisor may at any time subcontract all or a portion of its
obligations under the Advisory Agreement to one or more of its affiliates
involved in the business of managing Mortgage Assets. If no affiliate of the
Advisor is engaged in the business of managing Mortgage Assets, the Advisor may,
with the approval of a majority of the Board of Directors, subcontract all or a
portion of its obligations under the Advisory Agreement to unrelated third
parties. The Advisor may assign its rights or obligations under the Advisory
Agreement to any affiliate of the Company. The Advisor will not, in connection
with the subcontracting of any of its obligations under the Advisory Agreement,
be discharged or relieved in any respect from its obligations under the Advisory
Agreement.
The Advisory Agreement has an initial term of two years, and will be
renewed automatically for additional one-year periods unless notice of
nonrenewal is delivered by either party to the other party. The Advisory
Agreement may be terminated by the Company at any time upon 90 days' prior
written notice. The Advisor will be entitled to receive an advisory fee equal to
$150,000 per year with respect to the advisory services provided by it to the
Company. The fee may be revised to reflect changes in the actual costs incurred
by the Advisor in providing services.
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
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, and is
controlled by and, through advisory and servicing agreements, totally reliant on
Webster Bank. The Company's Board of Directors consists entirely of Webster Bank
employees and, through the advisory and servicing agreements, Webster Bank and
its affiliates are involved in every aspect of the Company's existence. Webster
Bank administers the day-to-day activities of the Company in its role as Advisor
under the Advisory Agreement, and acts as Servicer of the Company's Mortgage
Loans under the Servicing Agreement. In addition, all of the officers of the
Company are also officers of Webster Bank. As the holder of all of the
outstanding voting stock of the Company, Webster Bank generally will have the
right to elect all of the directors of the Company. For a description of the
fees Webster Bank is entitled to receive under the advisory and servicing
agreements, see Notes 6 and 7 to the Company's Financial Statements included as
part of Item 8.
DEPENDENCE UPON WEBSTER BANK AS ADVISOR AND SERVICER
The Company is dependent on the diligence and skill of the officers and
employees of Webster Bank as its Advisor for the selection, structuring and
monitoring of the Company's mortgage assets. In addition, the Company is
dependent upon the expertise of Webster Bank as its Servicer for the servicing
of the Mortgage Loans. The personnel deemed most essential to the Company's
operations are Webster Bank's loan servicing and administration personnel, and
the staff of its finance department. The loan servicing and administration
personnel will advise the Company in the selection of Mortgage Assets, and
provide loan servicing oversight. The finance department will assist in the
administrative operations of the Company. The Advisor may subcontract all or a
portion of its obligations under the Advisory Agreement to one or more
affiliates, and under certain conditions to non-affiliates, involved in the
business of managing Mortgage Assets. The Advisor may assign its rights or
obligations under the Advisory Agreement, and the Servicer may assign its rights
and obligations under the Servicing Agreement, to any affiliate of the Company
involved in the business of managing real estate mortgage assets. Under the
Advisory Agreement, the Advisor may subcontract its obligations to unrelated
third parties with the approval of the Board of Directors of the Company. In the
event the Advisor or the Servicer subcontracts or assigns its rights or
obligations in such a manner, the Company will be dependent upon the
subcontractor or affiliate to provide services. Although Webster Bank has
indicated to the Company that it has no plans in this regard, if Webster Bank
were to subcontract all of its loan servicing to an outside third party, it also
would do so with respect to Mortgage Assets under the Servicing Agreement. Under
such circumstances, there may be additional risks as to the costs of such
services and the ability to identify a subcontractor suitable to the Company.
The Servicer does not believe it would subcontract those duties unless it could
not perform such duties efficiently and economically itself.
29
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:
Statement of Condition at December 31, 1997
Statement of Income for the Period from March 17, 1997 (Date of
Inception) to December 31, 1997
Statement of Shareholders' Equity from March 17, 1997 (Date of
Inception) to December 31, 1997
Statement of Cash Flows for 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").
3.2 Certificate of Amendment for the Series A 7.375% Cumulative
Redeemable Preferred Stock of the Company.
3.3 Certificate of Amendment for the Series B 8.625% Cumulative
Redeemable Preferred Stock of the Company.
3.4 Amended and Restated By-Laws of the Company.
4.1 Specimen of certificate representing the Series A 7.375%
Cumulative Redeemable Preferred Stock of the Company.
4.2 Specimen of certificate representing the Series B 8.625%
Cumulative Redeemable Preferred Stock of the Company.
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.
21 Subsidiaries of the Company.
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.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WEBSTER PREFERRED CAPITAL CORPORATION
Registrant
BY: /s/ John V. Brennan
------------------------------------------
John V. Brennan, President and Director
Date: March 30, 1998
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 noted as of March 30, 1998.
By: /s/ John V. Brennan
-----------------------------------------
John V. Brennan, President and
Director
Principal Executive Officer
By: /s/ Peter J. Swiatek
-----------------------------------------
Peter J. Swiatek, Vice President and Treasurer
Principal Financial Officer and Principal
Accounting Officer
By: /s/ Ross M. Strickland
-----------------------------------------
Ross M. Strickland, Director
By: /s/ Harriet Munrett Wolfe
-----------------------------------------
Harriet Munrett Wolfe,
Director
31
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation of Webster
Preferred Capital Corporation (the "Company").
3.2 Certificate of Amendment for the Series A 7.375% Cumulative
Redeemable Preferred Stock of the Company.
3.3 Certificate of Amendment for the Series B 8.625% Cumulative
Redeemable Preferred Stock of the Company.
3.4 Amended and Restated By-Laws of the Company.
4.1 Specimen of certificate representing the Series A 7.375%
Cumulative Redeemable Preferred Stock of the Company.
4.2 Specimen of certificate representing the Series B 8.625%
Cumulative Redeemable Preferred Stock of the Company.
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.
21 Subsidiaries of the Company
27 Financial Data Schedule.
32