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 and 2000, Webster Bank made no contributions to the Company. As of December 31, 2000 and 1999, 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, 2000, approximately 43.3% of the Company's residential mortgage loans are fixed-rate loans and 56.7% 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, Webster Bank will benefit significantly from state tax treatment of dividends paid by the Company as a result of its qualification as a REIT.
CHANGES IN FINANCIAL CONDITION
Total assets were $968.2 million at December 31, 2000, an increase of $1.0 million from $967.2 million at December 31, 1999, primarily due to the fair market value increase in mortgage-backed securities. Shareholder's equity was $927.3 million at December 31, 2000 and $926.2 million at December 31, 1999.
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, 2000, residential real estate loans comprised the entire loan portfolio. The Company also invests in highly rated mortgage-backed securities.
NONACCRUAL ASSETS AND DELINQUENCIES
The aggregate amount of nonaccrual assets was approximately $705,000, $1.2 million, $1.3 million and $1.3 million, respectively at December 31, 2000, 1999, 1998 and 1997. The following table details the Company's nonaccrual assets for the last four years:
At December 31, 2000, 1999, 1998 and 1997 the allowance for loan losses was approximately $2.1 million, $1.9 million, $1.6 million, and $1.5 million or 292%, 158%, 121% and 118%, respectively, of nonaccrual assets, and .26%, .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.
The following table sets forth information as to the Company's loans past due 30-89 days and still accruing:
RESIDENTIAL MORTGAGE LOANS
A summary of the Company's carrying amount of residential mortgage loans for the last four years follows:
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 of2premiums, 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 2000 and 1999, Webster Bank made no contributions to the Company.
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:
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 the Federal National Mortgage Association ("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 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, 2000 and 1999, 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. In January 2001, the Company redeemed its outstanding shares of Series A Preferred Stock for $40 million, plus accrued dividends. The Company had sufficient cash on hand to redeem the shares. 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.
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.
ITEM 2.
ITEM 2. PROPERTIES
Not Applicable.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incident to the registrant's business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year 2000 to security holders for a vote.
PART II
ITEM 5.
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 2000 and 1999 totaled $61.5 million and $60.3 million, respectively. Dividends declared on the Series A Preferred Stock in 2000 and 1999 totaled $3.0 million for each year. Dividends declared on the Series B Preferred Stock in 2000 and 1999 totaled $862,500 for each year.
The market price for the Series B Preferred Stock averaged $9.3618 and $10.247 for the years ending December 31, 2000 and 1999, respectively. The Series B Preferred Stock reached a low of $8.375 and a high of $10.25, during the year ended December 31, 2000. The Series B Preferred Stock reached a low of $9.125 and a high of $11, during the year ended December 31, 1999.
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.
The Series A Preferred Stock is required to be redeemed on January 15, 2001, at $1,000 per share, plus accrued and unpaid dividends. The total redemption was made on January 16, 2001 for $40.7 million out of existing cash.
ITEM 6.
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:
*No ratio of earnings to fixed charges is presented because the Company has no fixed charges.
ITEM 7.
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 2000 and 1999, Webster Bank made no contributions to the Company. Total assets at December 31, 2000 and December 31, 1999 were $968.2 million and $967.2 million, respectively, consisting primarily of residential mortgage loans, interest-bearing deposits and mortgage-backed securities. Interest-bearing deposits of $97.5 million in 2000 are a result of planning for the maturity of the Series A preferred stock and other cash flow needs anticipated for January 2001. The deposits were funded by principal payments on mortgage-backed securities and residential mortgage loans. Total assets increased $1.0 million, primarily due to the increase in fair market value of the mortgage-backed securities, as evidenced in the $1.8 increase in other comprehensive income.
The Company has elected to be treated as a REIT under the Code and will generally not be subject to federal income tax for as long as it maintains its qualification as a REIT, requiring among other things, that it currently distribute to stockholders at least 95% of its "REIT taxable income" (not including capital gains and certain items of noncash income). The Company and Webster Bank will also benefit significantly from 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, 2000 and 1999, 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, 2000, 1999 and 1998 were approximately $705,000, $1.2 million and $1.3 million, respectively. The following table details the Company's nonaccrual assets at December 31, 2000, 1999 and 1998:
At December 31, 2000, 1999 and 1998, the allowances for loan losses were approximately $2.1 million, $1.9 million and $1.6 million, or 292%, 158% and 121%, 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.
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.
The Series A Preferred Stock was redeemed on January 16, 2001. The Company expects sufficient cash flow from loan payment streams to replenish its cash.
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, 2000, 56.7% 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, 2000, 1999 and 1998, the Company reported net income of $61.7 million, $60.2 million and $58.3 million, respectively or $608,189, $593,550 and $573,970, respectively, per common share on a diluted basis.
Total interest income for 2000 amounted to $65.3 million, net of servicing fees, an increase of $1.1 million from $64.2 million, net of servicing fees, in 1999. Total interest income for 1999 increased $2.1 million over the 1998 amount of $62.1 million. The following table shows the major categories of average assets together with their respective interest income and the rates earned by the Company.
The provision for loan losses for the years ended December 31, 2000, 1999 and 1998 amounted to $190,000, $480,000 and $300,000, respectively. The provision for loan losses reflects the change in the total residential mortgage loan portfolio.
Gains from the sale of mortgage-backed securities for the years ended December 31, 2000 and 1998 were $94,000 and $261,000, respectively. There were no sales of mortgage-backed securities in 1999.
Noninterest expenses for the years ended December 31, 2000, 1999 and 1998 amounted to $3.5 million, $3.5 million and $3.8 million, 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.
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 is critical to the maintenance of acceptable performance levels.
RECENT FINANCIAL ACCOUNTING STANDARDS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", a replacement of SFAS No. 125. SFAS No. 140 addresses implementation issues that were identified in applying SFAS No. 125. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement is to be applied prospectively with certain exceptions. Other than those exceptions, earlier or retroactive application is not permitted.
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 as 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.
ITEM 7A.
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, 2000 and 1999, and the projected change to market values if interest rates instantaneously increase or decrease by 100 basis points.
Interest-sensitive assets, net of interest-sensitive liabilities, when impacted by a minus 100 basis point rate change, result in a favorable $11.8 million change in net market values for 2000 compared to a favorable $22.1 million net market value change in 1999. These changes represent 1.4% of interest-sensitive assets in 2000 and 2.4% in 1999. A plus 100 basis point rate change results in an unfavorable $19.7 million or 2.3% change in 2000 compared to an unfavorable $26.9 million or 2.9% change in 1999.
Based on the Company's asset/liability mix at December 31, 2000, management estimates that an instantaneous 100 basis point increase in interest rates would increase net interest income over the next twelve months by 1.9%. An instantaneous 100 basis point decline in interest rates would decrease net interest income by 1.9% . These estimates assume that management takes no action to mitigate any negative effects from changing interest rates.
The market values and net interest income estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest-rate risk position at December 31, 2000, represents a reasonable level of risk.
FORWARD LOOKING STATEMENTS
Statements in Management's Discussion and Analysis in the section captioned "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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of Webster Preferred Capital Corporation
We have audited the accompanying statements of condition of Webster Preferred Capital Corporation (a subsidiary of Webster Bank) as of December 31, 2000 and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2000, 1999, and 1998 in conformity with accounting principles generally accepted in the United States of America.
- --------------- KPMG LLP Hartford, Connecticut January 23, 2001
See accompanying notes to financial statements
WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF INCOME (Dollars In Thousands, Except Share Data)
See accompanying notes to financial statements
WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars In Thousands, Except Per Share Data)
See accompanying notes to financial statements
WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF CASH FLOWS (Dollars In Thousands)
See accompanying notes to financial statements
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"). As of December 31, 2000, 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 accounting principles generally accepted in the United States of America. 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, 2000 and 1999, there was $288,000 and $60,000, respectively, in other real estate owned by the Company.
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, 2000, 1999 and 1998 was 100.
H) STATEMENT OF CASH FLOWS For purposes of the Statement of Cash Flows, the Company defines 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 purpose for reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income includes net income and certain changes in equity from non-owner sources that are not recognized in the income statement (such as net unrealized gains and losses on securities available for sale). The Company has reported comprehensive income and its components for 2000, 1999 and 1998 in its Statements of Shareholders' Equity.
K) RECLASSIFICATION Certain financial statement balances as previously reported have been reclassified to conform to the 2000 Financial Statement Presentation.
NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The following table sets forth certain information regarding the mortgage-backed securities:
There were sales of $47.4 million of mortgage-backed securities for the year ending December 31, 2000, resulting in a net gain of $94,000. There were no sales of mortgage-backed securities for the year ending December 31, 1999.
All mortgage-backed securities have a contractual maturity of over 10 years. The weighted average yield at December 31, 2000 is 6.74%. Although the stated final maturities of these obligations are long-term, the weighted average life is much shorter due to scheduled repayments and prepayments. Gains and losses on the sales of securities are recorded using the specific identification method.
NOTE 3: RESIDENTIAL MORTGAGE LOANS, NET
A summary of the carrying amount and fair market value of residential mortgage loans, net follows:
As of December 31, 2000, approximately 43.3% of the Company's residential mortgage loans are fixed-rate loans and approximately 56.7% are adjustable-rate loans.
A detail of the change in the allowance for loan losses, for the periods indicated follows:
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. This redemption took place on January 16, 2001, due to a legal holiday on January 15, 2001.
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 2000 and 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.
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 $157,500 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 90% of its "REIT taxable income" (not including capital gains and certain items of non-cash income). If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax at regular corporate rates.
NOTE 9: OTHER COMPREHENSIVE INCOME
The following table summarizes reclassification adjustments for other comprehensive income for the years ended December 31, 2000, 1999 and 1998 (there is no related tax effect):
BEFORE AND NET-OF-TAX (In Thousands) AMOUNT ----------------------------------------------------------------------------- Unrealized net gain on available for sale securities: Unrealized net holding gain arising during the period $ 1,887 Less: Reclassification adjustment for gains realized during the period 94 ------------------------------------------------------------------------------
Other comprehensive income at December 31, 2000 $ 1,793 ==============================================================================
Unrealized net loss on available for sale securities: Unrealized holding losses arising during the period $ (2,555) Less: Reclassification adjustment for gains realized during the period - ------------------------------------------------------------------------------ Other comprehensive loss at December 31, 1999 $ (2,555) ==============================================================================
Unrealized net gain on available for sale securities: Unrealized holding gains arising during the period $ 1,313 Less: Reclassification adjustment for gains realized during the period 261 ------------------------------------------------------------------------------ Other comprehensive income at December 31, 1998 $ 1,052 ==============================================================================
NOTE 10: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors currently consists of three members. Directors are elected for a one-year term. The Company currently has four officers. The Company has no other employees.
The persons who are current directors and executive officers of the Company are as follows:
NAME AGE POSITION AND OFFICES HELD - ---- --- ------------------------- Ross M. Strickland 51 President and Director
Harriet Munrett Wolfe 47 Director
Gregory S. Madar 38 Vice President and Secretary
Peter J. Swiatek 42 Treasurer and Director
John D. Benjamin 53 Secretary
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.
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, 2000, 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.
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 maintains 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 pay the directors of the Company fees for their services as directors. Although no direct compensation is paid by the Company, under the Advisory Services Agreement, the Company reimburses 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 had an initial term of two years, and has been renewed for additional one-year periods. It will continue to be renewed until 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 is entitled to receive an advisory fee equal to $157,500 per year beginning January 1, 2000 with respect to the advisory services provided by it to the Company, as per the amended agreement adopted on December 16, 1999. 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 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.
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.
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 advises the Company in the selection of Mortgage Assets, and provide loan-servicing oversight. The finance department assists 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.
PART IV
ITEM 14.
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, 2000 and 1999
Statements of Income for years ended December 31, 2000, 1999 and 1998
Statements of Shareholders' Equity for years ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for years ended December 31, 2000, 1999 and
Notes to Financial Statements
Independent Auditors' Report
(a)(2) There are no financial statement schedules which are required to be filed as part of this form.
(a)(3) See (c) below for all exhibits filed herewith and the Index to Exhibits.
(b) Reports on Form 8-K. Not applicable.
(c) Exhibits.
The following exhibits either are filed as a part of this Report or are incorporated herein by reference:
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Webster Preferred Capital Corporation (the "Company") (incorporated herein by reference from Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
3.2 Certificate of Amendment for the Series A 7.375% Cumulative Redeemable Preferred Stock of the Company (incorporated herein by reference from Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
3.3 Certificate of Amendment for the Series B 8.625% Cumulative Redeemable Preferred Stock of the Company (incorporated herein by reference from Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
3.4 Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
4.1 Specimen of certificate representing the Series A 7.375% Cumulative Redeemable Preferred Stock of the Company (incorporated herein by reference from Exhibit 4.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
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).
(d) There are no financial statements and financial statement schedules which were excluded from this Report which are required to be included herein.
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/ Ross M. Strickland ------------------------------------------ Ross M. Strickland, President and Director
Date: March , 2001
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 , 2001.
By: /s/ Ross M. Strickland ----------------------------------------- Ross M. Strickland President and Director (Principal Executive Officer)
By: /s/ Peter J. Swiatek ----------------------------------------- Peter J. Swiatek, Treasurer and Director (Principal Financial Officer and Principal Accounting Officer)
By: /s/ Harriet Munrett Wolfe ----------------------------------------- Harriet Munrett Wolfe, Director
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).