UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended March 31, 2002
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
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WEBSTER PREFERRED CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1478208
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
145 BANK STREET, WATERBURY, CONNECTICUT 06702
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 578-2286
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 31, 2002 is: 100 shares
WEBSTER PREFERRED CAPITAL CORPORATION
INDEX
PAGE
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PART I - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. Financial Statements:
Statements of Condition at March 31, 2002 and December 31, 2001................................. 3
Statements of Income for the Three Months Ended March 31, 2002 and March 31, 2001 .............. 4
Statements of Cash Flows for the Three Months Ended March 31, 2002 and March 31, 2001........... 5
Notes to Financial Statements................................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 13
PART II - OTHER INFORMATION.................................................................................. 14
SIGNATURE ................................................................................................ 15
2
WEBSTER PREFERRED CAPITAL CORPORATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF CONDITION
(UNAUDITED)
(Dollars in Thousands, Except Share and Per Share Data) March 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 847 $ 3,850
Interest-bearing deposits 258,500 167,500
Mortgage-backed securities available for sale, at fair value (Note 2) 148,744 158,543
Residential mortgage loans, net (Note 3) 525,806 588,747
Accrued interest receivable 3,373 3,562
Other real estate owned 103 88
Prepaid expenses and other assets 1,494 6,382
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 938,867 $ 928,672
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued dividends payable $ 180 $ 181
Accrued expenses and other liabilities 8 65
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 188 246
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Series B 8.625% cumulative redeemable preferred stock, liquidation preference
$10 per share; par value $1.00 per share; 1,000,000 shares authorized,
issued and outstanding 1,000 1,000
Common stock, par value $.01 per share:
Authorized - 1,000 shares
Issued and outstanding - 100 shares 1 1
Paid-in capital 928,799 928,799
Retained earnings (distributions in excess of accumulated earnings) 9,069 (2,586)
Accumulated other comprehensive (loss) income (190) 1,212
- ------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 938,679 928,426
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 938,867 $ 928,672
==================================================================================================================
See accompanying notes to financial statements.
3
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31,
(Dollars In Thousands, Except Per Share Data) 2002 2001
- -------------------------------------------------------------------------------------------------------
Interest Income:
Loans $ 9,044 $ 13,191
Securities and interest bearing deposits 3,412 1,820
- -------------------------------------------------------------------------------------------------------
Total interest income 12,456 15,011
Provision for loan losses (Note 3) -- 30
- -------------------------------------------------------------------------------------------------------
Interest income after provision for loan losses 12,456 14,981
Noninterest Expense:
Advisory fee expense paid to parent 47 39
Dividends on mandatorily redeemable preferred stock -- 123
Other noninterest expenses 24 19
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 71 181
Income before taxes 12,385 14,800
Income taxes -- --
- -------------------------------------------------------------------------------------------------------
NET INCOME 12,385 14,800
Preferred stock dividends 216 216
- -------------------------------------------------------------------------------------------------------
Net income available to common shareholder $ 12,169 $ 14,584
=======================================================================================================
Net income per common share:
Basic $ 121,693 $ 145,837
Diluted $ 121,693 $ 145,837
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
(In Thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------
Net Income $ 12,385 $ 14,800
Other comprehensive (loss) income:
Unrealized net holding (loss) gain on securities
available for sale arising during the period (1,402) 854
- -------------------------------------------------------------------------------------------------------
Comprehensive income $ 10,983 $ 15,654
=======================================================================================================
See accompanying notes to financial statements.
4
WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31,
(Dollars In Thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 12,385 $ 14,800
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses -- 30
Amortization on mortgage premiums 50 50
Accretion of securities discount (69) (26)
Amortization of net deferred loan costs 319 169
Decrease in accrued interest receivable 189 283
Decrease in accrued liabilities (58) (622)
Decrease (increase) in prepaid expenses and other assets 4,888 (1,531)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,704 13,153
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Principal repayments on mortgage-backed securities 8,466 1,434
Proceeds from OREO sale 88 301
(Increase) decrease in interest-bearing deposits (91,000) 27,150
Principal repayments of loans, net 62,469 32,661
- ------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (19,977) 61,546
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Redemption of Series A preferred stock -- (40,000)
Dividends paid on common and preferred stock (730) (50,216)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (730) (90,216)
- ------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (3,003) (15,517)
Cash and cash equivalents at beginning of period 3,850 16,996
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 847 $ 1,479
==================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ -- $ --
Interest paid -- --
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
Transfer of residential mortgage loans to other real estate
owned $ 103 $ 96
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
WEBSTER PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
The accompanying financial statements represent the accounts of Webster
Preferred Capital Corporation (the "Company" or "WPCC") and have been prepared
in conformity with accounting principles generally accepted in the United States
of America. The statements include all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. All adjustments were of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of the
results which may be expected for the year as a whole. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in WPCC's 2001 Annual Report on Form 10-K. The Company has no
subsidiaries. The Company has no changes in or disagreements with its outside
accountants on accounting and financial disclosures.
NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE
The following table sets forth certain information regarding the mortgage-backed
securities:
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
March 31, 2002 Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------
Available for sale portfolio $148,934 $ 957 $ (1,147) $148,744
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
December 31, 2001 Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------
Available for sale portfolio $157,331 $ 1,326 $ (114) $158,543
=========================================================================================================
The weighted average expected yield at March 31, 2002 is 6.61%. Although the
stated final maturity of these securities is long-term, the weighted average
life is much shorter due to anticipated prepayments. At March 31, 2002 and
December 31, 2001, all mortgage-backed securities available for sale were issued
by government or government-sponsored agencies.
There were no sales of mortgage-backed securities in the first quarters of 2002
and 2001.
6
WEBSTER PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 3: RESIDENTIAL MORTGAGE LOANS, NET
A summary of the Company's residential mortgage loans, net, follows:
March 31, December 31,
2002 2001
- -------------------------------------------------------------------------------------------------
Carrying Carrying
(In Thousands) Amount Amount
- -------------------------------------------------------------------------------------------------
Fixed-Rate Loans:
15 yr. Loans $ 71,833 $ 78,772
20 yr. Loans 4,201 4,533
25 yr. Loans 2,386 2,510
30 yr. Loans 169,738 184,505
- -------------------------------------------------------------------------------------------------
Total Fixed-Rate Loans 248,158 270,320
- -------------------------------------------------------------------------------------------------
Variable-Rate Loans:
15 yr. Loans 2,501 3,109
20 yr. Loans 5,113 5,534
25 yr. Loans 4,298 4,723
30 yr. Loans 266,030 305,019
- -------------------------------------------------------------------------------------------------
Total variable-rate loans 277,942 318,385
- -------------------------------------------------------------------------------------------------
Total residential mortgage loans 526,100 588,705
Premiums and deferred costs on loans, net 1,812 2,181
Less: allowance for loan losses (2,106) (2,139)
- -------------------------------------------------------------------------------------------------
Residential mortgage loans, net $ 525,806 $ 588,747
=================================================================================================
As of March 31, 2002 approximately 47.2% of the Company's residential mortgage
loans were fixed-rate loans and approximately 52.8% were adjustable-rate loans.
A detail of the change in the allowance for loan losses, for the periods
indicated follows:
Three Months Ended Three Months Ended
(In Thousands) March 31, 2002 March 31, 2001
- --------------------------------------------------------------------------------
Balance at beginning of period $ 2,139 $ 2,059
Provision charged to operations -- 30
Charge-offs (33) (10)
Recoveries -- --
- --------------------------------------------------------------------------------
Balance at end of period $ 2,106 $ 2,079
================================================================================
7
WEBSTER PREFERRED CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
NOTE 4: 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 Company
estimates that the fees paid to Webster Bank for servicing approximate fees that
would be paid if the Company operated as an unaffiliated entity. Servicing fees
paid for the three months ended March 31, 2002 and 2001 were $111,000 and
$151,000, respectively. Servicing fees are included in interest income on the
Statements of Income, as they are classified as a reduction in yield to the
Company.
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.
8
WEBSTER PREFERRED CAPITAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
- -------
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. Total assets at March 31, 2002 and December
31, 2001 were $938.9 million and $928.7 million, respectively, consisting
primarily of residential mortgage loans 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 (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 90% of its "REIT taxable income" (not including capital gains and
certain items of noncash income). 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.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
Total assets were $938.9 million at March 31, 2002, an increase of $10.2 million
from $928.7 million at December 31, 2001. The increase in total assets is
primarily attributable to a $91.0 million increase in interest-bearing deposits,
partially offset by declines in loans ($62.9 million) and securities ($10.8
million). This increase was funded by net income of $12.4 million. Shareholders'
equity was $938.7 million at March 31, 2002 and $928.4 million at December 31,
2001.
The reduction in loans and securities was due to scheduled payments as well as
prepayments. Prepayments accelerated during the first quarter of 2002 due to the
declining interest rate environment. Cash proceeds from loan payments were
invested in interest-bearing deposits, which increased $91.0 million. The
decrease in other assets from $6.4 million to $1.5 million was due to a
reduction in the balance of mortgage payments collected by Webster Bank, the
Company's loan servicer, but remitted subsequent to quarter end.
ASSET QUALITY
- -------------
The Company maintains asset quality by investing in residential real estate
loans that have been conservatively underwritten and by aggressively managing
nonperforming assets. At March 31, 2002, residential real estate loans comprised
the entire loan portfolio. The Company also invests in government agency or
government-sponsored agency issued mortgage-backed securities.
The following table details the Company's nonperforming assets at March 31, 2002
and December 31, 2001:
March 31, December 31,
(In Thousands) 2002 2001
- --------------------------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Residential fixed-rate loans $216 $120
Residential variable-rate loans 407 425
- --------------------------------------------------------------------------------
Total nonperforming loans 623 545
Other Real Estate Owned 103 88
- --------------------------------------------------------------------------------
Total nonperforming assets $726 $633
================================================================================
At both March 31, 2002 and December 31, 2001, the allowance for loan losses was
approximately $2.1 million, or 338% and 392% of nonperforming loans,
respectively. Management believes that the allowance for loan losses is adequate
to cover expected losses in the portfolio.
9
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary sources of liquidity for the Company are principal and interest
payments from the residential mortgage loans and mortgage-backed securities
portfolios. The primary uses of liquidity are purchases of residential mortgage
loans and mortgage-backed securities and the payment of dividends on the common
and preferred stock.
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.
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. The Company periodically makes dividend payments on
its common stock in accordance with Company by-laws. Common stock dividends are
paid to comply with REIT qualification rules. REIT qualification rules require
that 90% of net taxable income for the year be distributed to shareholders. In
April 2002, the Company declared and paid a return of capital dividend to the
Company's common shareholder of $200 million. Accelerated prepayments during the
second half of 2001 and the first quarter of 2002 resulted in increased cash
levels for the Company. This dividend returns the cash to the Company's common
shareholder.
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 market risk.
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. The market values of certain of
the Company's financial assets are sensitive to fluctuations in market interest
rates. The market values of fixed-rate loans and mortgage-backed securities tend
to decline in value as interest rates rise. If interest rates decrease, the
market value of loans and mortgage-backed securities generally will tend to
increase with the level of prepayments also normally increasing. The interest
income earned on the Company's variable-rate interest-sensitive instruments,
which represent primarily variable-rate mortgage loans, may change due to
changes in quoted interest-rate indices. The variable-rate mortgage loans
generally reprice based on a stated margin over U.S. Treasury Securities indices
of varying maturities, the terms of which are established at the time that the
loan is closed. At March 31, 2002, 52.8% of the Company's residential mortgage
loans were variable-rate loans.
10
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 2002 and 2001, the Company reported net
income of $12.4 million and $14.8 million, respectively, or $121,693 and
$145,837, respectively, per common share on a diluted basis.
Total interest income for the three months ended March 31, 2002 and 2001
amounted to $12.5 million and $15.0 million, respectively, net of servicing
fees. The following table shows the major categories of average interest-earning
assets, together with their respective interest income and the rates earned by
the Company:
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001
Average Interest Average Average Interest Average
(In Thousands) Balance Income Yield Balance Income Yield
- -------------------------------------------------------------------------------------------------------------------------
Mortgage Loans $568,100 $ 9,044 6.37% $764,765 $ 13,191 6.90%
Mortgage-Backed Securities 153,139 2,492 6.51% 76,833 1,219 6.35%
Interest Bearing Deposits 205,317 920 1.79% 46,273 601 5.20%
- -------------------------------------------------------------------------------------------------------------------------
Total $926,556 $ 12,456 5.38% $887,871 $ 15,011 6.76%
=========================================================================================================================
The decline in interest income of $2.6 million, or 17.0%, from first quarter
2001 to first quarter 2002 was due to a decline in yield on earning assets. Due
to the declining interest rate environment during 2001 and 2002, mortgage
prepayments accelerated. These assets were replaced with ones earning a lower
yield. In addition, this lower rate environment effected the yield earned on
deposits, which declined by 341 basis points.
There was no provision for loan losses for the three months ended March 31,
2002. The provision for loan losses for the three months ended March 31, 2001
was $30,000. The change in the provision for loan losses is reflective of the
decrease in the total residential portfolio, due to accelerated prepayments in
mortgage loans.
There were no sales of mortgage-backed securities for the three months ended
March 31, 2002 and March 31, 2001.
Noninterest expenses for the three months ended March 31, 2002 and 2001 amounted
to $71,000 and $181,000, respectively, and included advisory fees and dividends
on Series A Preferred Stock. The Series A redemption on January 15, 2001 reduced
noninterest expenses by $123,000 for the current period from the three months
ended March 31, 2001. No significant income tax expense was recorded for either
three month periods ended March 31, 2002 and 2001.
RECENT FINANCIAL ACCOUNTING STANDARDS
- -------------------------------------
On October 3, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement
also supersedes the accounting and reporting provisions of APB Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The changes in this Statement improve financial
reporting by requiring that one accounting model be used for long-lived assets
to be disposed of by broadening the presentation of discontinued operations to
include more disposal transactions. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The provisions of this Statement are to be
applied prospectively. The Company adopted SFAS No. 144 effective January 1,
2002 without any material impact on its financial statements.
11
WEBSTER PREFERRED CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
On August 16, 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." Statement 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Statement 143 applies to all
entities. This Statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Under this Statement, the liability is discounted and the
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. The FASB issued this
Statement to provide consistency for the accounting and reporting of liabilities
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Earlier application is
permitted. The Company does not expect any material impact on its financial
statements when this Statement is adopted.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement No. 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of Statement No. 142. Statement No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted the provisions of Statement No. 141 effective July 1, 2001
and the provisions of Statement No. 142 effective January 1, 2002, without a
material impact on its financial statements.
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 No. 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. The Company implemented SFAS No. 140 effective April 1, 2001
without any material impact on its financial statements.
FORWARD LOOKING STATEMENTS
- --------------------------
This report contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended. Actual results, performance or
developments may differ materially from those expressed or implied by such
forward-looking statements as a result of market uncertainties and other
factors. Some important factors that would cause actual results to differ from
those in any forward-looking statements include changes in interest rates and
the general economy in the Connecticut market area where a substantial portion
of the real estate securing the Company's loans are located, legislative and
regulatory changes, changes in tax laws and policies, and changes in accounting
policies, principles or guidelines. Such developments could have an adverse
impact on the Company's financial position and results of operations. An example
of such a forward-looking statement is the "Quantitative and Qualitative
Disclosures About Market Risk" section in Management's Discussion and Analysis.
12
WEBSTER PREFERRED CAPITAL CORPORATION
ITEM 3. 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 March 31, 2002
and December 31, 2001 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
- ---------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 2002
Interest Sensitive Assets:
Mortgage-backed securities $148,744 $148,744 $ 6,040 $ (7,110)
Variable-rate residential loans 277,942 271,199 4,161 (5,328)
Fixed-rate residential loans 248,158 258,925 9,214 (10,907)
- ---------------------------------------------------------------------------------------------------------------------
Total net assets $674,844 $678,868 $19,415 $(23,345)
=====================================================================================================================
AT DECEMBER 31, 2001
Interest Sensitive Assets:
Mortgage-backed securities $158,543 $158,543 $ 6,175 $ (7,605)
Variable-rate residential loans 318,385 308,533 4,186 (4,829)
Fixed-rate residential loans 270,320 287,009 10,579 (13,841)
- ---------------------------------------------------------------------------------------------------------------------
Total net assets $747,248 $754,085 $20,940 $(26,275)
=====================================================================================================================
Interest-sensitive assets, net of interest-sensitive liabilities, when impacted
by an instantaneous 100 basis point rate decrease results in a projected
increase in net market value of $19.4 million at March 31, 2002 compared to a
projected increase in net market value of $20.9 million at December 31, 2001.
These changes in net market value represent 2.86% of interest-sensitive assets
at March 31, 2002 and 2.78% of interest-sensitive assets at December 31, 2001.
Interest-sensitive assets, when impacted by an instantaneous 100 basis point
rate increase results in a projected decrease in net market value of $23.3
million at March 31, 2002 compared to a projected decrease in net market value
of $26.3 million at December 31, 2001. These changes in net market value
represent 3.44% of interest-sensitive assets at March 31, 2002 and 3.48% of
interest-sensitive assets at December 31, 2001. Changes in the projected net
market value due to an instantaneous 100 basis point rate increase or decrease
when comparing such amounts at March 31, 2002 and December 31, 2001 are a result
of changes in outstanding balances of the assets and an overall decline in
market interest rates.
Based on the Company's asset/liability mix at March 31, 2002, simulation
analyses project that an instantaneous 100 basis point increase in interest
rates would increase net interest income over the next twelve months by
approximately 6.9%. An instantaneous 100 basis point decrease in interest rates
would decrease net interest income by approximately 6.8%.
In particular, the Company's interest rate sensitive assets are subject to
prepayment risk. Prepayment risk is inherently difficult to estimate and is
dependent upon a number of economic, financial and behavioral variables. The
Company uses a sophisticated mortgage prepayment modeling system to estimate
prepayments and the corresponding impact on market value and net interest
income. The model uses information that includes the instrument type, coupon
spread, loan age and other factors in its projections.
These assumptions are inherently uncertain and, as a result, the simulation
analyses cannot precisely estimate the impact that higher or lower rate
environments will have on net interest income. Actual results will differ from
simulated results due to timing, magnitude and frequency of interest rate
changes, changes in cash flow patterns and market conditions, as well as changes
in management's strategies. Management believes that the Company's interest-rate
risk position at March 31, 2002, represents a reasonable level of risk.
13
WEBSTER PREFERRED FINANCIAL CORPORATION
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
In April 2002, the directors of the Company approved a return of capital
dividend to the Company's common shareholder of $200 million. This dividend was
paid by April 30, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WEBSTER PREFERRED CAPITAL CORPORATION
-------------------------------------
Registrant
BY: /s/ Gregory S. Madar
----------------------------------------------
Gregory S. Madar,
Senior Vice President,
Treasurer & Assistant Secretary
Principal Financial and Accounting Officer
Date: May 13, 2002
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