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EX-32.1 - WRITTEN STATEMENT OF PRINCIPAL EXECUTIVE OFFICER SECTION 906 - WEBSTER PREFERRED CAPITAL CORPd234468dex321.htm
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Table of Contents

 

 

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 quarterly period ended September 30, 2011

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-23513

 

 

WEBSTER PREFERRED CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Connecticut   06-1478208

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification Number)

 

145 Bank Street (Webster Plaza), Waterbury, Connecticut   06702
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (203) 578-2202

 

 

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  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, $.01 par value per share, as of October 28, 2011 was 100 shares.

 

 

 


Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

INDEX

 

     Page  

PART I - FINANCIAL INFORMATION

  

Item 1. Financial Statements

     3   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     24   

Item 4. Controls and Procedures

     25   

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

     25   

Item 1A. Risk Factors

     25   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     25   

Item 3. Defaults Upon Senior Securities

     25   

Item 4. [Removed and Reserved]

     25   

Item 5. Other Information

     25   

Item 6. Exhibits

     26   

SIGNATURES

     27   

EXHIBIT INDEX

     28   

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED BALANCE SHEETS

 

(In thousands, except share and per share data)    September 30,
2011
    December 31,
2010
 
     (unaudited)        

Assets:

    

Cash

   $ 7,468      $ 6,734   

Residential mortgage loans

     110,639        125,864   

Allowance for loan losses

     (1,397     (1,714
  

 

 

   

 

 

 

Residential mortgage loans, net

     109,242        124,150   

Other real estate owned

     163        241   

Accrued interest receivable and other assets

     395        433   
  

 

 

   

 

 

 

Total assets

   $ 117,268      $ 131,558   
  

 

 

   

 

 

 

Liabilities:

    

Accrued dividends

   $ 180      $ 927   

Accrued expenses and other liabilities

     48        44   
  

 

 

   

 

 

 

Total liabilities

     228        971   
  

 

 

   

 

 

 

Shareholder’s 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

     117,800        132,800   

Accumulated deficit

     (1,761     (3,214
  

 

 

   

 

 

 

Total shareholder’s equity

     117,040        130,587   
  

 

 

   

 

 

 

Total liabilities and shareholder’s equity

   $ 117,268      $ 131,558   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

3


Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF INCOME (unaudited)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
(In thousands, except per share data)    2011      2010      2011      2010  

Interest income:

           

Interest and fees on loans, net

   $ 1,169       $ 1,540       $ 3,735       $ 5,037   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     1,169         1,540         3,735         5,037   

Provision for loan losses

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,169         1,540         3,735         5,037   

Non-interest expense:

           

Advisory fee expense paid to Parent

     55         55         165         165   

Other expenses

     42         43         156         115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     97         98         321         280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     1,072         1,442         3,414         4,757   

Preferred stock dividends

     216         216         647         647   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholder

   $ 856       $ 1,226       $ 2,767       $ 4,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

   $ 8,560       $ 12,260       $ 27,670       $ 41,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to condensed financial statements.

 

4


Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

 

     Nine months ended
September 30,
 
(In thousands, except per share data)    2011     2010  

Beginning Balance

   $ 130,587      $ 157,586   

Net income

     3,414        4,757   

Return of capital dividend

     (15,000     (21,000

Preferred stock dividends

     (647     (647

Common stock dividends ($13,140 per share and $42,660 per share, respectively)

     (1,314     (4,266
  

 

 

   

 

 

 

Ending Balance

   $ 117,040      $ 136,430   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

5


Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (unaudited)

 

     Nine months ended
September 30,
 
(In thousands)    2011     2010  

Operating Activities:

    

Net income

   $ 3,414      $ 4,757   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net amortization and accretion

     112        110   

Foreclosed and repossessed asset write-downs

     43        25   

Net decrease in accrued interest receivable and other assets, net

     38        57   

Net increase in accrued expenses and other liabilities, net

     4        624   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,611        5,573   
  

 

 

   

 

 

 

Investing Activities:

    

Net decrease in residential mortgage loans

     14,831        18,413   
  

 

 

   

 

 

 

Net cash provided by investing activities

     14,831        18,413   
  

 

 

   

 

 

 

Financing Activities:

    

Dividends paid on preferred stock

     (647     (647

Dividends paid on common stock

     (2,061     (4,266

Return of capital dividend

     (15,000     (21,000
  

 

 

   

 

 

 

Net cash used for financing activities

     (17,708     (25,913
  

 

 

   

 

 

 

Net increase (decrease) in cash

     734        (1,927

Cash at beginning of period

     6,734        6,374   
  

 

 

   

 

 

 

Cash at end of period

   $ 7,468      $ 4,447   
  

 

 

   

 

 

 

Noncash investing activities:

    

Transfer of loans, net to other real estate owned

   $ —        $ 447   

See accompanying notes to condensed financial statements.

 

 

6


Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1: Summary of Significant Accounting Policies

Nature of Operations

Webster Preferred Capital Corporation (the “Company”) is a Connecticut corporation incorporated in March 1997 and a subsidiary of Webster Bank, National Association, (“Webster Bank”), which is a wholly owned subsidiary of Webster Financial Corporation (“Webster”). The Company acquires, holds and manages real estate related mortgage assets.

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”). The Company will generally not be subject to Federal or Connecticut state income taxes for as long as it maintains its qualification as a REIT, requiring, among other organizational and operational issues, that it distribute to its shareholders at least 90%, on an annual basis, of its “REIT taxable income” (not including capital gains and certain items of noncash income). 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 commercial 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.

Basis of Presentation

The Condensed Financial Statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the Condensed Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s Financial Statements, and notes thereto, for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2011. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses is particularly subject to change.

Cash and Cash Equivalents

For purposes of the Condensed Statements of Cash Flows, the Company defines cash as amounts held in deposit accounts with Webster Bank.

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 does not apply since the Company has issued no options or other instruments representing potential common shares.

Reclassifications

Certain items in prior financial statements have been reclassified to conform to current presentation. These reclassifications had no impact on the Company’s financial position, results of operations or net change in cash or cash equivalents. There have been no changes to the Company’s significant accounting policies that were disclosed in the 2010 Form 10-K.

 

7


Table of Contents

Accounting Standards Updates

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” In April 2011, the FASB issued ASU No. 2011-02 to clarify when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”). The changes apply to a lender that modifies a receivable covered by Subtopic 310-40, “Receivables—Troubled Debt Restructurings by Creditors.” In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. A creditor may determine that a debtor is experiencing financial difficulties, even though the debtor is not currently in default, if the creditor determines it is probable that the debtor would default on its payments for any of its debts in the foreseeable future without the loan modification. Lenders who determine that they are making a concession on the terms of the loan to a borrower who is having financial problems should follow the guidance found in ASU No. 2011-02. The guidance on identifying and disclosing TDRs applies retrospectively to restructuring occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The provisions of ASU 2011-02 became effective for the Company on July 1, 2011 and did not have a significant impact on the Company’s financial statements. See Note 2 – Residential Mortgage Loans, Net.

ASU No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” In May 2011, the FASB issued ASU No. 2011-04 which will supersede most of the accounting guidance currently found in Topic 820 of FASB’s ASC. The amendments will improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and will be applied prospectively. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s Condensed Financial Statements.

 

8


Table of Contents

Note 2: Residential Mortgage Loans, Net

A summary of residential mortgage loans, net, by type and original maturity follows:

 

     At September 30,      At December 31,  
(In thousands)    2011      2010  

Fixed-rate loans:

     

15 year

   $ 2,726       $ 4,117   

20 year

     2,341         2,419   

25 year

     1,557         1,921   

30 year

     56,590         66,523   
  

 

 

    

 

 

 

Total fixed-rate loans

     63,214         74,980   
  

 

 

    

 

 

 

Adjustable-rate loans:

     

15 year

     164         184   

20 year

     102         109   

25 year

     294         338   

30 year

     46,417         49,693   
  

 

 

    

 

 

 

Total adjustable-rate loans

     46,977         50,324   
  

 

 

    

 

 

 

Loans receivable

     110,191         125,304   

Premiums and deferred costs on loans, net

     448         560   
  

 

 

    

 

 

 

Total residential mortgage loans

     110,639         125,864   

Accrued interest

     387         433   
  

 

 

    

 

 

 

Recorded investment

   $ 111,026       $ 126,297   
  

 

 

    

 

 

 

Recorded investment: individually evaluated for impairment

   $ 7,318       $ 5,716   
  

 

 

    

 

 

 

Recorded investment: collectively evaluated for impairment

   $ 103,708       $ 120,581   
  

 

 

    

 

 

 

All of the residential mortgage loans held by the Company at September 30, 2011 and December 31, 2010 were acquired from Webster Bank. There have been no loans acquired from Webster Bank or transferred to Webster Bank for the periods presented.

At September 30, 2011 and December 31, 2010, 57.4% and 59.8%, respectively, of the Company’s residential mortgage loans were fixed rate loans and 42.6% and 40.2%, respectively, were adjustable-rate loans.

Allowance for loan losses. The following table provides detail of activity in the Company’s allowance for loan losses:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
(In thousands)    2011     2010     2011     2010  

Allowance for loan losses:

        

Balance at beginning of the period

   $ 1,661      $ 1,947      $ 1,714      $ 2,183   

Provision for loan losses

     —          —          —          —     

Charge-offs

     (264     (191     (317     (427
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of the period

   $ 1,397      $ 1,756      $ 1,397      $ 1,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period: individually evaluated for impairment

   $ 900      $ 619      $ 900      $ 619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period: collectively evaluated for impairment

   $ 497      $ 1,137      $ 497      $ 1,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

Risk Management. The Company, through its servicing agreement with Webster Bank, uses policies and procedures established jointly by line and risk management personnel to monitor and manage loan risk. This activity, coupled with relatively small loan amounts, predominately collateralized structures spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting factors for residential mortgage loans include the borrower’s FICO score, the loan to property value and the borrower’s debt to income level, and are also influenced by statutory requirements.

A summary of the residential mortgage loans portfolio aging follows:

 

At September 30, 2011                  
(In thousands)    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current      Loans
Receivable
 

Residential:

                 

Residential fixed-rate loans

   $ 567       $ —         $ 1,769       $ 2,336       $ 61,720       $ 64,056   

Residential adjustable-rate loans

     1,310         —           2,268         3,578         43,392         46,970   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 1,877       $ —         $ 4,037       $ 5,914       $ 105,112       $ 111,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
At December 31, 2010                  
(In thousands)    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current      Loans
Receivable
 

Residential:

                 

Residential fixed-rate loans

   $ 410       $ 126       $ 2,902       $ 3,438       $ 72,540       $ 75,978   

Residential adjustable-rate loans

     394         —           2,699         3,093         47,226         50,319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 804       $ 126       $ 5,601       $ 6,531       $ 119,766       $ 126,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans on Nonaccrual Status. It is the Company’s policy that all loans 90 days or more past due are placed in non-accrual status. Non-accrual loans totaled $4.0 million at September 30, 2011 and $5.6 million at December 31, 2010 and represented 3.6% and 4.5% of total loans receivable as of September 30, 2011 and December 31, 2010, respectively. When residential loans are placed on non-accrual status, the accrual of interest is discontinued and unpaid accrued interest is reversed and charged against interest income. Interest on non-accrual loans that would have been recorded as additional interest income for the three and nine months ended September 30, 2011 and 2010 had the loans been current in accordance with their original terms totaled approximately $34 thousand and $185 thousand, and $51 thousand and $123 thousand, respectively.

 

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Impaired Loans. The Company, through its servicing agreement with Webster Bank, has an impairment analysis performed for all modified loans that are deemed to be a TDR and specific reserves are established as appropriate. A loan is deemed impaired when the contractual amounts of principal and interest are not expected to be collected in accordance with contractual provisions. For those TDRs where recovery is cash flow dependent, the original contractual interest rates for the loans are used as the discount rates for fixed rate loans. The current rate is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation. A specific valuation allowance is established equal to the calculated amount of impairment. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature.

The recorded investment balance of impaired loans totaled $7.3 million, with established specific reserves of $0.9 million, at September 30, 2011. At December 31, 2010, the recorded investment balance of impaired loans totaled $5.7 million with established specific reserves of $0.6 million.

The following table summarizes impaired loans as of September 30, 2011 and December 31, 2010:

 

     At September 30, 2011  
(In thousands)    Unpaid
Principal
Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
     Average
Recorded
Investment
 

Fixed-rate residential loans

   $ 6,030       $ 5,742       $ —         $ 5,742       $ 806       $ 5,063   

Adjustable-rate residential loans

     1,566         1,576         —           1,576         94         1,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,596       $ 7,318       $ —         $ 7,318       $ 900       $ 6,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2010  
(In thousands)    Unpaid
Principal

Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
     Average
Recorded
Investment
 

Fixed-rate residential loans (*)

   $ 4,647       $ 4,383       $ —         $ 4,383       $ 531       $ 2,986   

Adjustable-rate residential loans

     1,329         1,333         —           1,333         33         667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,976       $ 5,716       $ —         $ 5,716       $ 564       $ 3,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(*) As permitted in accordance with applicable accounting guidance, non-TDR residential mortgage loans that are collectively evaluated for impairment on a pooled basis have been removed from the data with respect to impaired loans without a specific valuation allowance as originally presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Management believes that these changes are immaterial to the Company’s financial statements and align reporting of such data more closely with peers.

The following table summarizes interest income recognized on impaired loans for the three and nine months ended September 30, 2011 and 2010:

 

     Three months ended September 30,  
     2011      2010  
(In thousands)    Loans with  No
Allowance
     Loans with
Specific Allowance
     Total      Loans with  No
Allowance
     Loans with
Specific Allowance
     Total  

Fixed-rate residential loans

   $ —         $ 61       $ 61       $ —         $ 6       $ 6   

Adjustable-rate residential loans

     —           14         14         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 75       $ 75       $ —         $ 6       $ 6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended September 30,  
     2011      2010  
(In thousands)    Loans with  No
Allowance
     Loans with
Specific Allowance
     Total      Loans with No
Allowance
     Loans with
Specific Allowance
     Total  

Fixed-rate residential loans

   $ —         $ 171       $ 171       $ —         $ 63       $ 63   

Adjustable-rate residential loans

     —           42         42         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 213       $ 213       $ —         $ 63       $ 63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Of the total interest income recognized for the three and nine months ended September 30, 2011 and 2010, $12 thousand and $29 thousand and $11 thousand and $33 thousand, respectively, was recognized on a cash basis method of accounting.

 

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Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing documented financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications are a combination of below market rate reductions and maturity extensions. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company does not employ modification programs for temporary or trial periods. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. If the modification agreement is violated, the loan is handled by Webster Bank’s Restructuring and Recovery group for resolution, which may result in foreclosure.

The Company’s policy is to place all TDRs on non-accrual status for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. Impaired and TDR classifications may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

The recorded investment balance of TDRs approximated $7.3 million at September 30, 2011 and $5.7 million at December 31, 2010. There were $5.7 million and $2.8 million TDRs on accrual status and $1.6 million and $2.9 million TDRs on nonaccrual status at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, the allowance for loan losses included specific reserves of $0.9 million and $0.6 million, respectively, related to TDRs. For the three and nine months ended September 30, 2011 and 2010, the Company charged off $4 thousand and $18 thousand and $12 thousand and $113 thousand, respectively, for the portion of TDRs deemed to be uncollectible. At September 30, 2011 and December 31, 2010, there were no commitments to lend any additional funds to borrowers whose loans were in TDR status.

The following table provides information on loans modified as a TDR during the three and nine months ended September 30, 2011 and 2010:

 

     For the Three Months Ended September 30,  
     2011     2010  

(Dollars in thousands)

   Number
of
Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Coupon
Rate
    Number
of
Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Coupon
Rate
 

Fixed-rate residential loans

     4       $ 731       $ 731         3.9     3       $ 606       $ 606         4.1

Adjustable-rate residential loans

     —           —           —           —          1         707         707         5.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

     4       $ 731       $ 731         3.9     4       $ 1,313       $ 1,313         5.0
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30,  
     2011     2010  
(Dollars in thousands)    Number
of
Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Coupon
Rate
    Number
of
Loans
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Coupon
Rate
 

Fixed-rate residential loans

     10       $ 1,675       $ 1,675         3.8     11       $ 2,303       $ 2,303         4.8

Adjustable-rate residential loans

     1         262         262         2.9        1         707         707         5.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

     11       $ 1,937       $ 1,937         3.7     12       $ 3,010       $ 3,010         5.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides information on how loans were modified as TDRs during the three and nine months ended September 30, 2011 and 2010:

 

     For the Three Months Ended September 30,  
     2011      2010  
(In thousands)    Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other      Total      Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other      Total  

Fixed-rate residential loans

   $ 114       $ —         $ 617       $ —         $ 731       $ —         $ —         $ 606       $ —         $ 606   

Adjustable-rate residential loans

     —           —           —           —           —           707         —           —           —           707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

   $ 114       $ —         $ 617       $ —         $ 731       $ 707       $ —         $ 606       $ —         $ 1,313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended September 30,  
     2011      2010  
(In thousands)    Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other      Total      Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other      Total  

Fixed-rate residential loans

   $ 317       $ —         $ 1,358       $ —         $ 1,675       $ 271       $ 595       $ 1,018       $ 419       $ 2,303   

Adjustable-rate residential loans

     262         —           —           —           262         707         —           —           —           707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

   $ 579       $ —         $ 1,358       $ —         $ 1,937       $ 978       $ 595       $ 1,018       $ 419       $ 3,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans modified as TDRs within the previous 12 months and for which there were payment defaults during the periods presented within this report.

Note 3: Redeemable Preferred Stock

In December 1997, the Company issued 1,000,000 shares of Series B 8.625% cumulative redeemable preferred stock at $10 per share. The preferred stock is redeemable after January 15, 2003 at the option of the Company. The redemption price is $10 per share. As of September 30, 2011, there have been no redemptions. The preferred shares are listed on NASDAQ under the symbol “WBSTP” and are not exchangeable into common stock or any other securities and carry no participation rights. Dividends paid on the preferred stock totaled $216 thousand and $647 thousand during the three and nine months ended September 30, 2011 and 2010, respectively, and are reflected as preferred stock dividends in the accompanying Condensed Statements of Income.

Note 4: Servicing

The mortgage loans owned by the Company are serviced by Webster Bank pursuant to the terms of an Amended and Restated Service Agreement (the “Service Agreement”). Webster Bank, in its role as servicer, receives fees at an annual rate of 9.58 basis points for loan servicing and collection, and 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 Webster Bank is responsible for servicing. The services provided to the Company by Webster Bank are at the level of a sub-servicing agreement. Servicing fees paid for the three and nine months ended September 30, 2011 and 2010 were approximately $27 thousand and $84 thousand and $33 thousand and $95 thousand, respectively. Servicing fees are netted against interest income in the accompanying Condensed Statements of Income, as they are considered a reduction in yield to the Company.

Webster Bank is entitled to retain any late payment charges, prepayment fees, penalties and assumption fees collected in connection with residential mortgage loans serviced by it. Webster Bank also 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 escrow funds with respect to mortgage loans it services. At the end of each calendar month, Webster Bank is required to invoice the Company for all fees and charges due.

 

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Table of Contents

Note 5: Income Taxes

The Company has elected to be treated as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and believes that its organization and operations meet the requirements for qualification as a REIT. The Company will generally not be subject to Federal or Connecticut income taxes provided it maintains its qualification as a REIT, requiring among other organizational and operational issues, that it distribute to its shareholders at least 90% of its REIT taxable income (not including capital gains and certain items of noncash income), for a given taxable year. Therefore, no provision for Federal or Connecticut income taxes has been included in the accompanying financial statements.

The Company recognizes interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense. No interest or penalties were recognized in its Condensed Statements of Income for the three and nine months ended September 30, 2011 and 2010, or accrued within its Condensed Balance Sheets at September 30, 2011 and December 31, 2010. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal and Connecticut income tax at regular corporate rates. The Company’s Federal and Connecticut income tax returns remain open to examination for tax years subsequent to 2007.

Note 6: Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using market quotes. However, in many instances there are no quoted market prices available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

The Company uses fair value to record adjustments to certain assets and to prepare required disclosures. The Company has no financial or non-financial assets measured at fair value on a recurring basis. Certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. Non-financial assets measured at fair value on a non-recurring basis include other real estate owned (upon initial recognition or subsequent impairment). Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and, accordingly, those measurements are classified as Level 3.

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used by the Company are presented below.

Cash. The carrying value of cash approximates fair value.

Loans Receivable. The Company employs an independent third party to provide fair value estimates for its residential mortgage portfolio loans. Such estimates are calculated using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans are estimated using the net present value of the expected cash flows or the fair value of the underlying collateral if repayment is collateral dependent.

A summary of estimated fair values of significant financial instruments consisted of the following:

 

     At September 30, 2011      At December 31, 2010  
(In thousands)    Carrying
Amount
     Estimated
Fair  Value
     Carrying
Amount
     Estimated
Fair  Value
 

Assets:

           

Cash

   $ 7,468       $ 7,468       $ 6,734       $ 6,734   

Residential mortgage loans, net

     109,242         115,762         124,150         126,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Other Real Estate Owned. Other real estate owned consists of real estate or assets acquired through repossession that are carried at the lower of cost or fair value less the estimated costs to sell. Independent appraisals are obtained to substantiate fair value and may be subject to adjustment based upon historical experience or specific geographic trends impacting the property. At the time a loan is referred to foreclosure, the excess of loan balance over fair value less cost to sell is charged off against the allowance for loan loss. Subsequent write-downs in value, maintenance expenses, and losses upon sale are charged to non-interest expense. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements are classified as Level 3. Other real estate owned is separately stated in the accompanying Condensed Balance Sheets.

The Company held other real estate owned totaling $163 thousand and $241 thousand at September 30, 2011 and December 31, 2010, respectively. The decrease of $78 thousand was due to a $43 thousand write-down of properties and $35 thousand charged off for a fair value appraisal relating to a property transferred to other real estate owned in late December 2010. There were no loans transferred to other real estate owned during the three and nine months ended September 30, 2011. For the three months ended September 30, 2010 there were no loans transferred to other real estate owned, while for the nine months ended September 30, 2010, loans with a carrying value of $447 thousand were transferred to other real estate owned.

 

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Table of Contents

WEBSTER PREFERRED CAPITAL CORPORATION

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company is a subsidiary of Webster Bank and has elected to be treated as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company will generally not be subject to Federal and Connecticut state income taxes for as long as it maintains its qualification as a REIT, requiring, among other organizational and operational issues, that it distribute to shareholders at least 90%, on an annual basis, 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 condensed financial statements and other financial data included elsewhere herein and in conjunction with the Company’s Financial Statements, and notes thereto, for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2011.

Forward Looking Statements and Factors that Could Affect Future Results

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may”, “plans”, “estimates” and similar references to future periods, however such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact; (2) volatility and disruption in national and international financial markets; (3) government intervention in the U.S. financial system; (4) changes in the level of non-performing assets and charge-offs; (5) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (6) inflation, interest rate, securities market and monetary fluctuations; (7) changes in consumer spending, borrowings and savings habits; (8) changes in the competitive environment among banks, financial holding companies and other financial service providers; (9) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company must comply, including those under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords; (10) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (11) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and (12) the Company’s success at managing the risks involved in the foregoing items. Any forward-looking statement made by the Company in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Summary

The Company’s net income for the three and nine months ended September 30, 2011 was $1.1 million and $3.4 million, respectively, compared to $1.4 million and $4.8 million for the comparable periods in 2010. The decrease in net income, of $0.3 million and $1.4 million for the three and nine months ended September 30, 2011, respectively, from the comparable periods is primarily due to lower interest income due to a reduced average balance of residential real estate loans.

 

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Table of Contents

Results of Operations

The Company reported net income available to the common shareholder of $0.9 million and $2.8 million for the three and nine months ended September 30, 2011, respectively, a decrease of $0.4 million and $1.3 million compared to the respective periods in 2010. The decreases are primarily a result of declining loan balances due to principal pay-downs on outstanding residential real estate loans and from lower yields on variable rate loans.

For the three and nine months ended September 30, 2011 average loans outstanding decreased $25.6 million and $27.9 million, respectively, compared to the three and nine months ended September 30, 2010, respectively. The average yield for residential mortgage loans for the three months ended September 30, 2011 was 4.18% compared to 4.48% for the three months ended September 30, 2010, a decline of 30 basis points. The average yield for residential mortgage loans for the nine months ended September 30, 2011 was 4.28% compared to 4.66% for the nine months ended September 30, 2010, a decline of 38 basis points.

Interest Income

Total interest income, net of servicing fees, was $1.2 million and $3.7 million for the three and nine months ended September 30, 2011, respectively, compared to $1.5 million and $5.0 million for the three and nine months ended September 30, 2010, respectively. The decrease of $0.3 million and $1.3 million, respectively, is a result of declining loan balances due to principal pay-downs and from lower yields on variable rate loans. Approximately 74% and 71% of the decrease is due to lower average loan balances, while approximately 26% and 29% is due to decreases in interest rates on variable rate loans for the three and nine months ended September 30, 2011, respectively.

The following table presents the average balances and yields on the Company’s interest-earning assets for the periods indicated:

 

     Three Months Ended
September 30, 2011
    Three Months Ended
September 30, 2010
 
(Dollars in thousands)    Average
Balance
     Interest
Income
     Average
Yield
    Average
Balance
     Interest
Income
     Average
Yield
 

Residential mortgage loans

   $ 111,932       $ 1,169         4.18   $ 137,565       $ 1,540         4.48
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     Nine Months Ended
September 30, 2011
    Nine Months Ended
September 30, 2010
 
(Dollars in thousands)    Average
Balance
     Interest
Income
     Average
Yield
    Average
Balance
     Interest
Income
     Average
Yield
 

Residential mortgage loans

   $ 116,254       $ 3,735         4.28   $ 144,129       $ 5,037         4.66
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets. Rate changes result from increases or decreases in the yields earned on assets. If significant, the change in interest income due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.

The following table presents a summary of the changes in interest income resulting from changes in the volume of average asset balances and changes in the average yields for the three and nine months ended September 30, 2011 when compared with the comparable periods for the preceding year:

 

     Three Months Ended September 30,
2011 v. 2010
Decrease due to
     Nine Months Ended September 30,
2011 v. 2010
Decrease due to
 
(In thousands)    Rate      Volume      Total      Rate      Volume      Total  

Interest on interest-earning assets:

                 

Residential mortgage loans, net

   $ 98       $ 273       $ 371       $ 383       $ 919       $ 1,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in interest income

   $ 98       $ 273       $ 371       $ 383       $ 919       $ 1,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Non-Interest Expense

The Company incurs advisory fee expense payable to Webster Bank pursuant to an advisory agreement for services relating to day-to-day operations. Advisory fees for the three and nine months ended September 30, 2011 and 2010 were $55 thousand and $165 thousand, respectively. Other expenses consist primarily of audit fees, exchange listing fees, write-downs on other real estate owned and other shareholder costs. Other expenses totaled $42 thousand and $156 thousand for the three and nine months ended September 30, 2011, respectively, compared to $43 thousand and $115 thousand for the three and nine months ended September 30, 2010, respectively. The increase for the nine months ended September 30, 2011 over the respective 2010 period is due to a $43 thousand write-down of other real estate owned.

Financial Condition

The Company had total assets of $117.3 million and $131.6 million at September 30, 2011 and December 31, 2010, respectively. The decrease in total assets of $14.3 million is primarily due to a $15.0 million decrease in the balance of outstanding residential mortgage loans to $109.2 million at September 30, 2011, as compared to $124.2 million at December 31, 2010, offset by $0.7 million net increase in cash. The decrease in residential mortgage loans outstanding is primarily due to principal pay-downs.

Shareholder’s equity decreased $13.6 million to $117.0 million at September 30, 2011 from $130.6 million at December 31, 2010, primarily due to the $15.0 million return of capital distribution to Webster Bank. Net income for the nine months ended September 30, 2011 of $3.4 million was partially offset by $2.0 million in common and preferred dividend declarations.

Asset Quality

All loans held by the Company were originated by Webster Bank in the ordinary course of its mortgage lending activities. As such, the Company’s asset quality is dependent upon Webster Bank’s ability to maintain adequate underwriting standards. At September 30, 2011 and December 31, 2010, the loan portfolio was comprised of residential real estate loans. No loans were acquired by the Company from Webster Bank in the nine months ended September 30, 2011 or for the year ended December 31, 2010.

Non-performing assets, including impaired and restructured loans, loan delinquency and credit losses are considered to be key measures of asset quality. Asset quality is one of the key factors in the determination of the level of the allowance for loan losses. See “Allowance for Loan Losses” contained elsewhere within this section for further information.

Non-performing Assets

The following table summarizes the Company’s non-performing assets for the periods indicated:

 

(Dollars in thousands)   At September 30, 2011     At December 31, 2010  

Loans accounted for on a non-accrual basis, net:

   

Residential fixed-rate loans

  $ 1,769      $ 2,902   

Residential adjustable-rate loans

    2,268        2,699   
 

 

 

   

 

 

 

Total non-performing loans

    4,037        5,601   

Other real estate owned

    163        241   
 

 

 

   

 

 

 

Total non-performing assets

  $ 4,200      $ 5,842   
 

 

 

   

 

 

 

Allowance for loan losses

  $ 1,397      $ 1,714   

Allowance for loan losses as a percent of non-performing loans

    34.60     30.60

Allowance for loan losses as a percent of total loans

    1.26        1.36   
 

 

 

   

 

 

 

It is the Company’s policy that all loans 90 days or more past due are placed in non-accrual status. When residential loans are placed on non-accrual status, the accrual of interest is discontinued and unpaid accrued interest is reversed and charged against interest income. The recorded investment of non-accrual loans totaled $4.0 million at September 30, 2011 and $5.6 million at December 31, 2010, respectively, and represented 3.6% and 4.5% of total loans receivable as of September 30, 2011 and December 31, 2010, respectively. Interest on non-accrual loans that would have been recorded as additional interest income for the three and nine months ended September 30, 2011 and 2010 had the loans been current in accordance with their original terms totaled approximately $34 thousand and $185 thousand and $51 thousand and $123 thousand, respectively.

 

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Table of Contents

Delinquent Loans

The following table sets forth information on the Company’s delinquent loans, past due 30-89 days and still accruing for the periods indicated:

 

     At September 30, 2011     At December 31, 2010  
(Dollars in thousands)    Principal
Balance
     % of
Loans
    Principal
Balance
     % of
Loans
 

Past due 30-89 days:

          

Residential fixed-rate loans

   $ 567         0.51   $ 536         0.43

Residential adjustable-rate loans

     1,310         1.18        394         0.31   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total past due 30-89 days and still accruing

   $ 1,877         1.69   $ 930         0.74
  

 

 

    

 

 

   

 

 

    

 

 

 

Impaired Loans

The Company, through its servicing agreement with Webster Bank, has an impairment analysis performed for all modified loans that are deemed to be troubled debt restructurings (“TDRs”) and specific reserves are established as appropriate. For those TDRs where recovery is cash flow dependent, as opposed to collateral dependent, the original contractual interest rates for the loans are used as the discount rates for fixed rate loans. The current rate is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation. A specific valuation allowance is established equal to the calculated amount of impairment. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature. The recorded investment balance of impaired loans totaled $7.3 million, with established specific reserves of $0.9 million, at September 30, 2011. At December 31, 2010, the recorded investment balance of impaired loans totaled $5.7 million with an impairment allowance of $0.6 million. The increase in impaired loans is the result of an increase in TDRs. Generally, TDRs remain in the impaired population for the remaining life of the loan.

To the extent that the recovery of a loan balance is collateral dependent, the Company obtains an independent appraisal. The appraised value is reduced for selling costs and additional discounts for historical experience with foreclosed real estate and repossessed asset sales, if necessary, to determine the estimated fair value of the collateral. The fair value is then compared to the loan balance. Any shortfall in fair value is charged against the allowance for loan losses in the month the related appraisal is received. Since the fair value of the collateral considers selling costs and adjustments for historical experience with foreclosed real estate and repossessed asset sales, charge offs may be incurred that reduce a loan balance below appraised value. Accordingly, amounts are charged off to bring the loan balance to fair value. No partial or excess charge offs occur. The loan remains on non-performing status subsequent to recording a partial charge off. Non-performing loans, which have not been modified, may qualify to return to performing status if unpaid interest is less than 90 days past due and there is no potential for future loss of the outstanding principal. Generally, if the loan has been modified, payment must be received under the new terms for a period of no less than six months before returning to performing status.

Updated appraisals are obtained for a collateral dependent loan upon a borrower credit event (i.e. renewal or modification) or as part of the foreclosure proceedings. New appraisals may not be ordered if the most recent appraisal was obtained in the past twelve months or the loan amount is under $250 thousand or other Financial Institutions Reform Recovery and Enforcement Act (“FIRREA”) acceptable real estate evaluations are permitted. The twelve month timeframe reflects the Company’s desire to obtain an appraisal as close to the foreclosure date as possible to ensure compliance with the court’s guidelines, which generally require appraisals not more than 30-90 days old. Appraisals, which are performed by independent, licensed appraisers, are requested by the Appraisal Department of Webster Bank. A licensed in-house appraisal officer or qualified reviewer reviews the appraisals when there is significant decline in property value, for all foreclosed properties, for loans greater than 180 days past due and for loans over a threshold of $400 thousand. Webster’s appraisal officer reviews the appraisal for compliance with FIRREA and the Uniform Standards of Professional Appraisal Practice.

In the ordinary course of monitoring all loans, information may come to the Company’s attention that indicates the collateral value has declined further from the value established in the most recent appraisal. Such information may include prices on recent comparable property sales or internet based property valuation estimates. In cases where this other information is deemed reliable, and the impact of a further reduction in collateral value would result in a further loss to the Company, an increase to the allowance for loan losses is recorded to reflect the additional estimated collateral shortfall in the period it was identified. A charge-off is recorded when the shortfall is subsequently verified by an appraisal.

 

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Troubled Debt Restructurings

A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing documented financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications are a combination of below market rate reductions and maturity extensions. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company does not employ modification programs for temporary or trial periods. If the modification agreement is violated, the loan is handled by the Webster’s Restructuring and Recovery group for resolution, which may result in foreclosure.

The Company’s policy is to place all TDRs on non-accrual status for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. At September 30, 2011 and December 31, 2010, the majority of the Company’s TDRs were on accrual status. At September 30, 2011, approximately 60% of the accruing TDRs have been performing in accordance with the restructured terms for more than one year.

The recorded investment balance of TDRs approximated $7.3 million at September 30, 2011 and $5.7 million at December 31, 2010. There were $5.7 million and $2.8 million TDRs on accrual status and $1.6 million and $2.9 million TDRs on nonaccrual status at September 30, 2011 and December 31, 2010, respectively. At September 30, 2011 and December 31, 2010, the allowance for loan losses included specific reserves of $0.9 million and $0.6 million, respectively, related to TDRs. For the three and nine months ended September 30, 2011 and 2010, the Company charged off $4 thousand and $18 thousand and $12 thousand and $113 thousand, respectively, for the portion of TDRs deemed to be uncollectible. At September 30, 2011 and December 31, 2010, there were no commitments to lend any additional funds to borrowers whose loans were in TDR status.

The following table summarizes the recorded investment of TDR loans for the periods indicated:

 

(In thousands)    At September 30, 2011      At December 31, 2010  

Fixed-rate residential loans

   $ 5,742       $ 4,383   

Adjustible-rate residential loans

     1,576         1,333   
  

 

 

    

 

 

 

Total TDR loans

   $ 7,318       $ 5,716   
  

 

 

    

 

 

 

See Note 2 – Residential Mortgage Loans, Net in the Notes to Condensed Financial Statements for a discussion of the amount of modified loans, modified loan characteristics and management’s evaluation of the success of its modification efforts.

 

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Allowance for Loan Losses

An allowance for loan losses (“ALL), in the judgment of management, is necessary to provide for estimated loan losses inherent in the loan portfolio. The ALL includes allowance allocations calculated in accordance with FASB ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with FASB ASC Topic 450, “Contingencies.” The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. Modified loans are analyzed for re-default probability, which is factored into the impaired reserve calculation for ALL. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Management considers the adequacy of the allowance for loan losses a critical accounting policy. The adequacy of the allowance for loan losses is subject to judgment in its determination. Actual loan losses could differ materially from management’s estimate if actual loss factors and conditions differ significantly from the assumptions utilized. These factors and conditions include the general economic conditions within the Company’s market as well as trends within real estate values, interest rate and the financial condition of individual borrowers. Webster Bank’s Credit Risk Management committee, in its role as advisor to the Company, meets on a quarterly basis to review and conclude on the adequacy of the allowance. The results are presented to and reviewed by management of the Company. While management believes the allowance for loan losses is adequate as of September 30, 2011, actual results may prove different and these differences could be significant.

At September 30, 2011, the allowance for loan losses was $1.4 million, or 1.26% of the total residential mortgage loan portfolio and 34.60% of total non-performing loans. This compares with an allowance of $1.7 million, or 1.36% of the total residential mortgage loan portfolio, and 30.60% of total non-performing loans at December 31, 2010. Net charge-offs for the three and nine months ended September 30, 2011 were $264 thousand and $317 thousand, respectively, an increase of $73 thousand for the three months ended September 30, 2011 and a decrease $110 thousand for the nine months ended September 30, 2011 when compared to charge-offs of $191 thousand and $427 thousand for the three and nine months ended September 30, 2010, respectively.

Allowance for loan losses activity, for the periods indicated, follows:

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
(In thousands)    2011     2010     2011     2010  

Allowance for loan losses:

        

Balance at beginning of the period

   $ 1,661      $ 1,947      $ 1,714      $ 2,183   

Provision for loan losses

     —          —          —          —     

Charge-offs

     (264     (191     (317     (427
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of the period

   $ 1,397      $ 1,756      $ 1,397      $ 1,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period: individually evaluated for impairment

   $ 900      $ 619      $ 900      $ 619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period: collectively evaluated for impairment

   $ 497      $ 1,137      $ 497      $ 1,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment in loans, for the periods indicated, follows:

 

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(In thousands)    At September  30,
2011
     At December  31,
2010
 

Loans:

     

Recorded investment

   $ 111,026       $ 126,297   
  

 

 

    

 

 

 

Recorded investment: individually evaluated for impairment

   $ 7,318       $ 5,716   
  

 

 

    

 

 

 

Recorded investment: collectively evaluated for impairment

   $ 103,708       $ 120,581   
  

 

 

    

 

 

 

 

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Liquidity and Capital Resources

The primary sources of liquidity for the Company are principal and interest payments from residential mortgage loans. The primary uses of liquidity are typically purchases of residential mortgage loans and the payment of dividends on the Company’s common stock and preferred stock.

While scheduled loan amortization is a predictable source of funds, loan prepayments can vary greatly and are influenced by factors such as general interest rates, economic conditions and competition. One of the inherent risks of investing in loans 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 $0.8625 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 at least 90% of net taxable income for the year be distributed to shareholders. The Company has experienced continued prepayments resulting in increased cash levels, and as such, return of capital dividends have been regularly declared in order to return a portion of available cash to its common shareholder.

In the event that principal and interest payments on its mortgage assets are insufficient to meet its operating needs, the Company has the ability to raise additional funds. The Company’s residential mortgage loans are underwritten to meet secondary market requirements and could be sold or securitized as mortgage-backed securities and used as borrowing collateral.

 

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WEBSTER PREFERRED CAPITAL CORPORATION

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As the majority of the Company’s assets are sensitive to changes in interest rates, the most significant form of market risk is interest rate risk. The primary goal of managing this risk is to maximize net income (short-term risk) and net economic value (long-term risk) over time in changing interest rate environments. An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action.

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. Webster Bank, in its role as advisor to 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. Webster Bank 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.

Both Webster Bank and the Company are unable to predict future fluctuations in interest rates. The market values 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 fixed rate loans and mortgage-backed securities generally will tend to increase, with the level of prepayments also typically increasing. The interest income earned on the Company’s adjustable-rate, interest-sensitive instruments, which represent primarily adjustable-rate mortgage loans, may change due to changes in quoted interest-rate indices. The adjustable-rate mortgage loans generally re-price 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 September 30, 2011, 42.6% of the Company’s residential mortgage loans were adjustable-rate loans, compared to 40.2% at December 31, 2010.

The following table summarizes the estimated fair values of the Company’s interest-sensitive assets at September 30, 2011 and December 31, 2010, and the projected change to fair values if interest rates instantaneously increase or decrease by 100 basis points. The Company had no interest-sensitive liabilities at September 30, 2011 and December 31, 2010. Loans are presented in the following table gross of the allowance for loan losses and exclude premiums and deferred costs as these components are not interest-sensitive assets:

 

                   Estimated Market Value Impact  
(In thousands)    Book Value      Fair Value      -100 BP    +100 BP  

At September 30, 2011

           

Interest sensitive assets:

           

Fixed-rate residential loans

   $ 63,214       $ 66,841       N/A    $ (778

Adjustable-rate residential loans

     46,977         48,921       N/A      (185
  

 

 

    

 

 

    

 

  

 

 

 
   $ 110,191       $ 115,762       N/A    $ (963
           

 

 

 

At December 31, 2010

           

Interest sensitive assets:

           

Fixed-rate residential loans

   $ 74,980       $ 76,171       N/A    $ (2,418

Adjustable-rate residential loans

     50,324         50,669       N/A      (467
  

 

 

    

 

 

    

 

  

 

 

 
   $ 125,304       $ 126,840       N/A    $ (2,885
           

 

 

 

Interest-sensitive assets, when shocked by an immediate plus 100 basis point rate change, sustain an unfavorable $1.0 million, or 0.8%, change in market value at September 30, 2011, compared to an unfavorable $2.9 million, or 2.3%, change in market value at December 31, 2010. As the federal funds rate remains between 0% and 0.25% at September 30, 2011, the -100 basis point scenario has been excluded. Based on the Company’s asset/liability mix at September 30, 2011, management estimates that a gradual 200 basis point increase in interest rates would increase net income over the next twelve months by 4.0%.

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 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. Based upon review of the work performed by Webster Bank, management believes that the Company’s interest-rate risk position at September 30, 2011 represents a reasonable level of risk.

 

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Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States, 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 investment trust’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.

Item 4. CONTROLS AND PROCEDURES

As of September 30, 2011, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and its Principal Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incident to its business, to which the Company is a party or of which any of its property is the subject.

Item 1A. RISK FACTORS

During the third quarter of 2011, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

Item 4. [REMOVED AND RESERVED]

Item 5. OTHER INFORMATION

None.

 

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Item 6. 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 of Rights and Preferences of 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).
  3.3    Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2007).
  4.1    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).
31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Executive Officer.
32.2    Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Financial Officer.
        101+ ++    The following materials from the Webster Preferred Capital Corporation, Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Statements of Operations, (ii) the Condensed Balance Sheets, (iii) the Condensed Statements of Cash Flows and (iv) related notes, tagged as blocks of text.

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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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

Date: November 7, 2011

   
  BY:  

/s/ Gregory S. Madar

   

Gregory S. Madar

Chief Financial Officer

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

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 of Rights and Preferences of 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).
  3.3    Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2007).
  4.1    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).
31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Executive Officer.
32.2    Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Financial Officer.
        101+ ++    The following materials from the Webster Preferred Capital Corporation, Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Statements of Operations, (ii) the Condensed Balance Sheets, (iii) the Condensed Statements of Cash Flows and (iv) related notes, tagged as blocks of text.

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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