UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

WEBSTER PREFERRED CAPITAL CORPORATION

Registrant’s telephone number, including area code: (203) 465-4329

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X       No      .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes      No X       .

The number of shares outstanding of each of the registrant’s classes of common stock, as of April 30, 2005 is: 100 shares.

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WEBSTER PREFERRED CAPITAL CORPORATION

INDEX

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WEBSTER PREFERRED CAPITAL CORPORATION

Item 1. Interim Financial Statements

STATEMENTS OF CONDITION
(unaudited)

See accompanying notes to interim financial statements.

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WEBSTER PREFERRED CAPITAL CORPORATION

STATEMENTS OF INCOME
(unaudited)

STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

See accompanying notes to interim financial statements.

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STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to interim financial statements.

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WEBSTER PREFERRED CAPITAL CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying interim financial statements represent the accounts of Webster Preferred Capital Corporation (the “Company” or “WPCC”) and have been prepared in conformity with U.S. generally accepted accounting principles. 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 interim financial statements should be read in conjunction with the financial statements and notes thereto included in WPCC’s 2004 Annual Report on Form 10-K.

NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

The following table sets forth certain information regarding the mortgage-backed securities:

At March 31, 2005 and December 31, 2004, all mortgage-backed securities available for sale were issued by government agencies or government-sponsored enterprises. There were no sales of mortgage-backed securities during the three months ended March 31, 2005 and 2004.

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WEBSTER PREFERRED CAPITAL CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS (continued)

NOTE 3: RESIDENTIAL MORTGAGE LOANS, NET

A summary of the Company’s residential mortgage loans by type and original maturity follows:

As of March 31, 2005, 73.8% of the Company’s residential mortgage loans are fixed-rate loans and 26.2% are adjustable-rate loans.

A detail of the change in the allowance for loan losses follows:

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WEBSTER PREFERRED CAPITAL CORPORATION

NOTES TO INTERIM FINANCIAL STATEMENTS (continued)

NOTE 4: SERVICING

The mortgage loans owned by the Company are serviced by Webster Bank, National Association (“Webster Bank”) pursuant to the terms of a servicing agreement. Webster Bank is the sole holder of the Company’s common stock. 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, 2005 and 2004 were $84,000 in each period. Servicing fees are reflected as a charge against 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 escrow 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.

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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 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 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 and in conjunction with the Company’s 2004 Annual Report on Form 10-K.

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. Except as required by law, the Company does not undertake to update forward looking information.

Summary

WPCC’s net income increased to $6.6 million for the three months ended March 31, 2005 from $6.3 million during the same period a year earlier due to the following factors:

Ÿ		For the first three months of 2005, average earning assets increased $2.2 million from the same period a year earlier as the result of loan purchases during 2004.
Ÿ		The yield on earning assets increased for the three months ended March 31, 2005 to 4.95% from 4.77%. The downward repricing of adjustable rate mortgages combined with the lower replacement yield on new mortgage assets combined to decrease the return on mortgage-related assets. The overall yield for the first quarter increased due to a higher percentage of higher yielding mortgage loans in the current first quarter than a year ago.

Changes in Financial Condition

Total assets, consisting primarily of residential mortgage loans were $542.8 million at March 31, 2005, an increase of $5.4 million from $537.4 million at December 31, 2004. Residential mortgage loans decreased $23.5 million as a result of prepayments. These cash flows were generally replaced with the purchase of interest-bearing deposits. Shareholders’ equity increased to $542.5 million at March 31, 2005 from $537.2 million at December 31, 2004, due primarily to the net income earned during for the first three months of 2005.

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, 2005, residential real estate loans comprised the entire loan portfolio. All such residential loans were purchased from Webster Bank. The Company also invests in government agency or government-sponsored enterprise issued mortgage-backed securities and short-term jumbo certificates of deposit.

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WEBSTER PREFERRED CAPITAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

The following table details the Company’s nonperforming assets:

At March 31, 2005 and December 31, 2004, the allowance for loan losses was approximately $2.0 million. Management believes that the allowance for loan losses is adequate to cover probable losses inherent in the current portfolio.

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 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 and mortgage-backed securities is the possibility that prepayments of principal prior to maturity will occur at rates different than those estimated at the time of purchase. The principal factor affecting these prepayments is changes in market interest rates.

In the unlikely event that principal and interest payments on its mortgage assets are insufficient to meet its operating needs, WPCC has the ability to raise additional funds. WPCC’s mortgage-backed securities, which total $19.6 million at March 31, 2005, would supply adequate collateral for borrowings through repurchase agreements. In addition, its residential mortgage loans are underwritten to meet secondary market requirements and could easily be sold or securitized as mortgage-backed securities and used as borrowing collateral.

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 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

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WEBSTER PREFERRED CAPITAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

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 are 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, 2005, 26.2% of the Company’s residential mortgage loans were variable-rate loans.

Results of Operations

For the three months ended March 31, 2005, the Company reported an increase in net income of 5.3% to $6.6 million, compared to the three months ended March 31, 2004, which amounted to $6.3 million.

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:

(a) Unrealized net gains are excluded from average balance

The increase in interest income for the current three month period of $268 thousand, as compared to a year earlier was due to an increase in average yields and a rebalancing of interest-earning assets.

Interest income also can be understood in terms of the impact of changing rates and changing volumes. The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets have impacted interest income during the periods indicated.

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WEBSTER PREFERRED CAPITAL CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS (continued)

Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume) and (iii) the net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

There were no provisions for loan losses for the three months ended March 31, 2005 and 2004.

There were no purchases or sales of mortgage-backed securities for the three months ended March 31, 2005 and 2004.

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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 at March 31, 2005 and December 31, 2004 and the projected change to market values if interest rates instantaneously increase or decrease by 100 basis points.

Interest-sensitive assets, when impacted by an instantaneous 100 basis point rate decrease results in a projected increase in net market value of $11.0 million at March 31, 2005 compared to a projected increase of $9.1 million at December 31, 2004. These changes in net market value represent 2.3% of interest-sensitive assets at March 31, 2005 and 1.8% at December 31, 2004. Interest-sensitive assets, when impacted by an instantaneous 100 basis point rate increase results in a projected decrease in net market value of $15.5 million at March 31, 2005 compared to a projected decrease of $15.1 million at December 31, 2004. These changes in net market value represent 3.3% of interest-sensitive assets at March 31, 2005 and 3.0% at December 31, 2004. Changes in the projected net market value due to the instantaneous rate changes when comparing such amounts at March 31, 2005 and December 31, 2004 are a result of changes in outstanding balances of the assets, and do not represent a significant change since year end.

Based on the asset/liability mix at March 31, 2005, management estimates that a gradual 200 basis point increase in interest rates over a 12 month period would increase net income over that period by approximately 3.9%. A gradual 200 basis point decrease in interest rates is projected to decrease net income by approximately 7.6%. At December 31, 2004, a projected 200 basis point increase and a 100 basis point decrease in rates produced changes of 3.0% and 3.6%, respectively.

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, 2005, represents a reasonable level of risk.

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WEBSTER PREFERRED CAPITAL CORPORATION

Item 4. CONTROLS AND PROCEDURES

The Company’s management, including the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective in alerting them in a timely manner to any material information relating to the Company required to be included in the Company’s Exchange Act filings.

There were no changes made in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company’s internal controls 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 the registrant’s business, to which the Company is a party or of which any of its property is subject.

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5. Other Information

Not Applicable

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Item 6. Exhibits

Exhibits

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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.

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