WEBSTER PREFERRED CAPITAL CORP
Business      3     Item 1A.    Risk Factors      5     Item 1B.    Unresolved Staff Comments      9
Properties      9
Legal Proceedings      9
Submission of Matters to a Vote of Security Holders      10                     PART II
Market for the Registrant’s Common Equity and Related Stockholder Matters      10
Selected Financial Data      10
Management’s Discussion and Analysis of Financial Condition and Results of Operations      11
Quantitative and Qualitative Disclosures About Market Risk      17
Financial Statements and Supplementary Data      18
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      28
Controls and Procedures      28
Other Information      28                     PART III                   Item 10.    Directors and Executive Officers of the Registrant      29     Item 11.    Executive Compensation      30     Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters      31     Item 13.    Certain Relationships and Related Transactions      31     Item 14.    Principal Accountant Fees and Services      32                     PART IV                   Item 15.    Exhibits and Financial Statement Schedules      33                     SIGNATURES     34                     EXHIBITS     35      EX-31.1: CERTIFICATION  EX-31.2: CERTIFICATION  EX-32.1: CERTIFICATION  EX-32.2: CERTIFICATION      2    Table of Contents  Forward Looking Statements  This Annual 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 could cause actual results to differ from those in any forward-looking statements include changes in interest rates and general economics in the Connecticut market area where a substantial portion of the real estate securing the Company’s loans is located, 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 a forward-looking statement is the “Quantitative and Qualitative Disclosures about Market Risk” section in this Annual Report.     PART I     Item 1. Business  General  Webster Preferred Capital Corporation (the “Company” or “WPCC”) is a Connecticut corporation incorporated in March 1997. The Company acquires, holds and manages real estate mortgage assets (“mortgage assets”), including, but not limited to, residential mortgage loans, mortgage-backed securities and commercial mortgage loans. At December 31, 2005 and 2004, the mortgage assets owned by the Company were comprised of residential mortgage loans and mortgage-backed securities. Although the Company may acquire and hold a variety of mortgage assets, its present intention is to acquire only residential mortgage loans and mortgage-backed securities. The Company intends to hold such assets to generate net income for distribution to its shareholders based on the spread between the interest income earned on the mortgage assets and the cost of its capital and operations. The Company may invest up to 5% of the total value of its portfolio in assets other than residential mortgage loans and mortgage-backed securities eligible to be held by real estate investment trusts (“REITs”).  All of the Company’s common stock is owned by Webster Bank, National Association (“Webster Bank”). Webster Bank has indicated to the Company that, for as long as any of the Company’s preferred shares are outstanding, Webster Bank intends to maintain direct ownership of 100% of the outstanding common stock of the Company. Pursuant to the Company’s Certificate of Incorporation, the Company cannot redeem, or make any other payments or distributions with respect to shares of its common stock to the extent such redemptions, payments or distributions would cause the Company’s total shareholders’ equity (as determined in accordance with U.S. generally accepted accounting principles) to be less than 250% of the aggregate liquidation value of the issued and outstanding preferred shares. The preferred shares are not exchangeable into capital stock or other securities of the Company, Webster Bank or Webster Financial Corporation (“Webster”), the parent company of Webster Bank, and do not constitute regulatory capital of either Webster Bank or Webster. The Company has no subsidiaries.  The Company operates a single segment — acquiring, holding and managing real estate mortgage assets.  The Company has elected to be treated as a REIT under the Internal Revenue Code, as amended (the “Code”). The Company generally will not be subject to federal and state income tax to the extent that it distributes its earnings to its shareholders and maintains its qualification as a REIT.  Total assets of the Company were $511.8 million at December 31, 2005, a decrease of $25.5 million from $537.3 million at December 31, 2004, primarily due a $25.0 million return-of-capital distribution to Webster Bank. Reductions in cash of $6.9 million and residential mortgage loans of $87.7 million were partly offset by increases in mortgage-backed securities of $20.6 million and $48.0 million in interest-bearing deposits. There were $26.5 million of dividend payments to common and preferred shareholders, which exceeded net income of $26.4 million. Shareholder’s equity was $511.6 million at December 31, 2005 as compared to $537.2 million a year earlier.  3    Table of Contents  Residential Mortgage Loans  The Company may, from time to time, acquire both conforming and nonconforming residential mortgage loans. Conventional, conforming residential mortgage loans comply with the requirements for inclusion in a loan guarantee program sponsored by either Freddie Mac or Fannie Mae. Nonconforming residential mortgage loans do not qualify for these programs in one or more aspects. The nonconforming residential mortgage loans that the Company purchases generally have original principal balances which exceed the limits for these programs. The Company’s nonconforming residential mortgage loans are expected to meet the requirements for sale to national private mortgage conduit programs or other investors in the secondary mortgage market. WPCC generally purchases its mortgage loans from Webster Bank; there were no purchases in 2005 and $145.9 million during 2004.  Residential mortgage loans are evidenced by a promissory note secured by a mortgage or deed of trust or other similar security instrument creating a first lien on a single family (one-to-four unit) residential property, including stock allocated to a dwelling unit in a residential cooperative housing corporation. Residential real estate properties underlying residential mortgage loans consist of individual dwelling units, individual cooperative apartment units, individual condominium units, two- to four-family dwelling units, planned unit developments and townhouses.  Investment Activities  Mortgage-backed securities. The Company may, from time to time, acquire fixed-rate or adjustable-rate mortgage-backed securities representing interests in pools of residential mortgage loans. A portion of any of the mortgage-backed securities that the Company purchases may have been originated by Webster Bank by exchanging pools of mortgage loans for the mortgage-backed securities. The mortgage loans underlying the mortgage-backed securities are secured by single family residential properties located throughout the United States.  The Company intends to acquire only investment-grade mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac and Government National Mortgage Association (“GNMA”). The Company does not intend to acquire any interest-only, principal-only or high-risk mortgage-backed securities. Further, the Company does not intend to acquire any residual interests in real estate mortgage conduits or any interests, other than as a creditor, in any taxable mortgage pools.  Other real estate assets. Although the Company presently intends to invest only in residential mortgage loans and mortgage-backed securities, the Company may invest up to 5% of the total value of its portfolio in assets other than residential mortgage loans and mortgage-backed securities eligible to be held by REITs. In addition to commercial mortgage loans, such assets could include cash and cash equivalents. The Company does not intend to invest in securities or interests of persons primarily engaged in real estate activities. At December 31, 2005 and 2004, the Company did not hold any commercial mortgage loans.  Regulation  The Company is a wholly-owned subsidiary of Webster Bank, a wholly owned subsidiary of Webster. Webster Bank is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”) as its primary federal regulator. Webster Bank also is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”) and Webster is subject to oversight by the Board of Governors of the Federal Reserve System. These federal banking regulatory authorities have the right to examine the Company and its activities as a subsidiary of Webster Bank.  If Webster Bank were to become “undercapitalized” under “prompt corrective action” initiatives, the OCC has the authority to require, among other things, that Webster Bank or the Company alter, reduce or terminate any activity that they determine poses an excessive risk to Webster Bank. The Company does not believe that its activities currently pose, or in the future will pose, such a risk to Webster Bank; however, there can be no assurance in that regard. The regulators also could restrict transactions between Webster Bank and the Company, including the transfer of assets, or require Webster Bank to divest or liquidate the Company. Webster Bank could further be directed to take prompt corrective action if federal regulators determined that Webster Bank was in an unsafe or unsound condition or engaging in an unsafe or unsound practice. In light of Webster Bank’s control of the Company, as well as the Company’s dependence and reliance upon the skills and diligence of Webster Bank’s officers and employees, some or all of the foregoing actions and restrictions could have an adverse effect on the operations of the Company, including causing the Company to fail to qualify as a REIT.  4    Table of Contents  Pursuant to OCC regulations and the Company’s Certificate of Incorporation, the Company maintains a separate corporate existence from Webster Bank. In the event Webster Bank should be placed into receivership or conservatorship by federal bank regulators, such federal bank regulators would control Webster Bank. There can be no assurance that these regulators would not cause Webster Bank, as sole holder of the common stock of the Company, to take action adverse to the interest of holders of the preferred shares of the Company.  Taxation  The Company has elected to be treated as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to federal and Connecticut income taxes on its net income and capital gains that it distributes to the holders of its common stock and preferred stock.  To maintain REIT status, an entity must meet a number of organizational and operational requirements, including a requirement that it currently distribute to stockholders at least 90% of its “REIT taxable income” (not including capital gains and certain items of non-cash income). If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and Connecticut state income tax at regular corporate rates. Notwithstanding qualification for taxation as a REIT, the Company may be subject to federal, state and/or local tax, on undistributed REIT taxable income and net income from prohibited transactions.  Employees  The Company has three officers. The executive officers are described further below in Item 10, “Directors and Officers of the Registrant”. The Company does not anticipate that it will require any additional employees because it has retained an advisor to administer the day-to-day activities of the Company pursuant to an Advisory Agreement.  Competition  The Company does not engage in the business of originating mortgage loans. While the Company does intend to acquire additional mortgage assets, it anticipates that these additional mortgage assets will be acquired from Webster Bank. Accordingly, the Company does not compete or expect to compete with mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers or insurance companies in acquiring our mortgage assets. Webster Bank, from which the Company expects to continue to purchase most or all of its mortgage assets in the future, will face competition from these organizations.     Item 1A. Risk Factors  The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected.  CONTROL BY WEBSTER BANK  The Company was organized as a wholly-owned subsidiary of Webster Bank, and will continue to be controlled by and, through advisory and servicing agreements, thus totally reliant on Webster Bank. The Company’s Board of Directors consists entirely of Webster Bank employees and through advisory and servicing agreements, Webster Bank and its affiliates are involved in every aspect of the Company’s existence. Webster Bank administers the day-to-day activities of the Company in its role as (“Advisor”) under an (“Advisory Agreement”), and acts as (“Servicer”) of the Company’s mortgage loans under a (“Servicing Agreement”). In addition, all of the officers of the Company are also officers of Webster Bank. As the holder of all of the outstanding voting stock of the Company, Webster Bank generally will have the right to elect all of the directors of the Company.  5    Table of Contents  DEPENDENCE UPON WEBSTER BANK AS ADVISOR AND SERVICER       The Company is dependent on the diligence and skill of the officers and employees of Webster Bank as its Advisor for the selection, structuring and monitoring of the Company’s mortgage assets. See “Management.” In addition, the Company is dependent upon the expertise of Webster Bank as its Servicer for the servicing of the mortgage loans. The personnel deemed most essential to the Company’s operations are Webster Bank’s loan servicing and administration personnel, and the staff of its finance department. The loan servicing and administration personnel will advise the Company in the selection of mortgage assets, and provide loan servicing oversight. The finance department will assist in the administrative operations of the Company. The Advisor may subcontract all or a portion of its obligations under the Advisory Agreement to one or more affiliates, and under certain conditions to non-affiliates, involved in the business of managing mortgage assets. The Advisor may assign its rights or obligations under the Advisory Agreement, and the Servicer may assign its rights and obligations under the Servicing Agreement, to any affiliate of the Company involved in the business of managing real estate mortgage assets. Under the Advisory Agreement, the Advisor may subcontract out its obligations to unrelated third parties with the approval of the Board of Directors of the Company. In the event the Advisor or the Servicer subcontracts or assigns its rights or obligations in such a manner, the Company will be dependent upon the subcontractor or affiliate to provide services. Although Webster Bank has indicated to the Company that it has no plans in this regard, if Webster Bank were to subcontract all of its loan servicing to an outside third party, it also would do so with respect to mortgage assets under the Servicing Agreement. Under such circumstances, there may be additional risks as to the costs of such services and the ability to identify a subcontractor suitable to the Company. The Servicer does not believe it would subcontract these duties unless it could not perform such duties as efficiently and economically itself. See “–Item 13. Certain Relationships and Related Transactions”.  CONFLICTS OF INTEREST       Webster Bank and its affiliates may in the future have interests which are not necessarily identical to those of the Company. Consequently, conflicts of interest may arise with respect to transactions, including without limitation, future acquisitions of mortgage assets from Webster Bank and/or affiliates of Webster Bank; servicing of mortgage loans; future dispositions of mortgage loans to Webster Bank or affiliates of Webster Bank; and the modification of the Advisory Agreement or the Servicing Agreement. Under each of the foregoing circumstances, Webster Bank, as sole holder of the common stock, may, or may cause the directors and officers of the Company (each of whom is an employee of Webster Bank) to, take actions adverse to the interests of holders of Preferred Shares. It is the intention of the Company and Webster Bank that any agreements and transactions between the Company, on the one hand, and Webster Bank and/or its affiliates, on the other hand, are fair to all parties and consistent with market terms, including the prices paid and received for mortgage assets on their acquisition or disposition by the Company or in connection with the servicing of mortgage loans. Also, the Advisory Agreement provides that nothing contained in such agreement shall prevent Webster Bank, its affiliates, or an officer, director, employee or stockholder from engaging in any activity, including without limitation, purchasing and managing real estate mortgage assets, rendering services and investment advice with respect to real estate investment opportunities to any other person (including other REITs) and managing other investments (including the investments of Webster Bank and its affiliates). Although it is the intent of the Company and Webster Bank that the dealings between the two be fair, there can be no assurance that agreements or transactions will be on terms as favorable to the Company as those that could have been obtained from unaffiliated third parties.  RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS       The Board of Directors of the Company has established the investment policies, operating policies and strategies of the Company. These policies may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the Company’s stockholders, including holders of the preferred shares. The ultimate effect of any change in the policies and strategies of the Company on a holder of Preferred Shares may be positive or negative. For example, although the Company currently intends to maintain substantially all of its assets in a combination of residential mortgage loans and mortgage-backed securities, the Company may in the future acquire other mortgage assets, such as commercial mortgage loans, which have a different and distinct risk profile.  6    Table of Contents  REGULATORY IMPACT ON THE COMPANY       Webster Bank, which owns 100% of the Company’s common stock, is subject to supervision and regulation by, among others, the OCC and the FDIC. Because the Company is a subsidiary of Webster Bank, such federal banking regulatory authorities will have the right to examine the Company and its activities. If Webster Bank becomes “undercapitalized” under “prompt corrective action” initiatives of the federal bank regulators, such regulatory authorities will have the authority to require, among other things, Webster Bank or the Company to alter, reduce or terminate any activity that the regulator determines poses an excessive risk to Webster Bank. The Company does not believe that its activities presently do, or in the future will, pose a risk to Webster Bank; however there can be no assurance in that regard. The regulators also could restrict transactions between Webster Bank and the Company including the transfer of assets; require Webster Bank to divest or liquidate the Company; or require that Webster Bank be sold. Webster Bank could further be directed to take any other action that the regulatory agency determines will better carry out the purpose of prompt corrective action. Webster Bank could be subject to these prompt corrective action restrictions if federal regulators determined that Webster Bank was in an unsafe or unsound condition or engaging in an unsafe or unsound practice. In light of Webster Bank’s control of the Company, as well as the Company’s dependence and reliance upon the skill and diligence of Webster Bank officers and employees, some or all of the foregoing actions and restrictions could have an adverse effect on the operations of the Company, including causing the Company’s failure to qualify as a REIT.       Pursuant to OCC regulations and the Company’s Certificate of Incorporation, the Company is required to maintain a separate corporate existence from Webster Bank, notwithstanding that Webster Bank owns all of the common stock and that all of the directors and officers of the Company are Webster Bank employees. In the event Webster Bank should be placed into receivership by federal bank regulators, such federal bank regulators would be in control of Webster Bank. There can be no assurance that they would not cause Webster Bank, as sole holder of the common stock, to take action adverse to holders of preferred shares.  ADVERSE TAX CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT  The Company intends to operate so as to qualify as a REIT under the Code. Although the Company believes that it is owned, organized and operates in such a manner as to qualify as a REIT, no assurance can be given as to the Company’s ability to remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances, not entirely within the Company’s control, may affect the Company’s ability to qualify as a REIT. Although the Company is not aware of any proposal in Congress to amend the tax laws in a manner that would materially and adversely affect the Company’s ability to operate as a REIT, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws in the future with respect to qualification as a REIT or the federal income tax consequences of such qualification.  If, in any taxable year, the Company fails to qualify as a REIT, the Company would not be allowed a deduction for distributions to shareholders in computing its federal taxable income and would be subject to federal and Connecticut state income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. As a result, the amount available for distribution to the Company’s stockholders would be reduced for the year or years involved. In addition, unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. A failure of the Company to qualify as a REIT would not by itself give the Company the right to redeem the preferred shares, nor would it give the holders of the preferred shares the right to have their shares redeemed.  Notwithstanding that the Company currently intends to operate in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations may cause the Company to determine that it is in the best interest of the Company and the holders of its common stock and preferred stock to revoke the REIT election. The tax law prohibits the Company from electing treatment as a REIT for the four taxable years following the year of such revocation.  7    Table of Contents  In the event that the Company has insufficient available cash on hand or is otherwise precluded from making dividend distributions in amounts sufficient to maintain its status as a REIT or to avoid imposition of an excise tax, the Company may avail itself of consent dividend procedures. A consent dividend is a hypothetical dividend, as opposed to an actual dividend, declared by the Company and treated for U.S. federal tax purposes as though it had actually been paid to stockholders who were the owners of shares on the last day of the year and who executed the required consent form, and then recontributed the dividend to the Company. The Company would use the consent dividend procedures only with respect to its common stock.  GEOGRAPHIC CONCENTRATION       Certain geographic regions of the United States may from time to time experience natural disasters or weaker regional economic conditions and housing markets, and, consequently, may experience higher rates of loss and delinquency on mortgage loans generally. Any concentration of the mortgage loans in such a region may present risks in addition to those present with respect to mortgage loans generally. Substantially all of the residential properties underlying the mortgage assets presently are located in Connecticut. These mortgage assets may be subject to a greater risk of default than other comparable mortgage assets in the event of adverse economic, political or business developments or natural hazards that may affect such region and the ability of property owners in such region to make payments of principal and interest on the underlying mortgages.  RISKS RELATED TO CHANGES IN INTEREST RATES       The results of the Company’s operations will be affected by various factors, many of which are beyond the control of management. Because the Company does not intend to incur any borrowings, the Company’s net income will be dependent primarily upon the yield on its mortgage assets. Accordingly; income over time will vary as a result of changes in interest rates, the behavior of which involve various risks and uncertainties, and the supply of and demand for mortgage assets. Prepayment rates and interest rates depend upon the nature and terms of the mortgage assets, the geographic location of the real estate securing the mortgage loans included in or underlying the mortgage assets, conditions in financial markets, the fiscal and monetary policies of the United States government and the Board of Governors of the Federal Reserve System, competition and other factors, none of which can be predicted with any certainty. While increases in interest rates will generally increase the yields on the Company’s adjustable-rate mortgage assets, decreasing rates typically would decrease such yields and also may result in increased levels of prepayments. Under such circumstances, the Company may not be able to reinvest at a favorable yield.  REAL ESTATE MARKET CONDITIONS       The results of the Company’s operations will be affected by various factors, many of which are beyond the control of the Company, such as local and other economic conditions affecting the values of the properties underlying the mortgage assets and the ability of mortgagees to make payments of principal and interest on their mortgage loans. A decline in the value of properties underlying the mortgage assets may cause a higher level of defaults on mortgage loans. There can be no assurance that a decline in local or other economic conditions will not adversely affect mortgage assets currently owned by the Company or acquired by the Company in the future.  DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS       Even assuming that the mortgaged properties underlying the mortgage loans held by the Company provide adequate security for such mortgage loans, substantial delays could be encountered in connection with the liquidation of defaulted mortgage loans, with corresponding delays in the receipt of related proceeds by the Company. An action to foreclose on a mortgaged property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if defenses or counterclaims are interposed, sometimes requiring several years to complete. In some states, an action to obtain a deficiency judgment is not permitted following a non-judicial sale of a mortgaged property. In Connecticut, where substantially all of the properties currently securing the Company’s mortgage loans are located, foreclosures are judicial and an action to obtain a deficiency judgment is only permitted following a judicial foreclosure of a mortgaged property. In the event of a default by a mortgagor, these restrictions, among other things, may impede the ability of the Company to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due on the related mortgage loan. In addition, the servicer of the Company’s mortgage loans will be entitled to deduct from collections received all expenses reasonably incurred in attempting to recover amounts due and not yet repaid on liquidated mortgage loans, including legal fees and costs of legal action, real estate taxes and maintenance and preservation expenses, thereby reducing amounts available to the Company.  8    Table of Contents  NO CREDIT ENHANCEMENT OR SPECIAL HAZARD INSURANCE       The Company generally does not intend to obtain credit enhancements such as mortgagor bankruptcy insurance or to obtain special hazard insurance for its mortgage loans, other than standard hazard insurance, which will in each case only relate to individual mortgage loans. Accordingly, during the time it holds mortgage loans for which third party insurance is not obtained, the Company will be subject to risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In addition, in the event of a default on any mortgage loan held by the Company resulting from declining property values or worsening economic conditions, among other factors, the Company would bear the risk of loss of principal to the extent of any deficiency between (i) the value of the related mortgaged property, plus any payments from an insurer (or guarantor in the case of commercial mortgage loans) and (ii) the amount owing on the mortgage loan.  RISK ASSOCIATED WITH LEVERAGE       Although the Company does not currently intend to incur any indebtedness in connection with the acquisition and holding of mortgage assets, the Company may do so at any time. Under the Company’s Certificate of Incorporation and other corporate governance documents, there are no limitations on the Company’s ability to incur additional indebtedness. To the extent the Company were to change its policy with respect to the incurrence of indebtedness, the Company would be subject to risks associated with leverage, including, without limitation, changes in interest rates and prepayment risk.       A leveraging strategy may create instability in the Company’s operations and reduce income under adverse market conditions. A decline in the market value of mortgage assets could limit the Company’s ability to borrow. The Company could be required to sell mortgage assets under adverse market conditions in order to maintain liquidity. If these sales were made at prices lower than the carrying value of the mortgage assets, the Company would experience losses. A default by the Company under its collateralized borrowings could also result in a liquidation of the collateral, resulting in a loss of the difference between the value of the collateral and the amount borrowed. To the extent the Company is compelled to liquidate mortgage assets to repay borrowings, its compliance with the REIT rules regarding asset and sources of income requirements could be negatively affected, ultimately jeopardizing the Company’s status as a REIT.       In addition, if the Company were to rely on short term borrowings, it also would be subject to interest rate risk to the extent of a mismatch between the long term yield of its mortgage asset portfolio and the short term costs of its borrowings. Developing an effective interest rate risk management strategy is complex and no management strategy can completely insulate the Company from risks associated with changes in interest rates. In addition, any hedges of interest rate risk would involve transaction costs, which generally increase significantly as the period covered by the hedge increases as well as during periods of volatile interest rates. To the extent the Company hedges against interest rate risks, the Company may substantially reduce its net income. Further, the federal tax laws applicable to REITs may limit the Company’s ability to hedge fully its interest rate risks. Such federal tax laws may prevent the Company from effectively implementing hedging strategies that, absent such restrictions, would best insulate the Company from the risks associated with changing interest rates.     Item 1B.  Unresolved Staff Comments  The Company has no unresolved comments from the SEC staff.     Item 2. Properties  Not Applicable.     Item 3. 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.  9    Table of Contents     Item 4. Submission of Matters to a Vote of Security Holders  During the fourth quarter of 2005, no matters were submitted to a vote of the Company’s security holders.     PART II     Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters  All of the Company’s common stock is owned by Webster Bank, and consequently there is no market for such securities. The Company’s Series B 8.625% Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) is traded on the NASDAQ Stock Market’s National Market Tier under the symbol “WBSTP”.  The Series B Preferred Stock is currently redeemable at the option of the Company, at a redemption price of $10 per share, plus any accrued and unpaid dividends. At this time, management has no plans to redeem the Series B Preferred Stock.  Dividends are declared and paid at least annually on the common stock. Dividends paid in 2005 and 2004 totaled $25.6 million and $25.8 million, respectively. Dividends are declared and paid quarterly on the Series B Preferred Stock. Dividends paid in 2005 and 2004 totaled $862,500 for each year.  The following table provides information concerning the market price of the Series B Preferred Stock. At December 31, 2005, the closing market price was $11.00.                              For Year ended December 31,       2005   2004         Average   $ 11.04       10.94     High     13.90       11.74     Low     10.24       10.23           Dividends will be declared at the discretion of the Board of Directors after considering the Company’s distributable funds, financial requirements, tax considerations and other factors. The Company’s distributable funds will consist primarily of interest and principal payments on the mortgage assets held by it, and the Company anticipates that a significant portion of such assets will bear interest at adjustable rates. Accordingly, if there is a decline in interest rates, the Company may experience a decrease in income available to be distributed to its shareholders. However, the Company currently expects that both its cash available for distribution and its “REIT taxable income” will exceed the amount needed to pay dividends on the Series B Preferred Stock, even in the event of a significant decline in interest rate levels, because (i) the Company’s mortgage assets are interest-bearing, (ii) the Series B Preferred Stock is not expected to exceed 15% of the Company’s capitalization, and (iii) the Company does not anticipate incurring any indebtedness.     Item 6. Selected Financial Data  The selected financial data set forth below should be read in conjunction with the Company’s audited financial statements and notes thereto appearing elsewhere in this document.  Balance Sheet Data                                                      At December 31,   (In thousands)   2005   2004   2003   2002   2001         Total assets   $ 511,761       537,346       538,471       631,237       928,672     Available for sale securities     41,335       20,709       46,116       110,061       158,543     Residential mortgage loans, net     388,136       475,879       426,251       379,590       588,747     Interest-bearing deposits     77,000       29,000       52,000       110,500       167,500     Total shareholders’ equity     511,571       537,160       538,235       630,992       928,426           10    Table of Contents  Income Statement Data                                                      For the Year Ended December 31,     (In thousands)   2005     2004     2003     2002     2001           Total interest income   $ 26,708       26,450       28,249       42,255       58,071     Provision for loan losses     —       —       —       —       90     Gain on sale of securities     —       536       268       —       —     Noninterest expenses     294       399       329       310       384         Net income     26,414       26,587       28,188       41,945       57,597     Preferred stock dividends     863       863       863       863       863         Net income available to common shareholder   $ 25,551       25,724       27,325       41,082       56,734           Significant Statistical Data                                                      For the Year Ended December 31,         2005     2004     2003     2002     2001           Net income per common share                                           Basic   $ 255,505       257,244       273,254       410,816       567,336     Dividends declared per common share     249,195       257,253       274,366       412,272       570,141              Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations  The Company has elected to be treated as a REIT under the Code and will generally not be subject to federal and Connecticut 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.  Summary  WPCC’s net income for 2005 declined to $26.4 million from $26.6 million in 2004 due to the following principal factors:       •   2004 results included $536,000 of gains on sales of securities. There was no corresponding gains in the 2005 results.        •   Total interest income increased $258,000 in 2005 primarily due to the increased yield on short term investments. The overall yield on earning assets increased to 4.97% in 2005 from 4.85% in 2004 as short-term market rates continued to rise throughout 2005. This was offset, in part, by the downward pricing of adjustable rate mortgages combined with the lower replacement yield on new mortgage assets.    Critical Accounting Policies Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows: Allowance for Loan Losses Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as the prevailing business and economic environment; as it is affected by changing economic conditions and various other external factors, subsequent changes in these factors may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off. 11    Table of Contents  Financial Condition Total assets, consisting primarily of residential mortgage loans and mortgage-backed securities, were $511.8 million at December 31, 2005, a decrease of $25.5 million from $537.3 million at December 31, 2004. Cash flow from mortgage loans and mortgage-backed securities, primarily due to accelerated prepayments throughout 2005 arising from the low interest rate environment, resulted in large cash inflows. With the increased cash flow, the Company purchased short term investments and mortgage-backed securities. A summary of the Company’s residential mortgage loans by original maturity for the last five years follows:                                                     At December 31,     (In thousands)   2005     2004     2003     2002     2001           Fixed-rate loans:                                           15 yr. loans   $ 50,842       63,747       71,217       55,956       81,566     20 yr. loans     7,218       8,083       8,261       3,132       4,693     25 yr. loans     3,718       4,037       4,414       2,542       2,598     30 yr. loans     232,742       273,028       190,888       138,008       191,049                                                     Total fixed-rate loans     294,520       348,895       274,780       199,638       279,906         Variable-rate loans:                                           15 yr. loans     666       1,009       2,351       1,605       3,015     20 yr. loans     1,241       5,246       3,176       3,127       5,368     25 yr. loans     1,183       1,382       1,843       2,680       4,581     30 yr. loans     89,951       118,287       144,728       173,482       295,835                                                     Total variable-rate loans     93,041       125,924       152,098       180,894       308,799                                                     Total residential mortgage loans     387,561       474,819       426,878       380,532       588,705     Premiums and deferred costs on loans, net     2,597       3,082       1,479       1,164       2,181     Less: allowance for loan losses     (2,022 )     (2,022 )     (2,106 )     (2,106 )     (2,139 )                                                   Residential mortgage loans, net   $ 388,136       475,879       426,251       379,590       588,747           Asset Quality  The Company maintains asset quality by acquiring residential real estate loans that have been conservatively underwritten and by aggressively managing nonperforming assets. During 2004 and 2003, all loan purchases by the Company were from Webster Bank. There were no purchases in 2005. As such, the Company’s asset quality is dependent upon Webster Bank’s ability to maintain conservative underwriting standards. At December 31, 2005, residential real estate loans comprised the entire loan portfolio. The Company also invests in mortgage-backed securities issued by government agencies or government-sponsored enterprises.  12    Table of Contents  Nonperforming Assets and Delinquencies  The following table details the Company’s nonperforming assets for the last five years:                                                      At December 31,     (Dollars in thousands)   2005     2004     2003     2002     2001           Loans accounted for on a nonaccrual basis:                                           Residential fixed-rate loans   $ —       —       185       247       120     Residential variable-rate loans     97       179       173       209       425         Total nonperforming loans     97       179       358       456       545     Other real estate owned     —       —       104       79       88         Total nonperforming assets   $ 97       179       462       535       633                                                     Allowance for loan losses   $ 2,022       2,022       2,106       2,106       2,139     Allowance / nonperforming loans     2,085 %     1,130       588       462       392     Allowance / total mortgage loans     0.52       0.43       0.49       0.55       0.36           The following table sets forth information as to the Company’s loans past due 30-89 days and still accruing:                                                      At December 31,     (In thousands)   2005     2004     2003     2002     2001           Past due 30-89 days:                                           Residential fixed-rate loans   $ 723       279       287       643       583     Residential variable-rate loans     539       266       491       1,176       1,749         Total   $ 1,262       545       778       1,819       2,332           Allowance for Loan Losses  An allowance for loan losses is established based upon a review of the loan portfolio, loss experience, specific problem loans, current and anticipated economic conditions and other pertinent factors which, in management’s judgment, deserve current recognition in estimating probable loan losses.  Management believes that the allowance for loan losses is adequate. While management believes it uses the best available information to recognize losses on loans, future additions to the allowance may be necessary based on actual results or changes in information used. In addition, various regulatory agencies, as an integral part of their examination process of Webster Bank, periodically may review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on judgments different from those of management.  A detail of the change in the allowance for loan losses for the periods indicated follows:                                                      For the Year Ended December 31,     (In thousands)   2005     2004     2003     2002     2001           Balance at beginning of the year   $ 2,022       2,106       2,106       2,139       2,059     Provision charged to operations     —       —       —       —       90     Charge-offs     —       (84 )     —       (33 )     (10 )       Balance at end of the year   $ 2,022       2,022       2,106       2,106       2,139           13    Table of Contents  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 ability of such instruments to incur prepayments of principal prior to maturity at prepayment rates different than those estimated at the time of purchase. This generally occurs because of changes in market interest rates.  Dividends on the Series B Preferred Stock are payable at the rate of 8.625% per annum (an amount equal to $.8625 per annum per share), in all cases if, when and as declared by the Board of Directors of the Company. Dividends on the preferred shares are cumulative and, if declared, payable on January 15, April 15, July 15 and October 15 in each year. The Company periodically makes dividend payments on its common stock in accordance with Company by-laws. Common stock dividends are paid to comply with REIT qualification rules. REIT qualification rules require that at least 90% of net taxable income for the year be distributed to shareholders. Accelerated prepayments beginning in 2002 and continuing throughout 2005 resulted in increased cash levels for the Company. In 2002, 2003 and 2005, WPCC declared return of capital dividends in order to return a portion of the available cash to the Company’s common shareholder.  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 totaled $41.3 million at December 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 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 interest rates rise. If interest rates decrease, the market value of loans and mortgage-backed securities generally will tend to increase with the level of prepayments also normally increasing. The interest income earned on the Company’s variable-rate, interest-sensitive instruments, which represent primarily variable-rate mortgage loans, may change due to changes in quoted interest-rate indices. The variable-rate mortgage loans generally reprice based on a stated margin over U.S. Treasury Securities indices of varying maturities, the terms of which are established at the time that the loan is closed. At December 31, 2005, 24.0% of the Company’s residential mortgage loans were variable-rate loans.  14    Table of Contents  Results of Operations  Net income declined to $26.4 million for the 2005 year from $26.6 million the previous year and $28.2 million in 2003. The decline in 2005 compared to 2004 is primarily due to a decline in the gain on sale of securities. The decline in 2004 compared to 2003 is primarily due to a decline in interest income.  The increase in interest income of $0.3 million, or 1%, from 2004 to 2005 was primarily due to an increase in average yields for short-term investments, as short-term market rates continued to rise throughout 2005. The decrease in interest income of $1.8 million, or 6.4%, from 2003 to 2004 was primarily due to a lower average balance and average yield on mortgage-backed securities. Due to the lower interest rate environment during 2003, 2004 and 2005, mortgage asset prepayments accelerated. The decline in balances over the three-year period was due to these accelerated prepayments in a low interest rate environment. Return of capital dividends to shareholders of $25 million in 2005 and $90 million in 2003 also reduced interest earning assets.                                                                                      For the Years Ended December 31,         2005     2004     2003         Average     Interest     Average     Average     Interest     Average     Average     Interest     Average     (Dollars in thousands)   Balance     Income     Yield     Balance     Income     Yield     Balance     Income     Yield           Mortgage loans, net   $ 435,078       23,052       5.30 %   $ 455,756       24,206       5.31 %   $ 412,976       22,989       5.57 %   Mortgage-backed securities(a)     19,218       882       4.59       29,927       1,491       4.98       79,825       4,338       5.43     Interest-bearing deposits     82,609       2,774       3.36       59,121       753       1.27       84,394       922       1.09         Total   $ 536,905       26,708       4.97 %   $ 544,804       26,450       4.85 %   $ 577,195       28,249       4.89 %         (a) Average balance does not include unrealized gain (loss) on available for sale securities.  Net 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. 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.                                                              Years ended December 31,     Years ended December 31,         2005 v. 2004     2004 v. 2003         Increase (Decrease) due to     Increase (Decrease) due to     (In thousands)   Rate     Volume     Total     Rate     Volume     Total           Interest on interest-earning assets:                                                   Loans, net   $ (46 )     (1,108 )     (1,154 )   $ (1,102 )     2,319       1,217     Mortgage-backed securities     (109 )     (500 )     (609 )     (333 )     (2,514 )     (2,847 )   Interest-bearing deposits     1,628       393       2,021       136       (305 )     (169 )       Net change in fully taxable-equivalent net interest income   $ 1,473       (1,215 )     258     $ (1,299 )     (500 )     (1,799 )         There was no provision for loan losses for the years ended December 31, 2005, 2004 and 2003. The absence of a provision for loan losses is reflective of the continued low level of nonperforming loans and charge-offs, as well as the solid economic performance of the local area where the collateral for the majority of the loans reside.  15    Table of Contents  Impact of Inflation and Changing Prices  The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.  Unlike most industrial companies, virtually all of the assets and liabilities of a real estate investment trust are monetary in nature. As a result, interest rates have a more significant impact on a real estate corporation’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, the maturity structure of the Company’s assets is critical to the maintenance of acceptable performance levels.  Recent Accounting Standards  Statement of Financial Accounting Standards  Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3,” establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. Under SFAS No. 154, retrospective application requires (i) the cumulative effect of the change to the new accounting principle on periods prior to those presented to be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented, (ii) an offsetting adjustment, if any, to be made to the opening balance of retained earnings (or other appropriate components of equity) for that period, and (iii) financial statements for each individual prior period presented to be adjusted to reflect the direct period-specific effects of applying the new accounting principle. Special retroactive application rules apply in situations where it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Indirect effects of a change in accounting principle are required to be reported in the period in which the accounting change is made. SFAS No. 154 carries forward the guidance in APB Opinion No. 20, “Accounting Changes,” requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 also carries forward without change the guidance contained in APB Opinion No. 20, for reporting the correction of an error in previously issued financial statements and for a change in an accounting estimate. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  Financial Accounting Standards Board Staff Positions  In November 2005, the FASB issued Staff Position Nos. 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP No. 115-1”), which addresses the determination of when an investment is considered impaired; whether the impairment is other-than-temporary; and how to measure an impairment loss. FSP No. 115-1 also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment loss on a debt security and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP No. 115-1 replaces the impairment guidance in Emerging Issues Task Force Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and Securities and Exchange Commission Staff Accounting Bulletin No. 59, “Accounting for Noncurrent Marketable Equity Securities”). Under FSP No. 115-1, impairment losses must be recognized in earnings for the difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. FSP No. 115-1 also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of FSP No. 115-1 will have a material impact on its financial statements.  16    Table of Contents     Item 7A. Quantitative and Qualitative Disclosures About Market Risk  Because the majority of our assets are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. 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 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.  The following table summarizes the estimated market values of the Company’s interest-sensitive assets at December 31, 2005 and 2004, and the projected change to market values if interest rates instantaneously increase or decrease by 100 basis points. The Company had no interest-sensitive liabilities at December 31, 2005 and 2004.                                                              Estimated Market Value Impact     (In thousands)   Amortized Cost     Market Value     -100 BP     +100 BP           At December 31, 2005                                   Mortgage-backed securities   $ 41,835       41,335       521       (580 )   Variable-rate residential loans     93,041       92,557       1,168       (1,262 )   Fixed-rate residential loans     294,520       293,051       8,892       (12,363 )       At December 31, 2004                                   Mortgage-backed securities   $ 20,688       20,709       524       (664 )   Variable-rate residential loans     125,924       125,100       1,635       (1,878 )   Fixed-rate residential loans     348,895       354,998       6,929       (12,522 )         Interest-sensitive assets, when shocked by a minus 100 basis point rate change, results in a favorable $10.6 million change in market values for 2005 compared to a favorable $9.1 million market value change in 2004. These changes represent 2.5% of interest-sensitive assets in 2005 and 1.8% in 2004. A plus 100 basis point rate change results in an unfavorable $14.2 million, or 3.3%, change in 2005, compared to an unfavorable $15.1 million or 3.0%, change in 2004.  Based on the Company’s asset/liability mix at December 31, 2005, management estimates that a gradual 200 basis point increase in interest rates would increase net income over the next twelve months by 5.4%. A gradual 200 basis point decline in interest rates is projected to decrease net income by 5.9%.  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 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 Company’s interest-rate risk position at December 31, 2005 represents a reasonable level of risk.  17    Table of Contents     Item 8. Financial Statements and Supplementary Data  Report of Independent Registered Public Accounting Firm  The Board of Directors and Shareholders of Webster Preferred Capital Corporation:   We have audited the accompanying statements of condition of Webster Preferred Capital Corporation (a subsidiary of Webster Bank, N.A.) as of December 31, 2005 and 2004, and the related statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Webster Preferred Capital Corporation as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.  /s/ KPMG LLP  Hartford, Connecticut March 24, 2006   18    Table of Contents  WEBSTER PREFERRED CAPITAL CORPORATION  STATEMENTS OF CONDITION                              At December 31,     (Dollars in thousands, except per share data)   2005     2004           Assets                                       Cash   $ 3,402       10,325     Interest-bearing deposits     77,000       29,000     Mortgage-backed securities available for sale, at fair value (Note 2)     41,335       20,709     Residential mortgage loans, net (Note 3)     388,136       475,879     Accrued interest receivable     1,784       280     Prepaid expenses and other assets     104       1,153         Total assets   $ 511,761       537,346                             Liabilities and Shareholders’ Equity                                       Accrued dividends payable   $ 180       180     Accrued expenses and other liabilities     10       6         Total liabilities     190       186                             Shareholders’ Equity                                       Series B 8.625% cumulative redeemable preferred stock, liquidation preference $10 per share; par value $1.00 per share; 1,000,000 shares authorized, issued and outstanding (Note 4)     1,000       1,000     Common stock, par value $.01 per share; 1,000 shares authorized, 100 shares issued and outstanding     1       1     Paid-in capital     513,799       538,799     Distributions in excess of accumulated earnings     (2,729 )     (2,661 )   Accumulated other comprehensive (loss) income     (500 )     21         Total shareholders’ equity     511,571       537,160         Total liabilities and shareholders’ equity   $ 511,761       537,346           See accompanying notes to financial statements.  19    Table of Contents  WEBSTER PREFERRED CAPITAL CORPORATION  STATEMENTS OF INCOME                                      Years Ended December 31,     (In thousands, except per share data)   2005     2004     2003           Interest income:                           Loans (Note 5)   $ 23,052       24,206       22,989     Securities and interest-bearing deposits     3,656       2,244       5,260         Total interest income     26,708       26,450       28,249                                 Provision for loan losses (Note 3)     —       —       —         Interest income after provision for loan losses     26,708       26,450       28,249                                 Noninterest income:                           Gain on sale of securities     —       536       268                                 Noninterest expenses:                           Advisory fee expense paid to parent (Note 6)     195       195       195     Other noninterest expense     99       204       134         Total noninterest expense     294       399       329                                     Net income (Note 7)     26,414       26,587       28,188     Preferred stock dividends     863       863       863         Net income available to common shareholder   $ 25,551       25,724       27,325                                     Basic net income per common share   $ 255,505       257,244       273,254           STATEMENTS OF COMPREHENSIVE INCOME                                      Years Ended December 31,     (In thousands)   2005     2004     2003           Net income   $ 26,414       26,587       28,188                                 Other comprehensive loss:                           Unrealized net holding loss on securities available for sale arising during the year     (521 )     (431 )     (2,973 )                               Reclassification adjustment for gains realized during the year     —       (536 )     (268 )       Other comprehensive loss     (521 )     (967 )     (3,241 )       Comprehensive income   $ 25,893       25,620       24,947           See accompanying notes to financial statements.  20    Table of Contents  WEBSTER PREFERRED CAPITAL CORPORATION  STATEMENTS OF SHAREHOLDERS’ EQUITY                                                                                      Distributions   Accumulated                                   in Excess of   Other           Preferred   Common   Paid-In   Accumulated   Comprehensive       (In thousands, except per share data)   Stock   Stock   Capital   Earnings   Income (Loss)   Total         Balance, December 31, 2002   $ 1,000       1       628,799       (3,037 )     4,229       630,992                                                         Net income for 2003     —       —       —       28,188       —       28,188     Net unrealized loss on available for sale securities     —       —       —       —       (3,241 )     (3,241 )   Dividends declared and paid:                                                   Return of capital dividend on common stock     —       —       (90,000 )     —       —       (90,000 )   Common stock ($268,414 per share)     —       —       —       (26,841 )     —       (26,841 )   Preferred stock Series B     —       —       —       (863 )     —       (863 )       Balance, December 31, 2003     1,000       1       538,799       (2,553 )     988       538,235                                                         Net income for 2004     —       —       —       26,587       —       26,587     Net unrealized loss on available for sale securities     —       —       —       —       (967 )     (967 )   Dividends declared and paid:                                                   Common stock ($258,319 per share)     —       —       —       (25,832 )     —       (25,832 )   Preferred stock Series B     —       —       —       (863 )     —       (863 )       Balance, December 31, 2004     1,000       1       538,799       (2,661 )     21       537,160                                                         Net income for 2005     —       —       —       26,414       —       26,414     Net unrealized loss on available for sale securities     —       —       —       —       (521 )     (521 )   Dividends declared and paid:                                                   Return of capital dividend on common stock     —       —       (25,000 )     —       —       (25,000 )   Common stock ($256,184 per share)     —       —       —       (25,619 )     —       (25,619 )   Preferred stock Series B     —       —       —       (863 )     —       (863 )       Balance, December 31, 2005   $ 1,000       1       513,799       (2,729 )     (500 )     511,571           See accompanying notes to financial statements.  21    Table of Contents  WEBSTER PREFERRED CAPITAL CORPORATION  STATEMENTS OF CASH FLOWS                                      Years Ended December 31,   (In thousands)   2005   2004   2003         Operating Activities:                           Net income   $ 26,414       26,587       28,188     Adjustments to reconcile net income to net cash provided by operating activities:                           Net amortization and accretion     878       570       925     Gain on sale of securities     —       (536 )     (268 )   (Increase) decrease in accrued interest receivable     (1,504 )     71       841     Increase (decrease) in total liabilities     4       (50 )     (9 )   Decrease (increase) in prepaid expenses and other assets     1,049       520       (150 )       Net cash provided by operating activities     26,841       27,162       29,527         Investing Activities:                           Purchase of mortgage-backed securities     (24,658 )     —       (30,530 )   Principal repayments on mortgage-backed securities     3,441       9,270       81,874     Proceeds from sales of mortgage-backed securities     —       15,600       9,248     (Increase) decrease in short-term investments     (48,000 )     23,000       58,500     Purchase of loans     —       (145,900 )     (195,140 )   Principal repayments of loans, net     86,935       95,817       147,734     Proceeds from other real estate owned sales     —       95       175         Net cash provided (used) by investing activities     17,718       (2,118 )     71,861         Financing Activities:                           Dividends paid on common and preferred stock     (26,482 )     (26,695 )     (27,704 )   Return of capital dividend     (25,000 )     —       (90,000 )       Net cash used by financing activities     (51,482 )     (26,695 )     (117,704 )                                   Decrease in cash and cash equivalents     (6,923 )     (1,651 )     (16,316 )   Cash and equivalents at beginning of year     10,325       11,976       28,292         Cash and equivalents at end of year   $ 3,402       10,325       11,976                                     Supplemental Schedule of Non-Cash Investing Activity:                           Transfer of residential mortgage loans to other real estate owned   $ —       60       200       See accompanying notes to financial statements.  22    Table of Contents  WEBSTER PREFERRED CAPITAL CORPORATION  NOTES TO FINANCIAL STATEMENTS  Note 1: Summary of Significant Accounting Policies  a) Business  Webster Preferred Capital Corporation (the “Company”) is a Connecticut corporation incorporated in March 1997 and a subsidiary of Webster Bank, National Association, “(Webster Bank”), which is a wholly-owned subsidiary of Webster Financial Corporation (“Webster”). The Company acquires, holds and manages real estate mortgage assets (“mortgage assets”). As of December 31, 2005, mortgage assets owned by the Company consisted of whole loans secured by first mortgages or deeds of trusts on single family (one-to-four unit) residential real estate properties (“residential mortgage loans”), located primarily in Connecticut and mortgage-backed securities, secured by these same type of loans, located throughout the country.  The Company has elected to be treated as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), and will generally not be subject to federal income tax to the extent that it distributes its earnings to its stockholders and maintains its qualification as a REIT. All of the shares of the Company’s common stock, par value $0.01 per share, are owned by Webster Bank, which is a federally-chartered and federally-insured 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.  b) Basis of Financial Statement Presentation  The financial statements have been prepared in conformity with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial statements, and revenues and expenses for the periods presented. The actual results of the Company could differ from those estimates. An example of a material estimate that is susceptible to near-term changes is the allowance for loan losses.  c) Loans  Loans are stated at the principal amounts outstanding, adjusted by purchase premiums and discounts, deferred loan fees and/or costs, and the allowance for loan losses. Interest on loans is credited to income as earned based on the rate applied to principal amounts outstanding. Interest which is more than 90 days past due is not accrued. Such interest ultimately collected, if any, is credited to income in the period received. Loan origination fees, net of certain direct origination costs, and premiums and discounts on loans purchased are recognized in interest income over the lives of the loans using a method approximating the interest method. Servicing fees paid to the Servicer are charged against interest income.  The Company’s residential mortgage loans are not within the scope of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118, since these are homogenous loans with relatively small balances that are collectively evaluated for impairment.  d) Allowance for Loan Losses  The allowance for loan losses is established based upon a review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors which, in management’s judgment, deserve current recognition in estimating probable loan losses.  Management believes that the allowance for loan losses is adequate. While management believes it uses the best available information to recognize probable losses on loans, future additions to the allowance may be necessary based upon actual results or changes in the above mentioned factors. In addition, various regulatory agencies, as an integral part of their examination process of Webster Bank, periodically may review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on judgments different from those of management.  23    Table of Contents  e) Mortgage-Backed Securities  Mortgage-backed securities are issued by U.S. government agencies or government-sponsored enterprises and are classified as available for sale. Available for sale securities are carried at fair value with unrealized gains and losses recorded as adjustments to shareholders’ equity. The adjustment to shareholders’ equity is not tax-effected, as the Company is generally not subject to federal and state income tax. Management intends to hold these securities for indefinite periods of time as part of its asset/liability strategy and may sell the securities in response to changes in interest rates, changes in prepayment risk or other factors. One of the risks inherent when investing in mortgage-backed securities is the ability of such instruments to incur prepayments of principal prior to maturity. Because of prepayments, the weighted-average yield of these securities may also change, which could affect earnings. Realized gains and losses on sales of securities are recorded using the specific identification method. Unrealized losses on securities are charged to earnings when the decline in fair value is judged to be other than temporary.  f) 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. The weighted-average number of shares used in the computation of basic earnings per common share for the years ended December 31, 2005, 2004 and 2003 was 100.  g) Comprehensive Income  The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income includes net income and certain changes in equity from non-owner sources that are not recognized in the income statement (such as net unrealized gains and losses on securities available for sale).  h) Statement of Cash Flows  For purposes of the Statement of Cash Flows, the Company defines cash in banks to be cash and cash equivalents.  Note 2: Mortgage-Backed Securities Available for Sale  The following table sets forth certain information regarding the mortgage-backed securities:                                              Amortized   Unrealized   Unrealized   Estimated   (In thousands)   Cost   Gains   Losses   Fair Value         December 31, 2005                                   Available for sale portfolio   $ 41,835       —       (500 )     41,335         December 31, 2004                                   Available for sale portfolio   $ 20,688       21       —       20,709           During 2005 there were no sales of mortgage-backed securities. Mortgage-backed securities sold for proceeds of $15.6 million generated a gain of $536,000 during 2004. One fixed-rate mortgage-backed security was sold for proceeds of $9.2 million in 2003 generating a gain of $268,000.  All of the securities with unrealized losses at December 31, 2005 (2 securities) had been in a continuous unrealized loss position for less than twelve months. The unrealized losses were caused by increases in market yields subsequent to purchase. There were no securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security. Because the Company has the intent and ability to hold securities with unrealized losses until a market price recovery (which may be until maturity), the Company did not consider these securities to be other-than-temporarily impaired at December 31, 2005.  Unrealized losses on fixed income securities result from the cost basis of securities being greater than current market value. This will generally be due to an increase in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer. Management has and will continue to evaluate impairments, whether caused by adverse interest rate or credit movements, to determine if they are other-than-temporary.  24    Table of Contents  In accordance with applicable accounting literature, the Company must demonstrate an ability and intent to hold an impaired security until full recovery of its cost basis. Management uses both internal and external information sources to arrive at the most informed decision. This quantitative and qualitative assessment begins with a review of general market conditions and changes to market conditions, credit, investment performance and structure since the prior review period. The ability to hold the impaired security will involve a number of factors, including: forecasted recovery period based on the security’s average life; whether its return provides satisfactory carry relative to funding sources; and the Company’s capital, earnings and cash flow positions, among other things. The Company has the ability and intent to hold all temporarily impaired securities to full recovery, which may be until maturity.  Note 3: Residential Mortgage Loans, Net  A summary of residential mortgage loans, net, by type and original maturity follows:                              At December 31,   (In thousands)   2005   2004         Fixed-rate loans:                   15 yr. loans   $ 50,842       63,747     20 yr. loans     7,218       8,083     25 yr. loans     3,718       4,037     30 yr. loans     232,742       273,028                             Total fixed-rate loans     294,520       348,895         Variable-rate loans:                   15 yr. loans     666       1,009     20 yr. loans     1,241       5,246     25 yr. loans     1,183       1,382     30 yr. loans     89,951       118,287                             Total variable-rate loans     93,041       125,924                             Total residential mortgage loans     387,561       474,819                         Premiums and deferred fees on loans, net     2,597       3,082     Less: allowance for loan losses     (2,022 )     (2,022 )                           Residential mortgage loans, net   $ 388,136       475,879           A detail of the change in the allowance for loan losses follows:                                      Years Ended December 31,   (In thousands)   2005   2004   2003         Balance at beginning of year   $ 2,022       2,106       2,106     Provision charged to operations     —       —       —     Charge-offs     —       (84 )     —         Balance at end of year   $ 2,022       2,022       2,106           No loans were considered impaired at either December 31, 2005 or 2004. Nonaccrual loans totaled $97,000 and $179,000 at December 31, 2005 and 2004, respectively.  25    Table of Contents  Note 4: Redeemable Preferred Stock  In December 1997, 1,000,000 shares of Series B 8.625% cumulative redeemable preferred stock were issued at $10 per share, raising $10.0 million less issuance costs. The Series B preferred stock was not redeemable prior to January 15, 2003, except upon the occurrence of a specified tax event. Any redemption is solely at the option of the Company, which has no current plans to redeem the preferred stock. The redemption price is $10 per share.  Note 5: Servicing  The mortgage loans owned by the Company are serviced by Webster Bank pursuant to the terms of a servicing agreement. Webster Bank in its role as servicer under the terms of the servicing agreement is herein referred to as the “Servicer.” The Servicer receives fees at an annual rate of (i) 8 basis points for fixed-rate loan servicing and collection, (ii) 8 basis points for variable-rate loan servicing and collection and (iii) 5 basis points for all other services to be provided, as needed, in each case based on the daily outstanding balances of all the Company’s loans for which the Servicer is responsible. The services provided to the Company by Webster Bank are at the level of a sub-servicing agreement. As such, the Company estimates that the fees paid to Webster Bank for servicing approximates fees that would be paid if the Company operated as an unaffiliated entity. Servicing fees paid for the years 2005, 2004 and 2003 were $345,000, $355,000 and $326,000, respectively. Servicing fees are netted against interest income in the Statements of Income, as they are considered 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.  Note 6: Advisory Services  Advisory services are being provided pursuant to an agreement with Webster Bank to provide the Company with the following types of services: administer the day-to-day operations, monitor the credit quality of the mortgage assets, advise with respect to the acquisition, management, financing, and disposition of mortgage assets and provide the necessary executive administration, human resource, accounting and control, technical support, record keeping, copying, telephone, mailing and distribution, investment and funds management services. Webster Bank received an annual fee for advisory services provided to the Company of $195,000 in 2005, 2004 and 2003. The Company estimates that the fees paid to Webster Bank for advisory services approximate fees that would be paid for such services if the Company were an unaffiliated entity.  Operating expenses outside the scope of the advisory agreement are paid directly by the Company. Such expenses include, but are not limited to, fees for third party consultants, attorneys and external auditors, and any other expenses incurred that are not directly related to the advisory agreement.  Note 7: Income Taxes  The Company has elected to be treated as a REIT under Sections 856 through 860 of the Code, and believes that its organization and method of operation meet the requirements for qualification as a REIT. As a REIT, the Company generally will not be subject to federal income tax on net income and capital gains that it distributes to the holders of its common and preferred stock. Therefore, no provision for federal income taxes has been included in the accompanying financial statements.  To maintain REIT status, an entity must meet a number of organizational and operational requirements, including a requirement that it currently distributes to stockholders at least 90% of its “REIT taxable income” (not including capital gains and certain items of non-cash income). If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax at regular corporate rates.  26    Table of Contents  Note 8: Summary of Estimated Fair Values of Financial Instruments  A summary of estimated fair values of financial instruments follows:                                              At December 31,   (In thousands)   2005   2004         Carrying   Estimated   Carrying   Estimated       Amount   Fair Value   Amount   Fair Value         Assets:                                   Cash   $ 3,402       3,402       10,325       10,325     Interest-bearing deposits     77,000       77,000       29,000       29,000     Mortgage-backed securities     41,335       41,335       20,709       20,709                                         Residential mortgages     390,158       385,608       477,901       480,098     Less: allowance for loan losses     (2,022 )     (2,022 )     (2,022 )     (2,022 )       Residential mortgages, net     388,136       383,586       475,879       478,076       The Company uses Webster’s Asset/Liability simulation model to estimate the fair value of its residential mortgage loans. Fair value is estimated by discounting the average expected cash flows over multiple interest rate paths. An arbitrage-free trinomial lattice term structure model generates the interest rate paths. The month-end LIBOR/Swap yield curve and swap option volatilities are used as the input for deriving forward rates for future months. Cash flows for all instruments are created for each rate path using product specific behavioral models and account specific system data. Discount rates are matched with the time period of the expected cash flow. The Asset/Liability simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage Obligation database provided by two leading financial software companies. Instruments with explicit options (i.e., caps, floors, puts and calls) and implicit options (i.e., prepayment and early withdrawal ability) require such a rate and cash flow modeling approach to more accurately quantify value. A spread is added to the discount rates to reflect credit and option risks embedded in each instrument. Spreads and prices are calibrated to observable market instruments when available or to estimates based on industry standards.  The carrying amounts for interest-bearing deposits approximate fair value since they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of mortgage-backed securities (see Note 2) is estimated based on prices or quotations received from third parties or pricing services.  Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings or any part of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.  27    Table of Contents  Note 9: Selected Quarterly Financial Data (unaudited)                                          2005                       (In thousands, except share data)   First Quarter   Second Quarter   Third Quarter   Fourth Quarter         Interest income   $ 6,670       6,732       6,693       6,613     Noninterest income     —       —       —       —     Noninterest expenses     57       79       80       78             Net income     6,613       6,653       6,613       6,535     Preferred dividends     216       215       216       216             Net income available to common shareholder   $ 6,397       6,438       6,397       6,319             Basic net income per common share   $ 63,970       64,380       63,970       63,185                                                       2004                       (In thousands, except share data)   First Quarter   Second Quarter   Third Quarter   Fourth Quarter         Interest income   $ 6,402       6,687       6,666       6,695     Noninterest income     —       352       184       —     Noninterest expenses     120       144       58       77             Net income     6,282       6,895       6,792       6,618     Preferred dividends     216       215       216       216             Net income available to common shareholder   $ 6,066       6,680       6,576       6,402             Basic net income per common share   $ 60,660       66,800       65,760       64,024                  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  The Company had no changes in or disagreements with its independent registered public accounting firm on accounting and financial disclosures.     Item 9A. Disclosure Controls and Procedures  The Company’s management, including the Company’s 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 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2005. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There was no change 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 control over financial reporting.     Item 9B. Other Information  None  28    Table of Contents     PART III     Item 10. Directors and Executive Officers of the Registrant  The Company’s Board of Directors currently consists of three members. Directors are elected for a one-year term. The Company currently has three officers and no other employees.  The persons who are current directors and executive officers of the Company are as follows:                      Name   Age at December 31, 2005   Position and Offices Held     William T. Bromage      60     President and Director                   Harriet Munrett Wolfe      52     Director                   William J. Healy      61     Director                   Gregory S. Madar      43     Senior Vice President, Chief Accounting Officer and Assistant Secretary                   Mark S. Lyon      45     Secretary     The following is a summary of the experience of the officers and directors of the Company:  William T. Bromage was elected President and director of the Company during 2004. He is also Chief Operating Officer and a director of Webster and Webster Bank and Vice Chairman of Webster Bank. Mr. Bromage was elected President in April 2000 and Chief Operating Officer in January 2002. From September 1999 to April 2000, he served as Senior Executive Vice President — Business Banking and Corporate Development of Webster and Webster Bank. From May 1996 to August 1999, Mr. Bromage served as Executive Vice President — Business Banking of Webster and Webster Bank.  Harriet Munrett Wolfe has been a director of the Company since 1997. She is also the Executive Vice President, General Counsel and Secretary of Webster and Webster Bank. Ms. Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice President and Counsel, was appointed Secretary in June 1997 and General Counsel in September 1999. In January 2003, she was appointed Executive Vice President.  William J. Healy has been a director of the Company since 2001. He is also the Executive Vice President and Chief Financial Officer of Webster and Webster Bank, positions he has held since March 2001. Prior to joining Webster, Mr. Healy was Executive Vice President and Chief Financial Officer of Summit Bancorp, a bank holding company in Princeton, NJ.  Gregory S. Madar has been the Senior Vice President, Principal Financial and Accounting Officer and Assistant Secretary of the Company since April 2003. He also served as the Treasurer of the Company from 2001 to 2003, as Secretary of the Company from March 1997 to March 1999 and as Assistant Secretary of the Company since 1999. He is also Senior Vice President and Controller of Webster Bank. Mr. Madar, a Certified Public Accountant, joined Webster Bank in 1995 as Vice President and Tax Manager and was elected Senior Vice President and Assistant Controller in January 2000. In February 2002, he was promoted to Senior Vice President and Controller.  Mark S. Lyon has been the Secretary of the Company since December 2005. He is also Assistant Secretary of Webster and Senior Vice President and Assistant Secretary of Webster Bank. Mr. Lyon joined Webster in November 2005. Previously Mr. Lyon was Assistant Secretary for Praxair, Inc., an industrial gases company in Danbury, CT.  Code of Ethics  The Company has a code of ethics that applies to all employees, as well as each member of the Company’s Board of Directors. The code of ethics is available at Webster Bank’s website at www.websteronline.com.  29    Table of Contents  Audit Committee Matters  The entire Board of Directors serves as the audit committee of the Company. The Company, as an indirect subsidiary of Webster Financial Corporation (NYSE: WBS), is relying on the exemption provided in Section10A-3(c)(2) of the Securities Exchange Act of 1934.  Section 16(a) Beneficial Ownership Reporting Compliance  Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers and persons who own more than 10% of its Series B Preferred Stock to file with the SEC initial reports of ownership of the Company’s equity securities and to file subsequent reports when there are changes in such ownership. Based on a review of reports submitted to the Company, the Company believes that during the fiscal year ended December 31, 2005, all Section 16(a) filing requirements applicable to the Company’s officers, directors and more than 10% owners were complied with on a timely basis.     Item 11. Executive Compensation  The Company currently has three officers, none of whom receive separate compensation as employees of the Company. The Company has retained an advisor to perform certain functions pursuant to an Advisory Service Agreement described below under “The Advisor.” Each officer of the Company currently is also an officer of Webster Bank. The Company maintains corporate and accounting records that are separate from those of Webster Bank and any of Webster Bank’s affiliates.  It is not currently anticipated that the officers, directors or employees of the Company will have any pecuniary interest in any mortgage asset to be acquired or disposed of by the Company or in any transaction in which the Company has an interest.  The Company does not pay the directors of the Company fees for their services as directors. Although no direct compensation is paid by the Company, under the Advisory Services Agreement, the Company reimburses Webster Bank for its proportionate share of the salaries of such person for services rendered.  The Advisor  The Company has entered into an Advisory Service Agreement (the “Advisory Agreement”) with Webster Bank to administer the day-to-day operations of the Company. Webster Bank in its role as advisor under the terms of the Advisory Agreement is herein referred to as the “Advisor.” The Advisor is responsible for (i) monitoring the credit quality of the mortgage assets held by the Company, (ii) advising the Company with respect to the acquisition, management, financing and disposition of the Company’s mortgage assets, and (iii) maintaining custody of the documents related to the Company’s mortgage assets. The Advisor may at any time subcontract all or a portion of its obligations under the Advisory Agreement to one or more of its affiliates involved in the business of managing mortgage assets. If no affiliate of the Advisor is engaged in the business of managing mortgage assets, the Advisor may, with the approval of a majority of the Board of Directors, subcontract all or a portion of its obligations under the Advisory Agreement to unrelated third parties. The Advisor may assign its rights or obligations under the Advisory Agreement to any affiliate of the Company. The Advisor will not, in connection with the subcontracting of any of its obligations under the Advisory Agreement, be discharged or relieved in any respect from its obligations under the Advisory Agreement.  The Advisory Agreement had an initial term of two years, and has been renewed for additional one-year periods. It will continue to be renewed until notice of nonrenewal is delivered by either party to the other party. The Advisory Agreement may be terminated by the Company at any time upon 90 days’ prior written notice. The Advisor is entitled to receive an advisory fee equal to $195,000 per year beginning January 1, 2003 with respect to the advisory services provided by it to the Company, as per the amended agreement adopted on December 19, 2002. The fee may be revised to reflect changes in the actual costs incurred by the Advisor in providing services.  30    Table of Contents  The Advisory Agreement provides that the liability of the Advisor to the Company for any loss due to the Advisor’s performing or failing to perform the services under the Advisory Agreement shall be limited to those losses sustained by the Company which are a direct result of the Advisor’s negligence or willful misconduct. It also provides that under no circumstances shall the Advisor be liable for any consequential or special damages and that in no event shall the Advisor’s total combined liability to the Company for all claims arising under or in connection with the Advisory Agreement be more than the total amount of all fees payable by the Company to the Advisor under the Advisory Agreement during the year immediately preceeding the year in which the first claim giving rise to such liability arises. The Advisory Agreement also provides that to the extent that third parties make claims against the Advisor arising out of the services provided thereunder, the Company will indemnify the Advisor against all loss arising therefrom.     Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters  The following table sets forth, as of December 31, 2005, the number and percentage of the outstanding shares of either our Common Stock or Series B Preferred Stock beneficially owned by (i) all persons known by the Company to own more than five percent of such shares, (ii) each director of the Company, and (iii) each executive officer of the Company, and (iv) all executive officers and directors of the Company as group.                  Name and Address of Beneficial Owner   Amount of Beneficial Ownership   Percent of Class of Outstanding Shares     Webster Bank 145 Bank Street Waterbury, CT 06702    100 shares    Common – 100%               William T. Bromage President and Director    -0-    -0-               Harriet Munrett Wolfe Director    -0-    -0-               William J. Healy Director    -0-    -0-               Gregory S. Madar Senior Vice President, Chief Accounting Officer and Assistant Secretary    300 shares    Series B Preferred Stock*               Mark S. Lyon Secretary    -0-    -0-               All Officers and Directors as a group    300 shares    Series B Preferred Stock*                *   Less then one percent   The Company does not maintain any compensation plans pursuant to which equity securities of the Company may be issued.     Item 13. Certain Relationships and Related Transactions  The Company is organized as a subsidiary of Webster Bank, is controlled by and through advisory and servicing agreements and is totally reliant on Webster Bank. The Company’s Board of Directors consists entirely of Webster Bank employees and, through the advisory and servicing agreements, Webster Bank and its affiliates are involved in every aspect of the Company’s existence. Webster Bank administers the day-to-day activities of the Company in its role as Advisor under the Advisory Agreement and acts as Servicer of the Company’s Mortgage Loans under the Servicing Agreement. In addition, all of the officers of the Company are also officers of Webster Bank. As the holder of all of the outstanding voting stock of the Company, Webster Bank generally will have the right to elect all of the directors of the Company. For a description of the fees Webster Bank is entitled to receive under the advisory and servicing agreements, see Notes 5 and 6 to the Company’s Financial Statements included in Item 8.  31    Table of Contents  Dependence upon Webster Bank as Advisor and Servicer  The Company is dependent on the diligence and skill of the officers and employees of Webster Bank as its Advisor for the selection, structuring and monitoring of the Company’s mortgage assets. In addition, the Company is dependent upon the expertise of Webster Bank as its Servicer for the servicing of the mortgage loans. The personnel deemed most essential to the Company’s operations are Webster Bank’s loan servicing and administration personnel, and the staff of its finance department. The loan servicing and administration personnel advise the Company in the selection of mortgage assets, and provide loan-servicing oversight. The finance department assists in the administrative operations of the Company. The Advisor may subcontract all or a portion of its obligations under the Advisory Agreement to one or more affiliates, and under certain conditions to non-affiliates, involved in the business of managing mortgage assets. The Advisor may assign its rights or obligations under the Advisory Agreement, and the Servicer may assign its rights and obligations under the Servicing Agreement, to any affiliate of the Company involved in the business of managing real estate mortgage assets. Under the Advisory Agreement, the Advisor may subcontract its obligations to unrelated third parties with the approval of the Board of Directors of the Company. In the event the Advisor or the Servicer subcontracts or assigns its rights or obligations in such a manner, the Company will be dependent upon the subcontractor or affiliate to provide services. Although Webster Bank has indicated to the Company that it has no plans in this regard, if Webster Bank were to subcontract all of its loan servicing to an outside third party, it also would do so with respect to mortgage assets under the Servicing Agreement. Under such circumstances, there may be additional risks as to the costs of such services and the ability to identify a subcontractor suitable to the Company. The Servicer does not believe it would subcontract those duties unless it could not perform such duties efficiently and economically itself.     Item 14. Principal Accountant Fees and Services  Audit and Non-Audit Fees  The following table presents fees for professional audit services rendered by KPMG LLP for the audit of the Company’s annual financial statements for the years ended December 31, 2005 and 2004, and fees billed for other services rendered by KPMG LLP during those periods.                              2005     2004               Audit Fees (1)   $ 29,000       26,800     Audit Related Fees     —       —     Tax Fees     —       —     All Other Fees     —       —                     Total   $ 29,000       26,800                                  (1)   Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s annual financial statements and review of the interim financial statements included in quarterly reports, and services that are normally provided in connection with statutory and regulatory filings or engagements.         Before the principal accountant is engaged by the Company to render audit or non-audit services, the engagement is approved by the Company’s Board of Directors.   32    Table of Contents     PART IV     Item 15. Exhibits and Financial Statement Schedules  (a)(1) The financial statements of the registrant are included in Item 8 of Part II of the report.   (a)(2) There are no financial statement schedules which are required to be filed as part of this form.   (a)(3) The exhibits listed below are either filed as part of this report or are incorporated by reference.               Exhibit Number   Description         3.1    Amended and Restated Certificate of Incorporation of Webster Preferred Capital Corporation (the “Company”) (incorporated herein by reference from Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).           3.3    Certificate of Amendment for the Series B 8.625% Cumulative Redeemable Preferred Stock of the Company (incorporated herein by reference from Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).           3.4    Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).           4.2    Specimen of certificate representing the Series B 8.625% Cumulative Redeemable Preferred Stock of the Company (incorporated herein by reference from Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).           10.1    Mortgage Assignment Agreement, made as of March 17, 1997, by and between Webster Bank and the Company (incorporated herein by reference from Exhibit 10.1 to the Company’s Registration Statement on Form S-11 (File No. 333-38685) filed with the Securities and Exchange Commission (the “SEC”) on October 24, 1997).           10.2    Master Service Agreement, dated March 17, 1997, between Webster Bank and the Company (incorporated herein by reference from Exhibit 10.2 to the Company’s Registration Statement on Form S-11 (File No. 333-38685) filed with the SEC on October 24, 1997).           10.3    Advisory Service Agreement, made as of October 20, 1997, by and between Webster Bank and the Company (incorporated herein by reference from Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997).           31.1    Certificate of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           31.2    Certificate 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.        (b)    See (a) (3) for a list of all exhibits filed herewith or incorporated by reference.      (c)   There are no financial statements or financial statement schedules which were excluded from this Report which are required to be included herein.    33    Table of Contents        SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                        WEBSTER PREFERRED CAPITAL CORPORATION               Registrant                    BY:    /s/ William T. Bromage                         William T. Bromage, President and Director                   Date: March 28, 2006     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 28, 2006.                By:    /s/ William T. Bromage                 William T. Bromage, President and Director        (Principal Executive Officer)           By:    /s/ Gregory S. Madar                 Gregory S. Madar, Senior Vice President,        Treasurer and Assistant Secretary        (Principal Financial and Accounting Officer)           By:    /s/ William J. Healy                 William J. Healy, Director           By:    /s/ Harriet M. Wolfe                 Harriet Munrett Wolfe, Director     34       EX-31.1 2 y19060exv31w1.htm EX-31.1: CERTIFICATION    EX-31.1       EXHIBIT 31.1  CERTIFICATION  I, William T. Bromage, certify that:       1. I have reviewed this annual report on Form 10-K of Webster Preferred Capital Corporation.       2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;       3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;       4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:            a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;            b) evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and            c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and       5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):            a) all significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and            b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  Date: March 28, 2006                By:    /s/ William T. Bromage                 William T. Bromage President (Principal Executive Officer)     35       EX-31.2 3 y19060exv31w2.htm EX-31.2: CERTIFICATION    EX-31.2       EXHIBIT 31.2  CERTIFICATION  I, Gregory S. Madar, certify that:       1. I have reviewed this annual report on Form 10-K of Webster Preferred Capital Corporation.       2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;       3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;       4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:            a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;            b) evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and            c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and       5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):            a) all significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and            b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.  Date: March 28, 2006                By:    /s/ Gregory S. Madar                 Gregory S. Madar Senior Vice President, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer)     36       EX-32.1 4 y19060exv32w1.htm EX-32.1: CERTIFICATION    EX-32.1       EXHIBIT 32.1  Written Statement Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002  The undersigned, the President of Webster Preferred Capital Corporation (the “Company”), hereby certifies that, to his knowledge on the date hereof:     (a)   the Form 10-K Report of the Company for the year ended December 31, 2005 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (b)   information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.                       /s/ William T. Bromage                 William T. Bromage President (Principal Executive Officer)        March 28, 2006     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Webster Preferred Capital Corporation and will be retained by Webster Preferred Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request.  37       EX-32.2 5 y19060exv32w2.htm EX-32.2: CERTIFICATION    EX-32.2       EXHIBIT 32.2  Written Statement Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002  The undersigned, the Senior Vice President, Treasurer and Assistant Secretary of Webster Preferred Capital Corporation (the “Company”), hereby certifies that, to his knowledge on the date hereof:     (a)   the Form 10-K Report of the Company for the year ended December 31, 2005 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (b)   information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.                       /s/ Gregory S. Madar                 Gregory S. Madar Senior Vice President, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer)        March 28, 2006     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Webster Preferred Capital Corporation and will be retained by Webster Preferred Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request.  38       -----END PRIVACY-ENHANCED MESSAGE-----