##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.For the fiscal year ended December 31, 2004
 OR o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from             to
 Commission File Number: 0-23513 WEBSTER PREFERRED CAPITAL CORPORATION 
  Connecticut
    
    06-1478208(State or other jurisdiction of
incorporation or organization)
    
    (I. R. S. Employer
Identification Number)145 Bank Street, Waterbury, Connecticut
    
    06702(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (203) 578-2286 Securities registered pursuant to Section 12(b) of the Act:Not Applicable Securities registered pursuant to Section 12(g) of the Act: Title of Class
    
    Exchange where listedPreferred Stock, $1 par value
    
    NASDAQ
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12B-2). Yes o No
þ. State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of June 30, 2004. N/A The number of shares outstanding of each of the registrants classes of common stock, as of
February 28, 2005 is: 100 shares




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WEBSTER PREFERRED CAPITAL CORPORATION 2004 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
  
 PagePART IItem 1.Business
    
    
    3Item 2.Properties
    
    
    6Item 3.Legal Proceedings
    
    
    6Item 4.Submission of Matters to a Vote of Security Holders
    
    
    6PART IIItem 5.Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    6Item 6.Selected Financial Data
    
    
    7Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    8Item 7A.Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 8.Financial Statements and Supplementary Data
    
    
    15Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    26Item 9A.Controls and Procedures
    
    
    26Item 9B.Other Information
    
    
    26PART IIIItem 10.Directors and Executive Officers of the Registrant
    
    
    27Item 11.Executive Compensation
    
    
    28Item 12.Security Ownership of Certain Beneficial Owners and Management
    
    
    29Item 13.Certain Relationships and Related Transactions
    
    
    29Item 14.Principal Accountant Fees and Services
    
    
    30PART IVItem 15.Exhibits and Financial Statement Schedules
    
    
    31SIGNATURES
    
    
    32EXHIBITSEX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATIONEX-32.2 CERTIFICATION
  2




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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, principals 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 in this Annual Report is the Quantitative and Qualitative
Disclosures about Market Risk section contained in Managements Discussion and Analysis. 
 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, 2004 and 2003, 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 accounting principles
generally accepted in the United States of America) to be less than 250% of the aggregate
liquidation value of the issued and outstanding preferred shares. The preferred shares are not
exchangeable into capital stock or other securities of Webster Bank or Webster Financial
Corporation (Webster), the parent company of Webster Bank, and do not constitute regulatory
capital of either Webster Bank or Webster. The Company has 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 Connecticut 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 $537.3 million at December 31, 2004, a decrease of $1.2 million
from $538.5 million at December 31, 2003, primarily due to $26.7 million of dividend payments to
common and preferred shareholders, which exceeded net income of $26.6 million and a $1.0 million
decline in the value of mortgage-backed securities. As a result, reductions occurred in cash of
$1.7 million, interest-bearing deposits of $23.0 million and mortgage-backed securities of $25.4
million, were partly offset by an increase in residential mortgage loans of $49.6 million.
Shareholders equity was $537.2 million at December 31, 2004 as compared to $538.2 million a year
earlier. 3




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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 and purchased $145.9 million and $195.1 million
during 2004 and 2003, respectively. 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, 2004 and 2003, the Company
did not hold any commercial mortgage loans. Regulation The Company is a wholly-owned subsidiary of Webster Bank. 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




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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. ADVERSE 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. In the event that the Company has insufficient available cash on hand or is otherwise precluded
from making dividend distributions in amounts sufficient to maintain its status as a REIT or to
avoid imposition of an excise tax, the Company may avail itself of consent dividend procedures. A
consent dividend is a hypothetical dividend, as opposed to an actual dividend, declared by the
Company and treated for U.S. federal tax purposes as though it had actually been paid to
stockholders who were the owners of shares on the last day of the year and who executed the
required consent form, and then recontributed by those stockholders to the Company. The Company
would use the consent dividend procedures only with respect to its common stock. 5




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Employees The Company has three officers. The executive officers are described further below in Item 10,
Directors and Officers. 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, we anticipate 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 we expect to continue to purchase most or
all of our mortgage assets in the future, will face competition from these organizations. 
 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. 
 Item 4.Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the fiscal year 2004 to security holders for a
vote. 
 PART II 
  Item 5.
    Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 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 declared and paid at least annually on the common stock in 2004 and 2003 totaled $25.8
million and $26.8 million, respectively. Dividends declared on the Series B Preferred Stock in
2004 and 2003 totaled $862,500 for each year. The following table provides information concerning the market price of the Series B Preferred
Stock. At December 31, 2004, the closing market price was $11.15. For Year ended December 31,2004
    
    
    2003Average
    
    $
    10.94
    
    
    
    10.74High
    
    
    11.74
    
    
    
    12.29Low
    
    
    10.23
    
    
    
    10.00
 6




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Dividends will be declared at the discretion of the Board of Directors after considering the
Companys distributable funds, financial requirements, tax considerations and other factors. The
Companys distributable funds will consist primarily of interest and principal payments on the
Mortgage Assets held by it, and the Company anticipates that a significant portion of such assets
will bear interest at adjustable rates. Accordingly, if there is a decline in interest rates, the
Company may experience a decrease in income available to be distributed to its shareholders.
However, the Company currently expects that both its cash available for distribution and its REIT
taxable income will exceed the amount needed to pay dividends on the Preferred Shares, even in the
event of a significant decline in interest rate levels, because (i) the Companys Mortgage Assets
are interest-bearing, (ii) the Series 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 is based upon and 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)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Total assets
    
    $
    537,346
    
    
    
    538,471
    
    
    
    631,237
    
    
    
    928,672
    
    
    
    968,198Available for sale securities
    
    
    20,709
    
    
    
    46,116
    
    
    
    110,061
    
    
    
    158,543
    
    
    
    76,927Residential mortgage loans, net
    
    
    475,879
    
    
    
    426,251
    
    
    
    379,590
    
    
    
    588,747
    
    
    
    771,848Interest-bearing deposits
    
    
    29,000
    
    
    
    52,000
    
    
    
    110,500
    
    
    
    167,500
    
    
    
    97,500Mandatorily redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000Total shareholders equity
    
    
    537,160
    
    
    
    538,235
    
    
    
    630,992
    
    
    
    928,426
    
    
    
    927,334
 Income Statement Data For the Year Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Total interest income
    
    $
    26,450
    
    
    
    28,249
    
    
    
    42,255
    
    
    
    58,071
    
    
    
    65,312Provision for loan losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    190Gain on sale of securities
    
    
    536
    
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    94Noninterest expenses
    
    
    399
    
    
    
    329
    
    
    
    310
    
    
    
    384
    
    
    
    3,534Net income
    
    
    26,587
    
    
    
    28,188
    
    
    
    41,945
    
    
    
    57,597
    
    
    
    61,682Preferred stock dividends
    
    
    863
    
    
    
    863
    
    
    
    863
    
    
    
    863
    
    
    
    863Net income available to common
shareholder
    
    $
    25,724
    
    
    
    27,325
    
    
    
    41,082
    
    
    
    56,734
    
    
    
    60,819
 Significant Statistical Data For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net income per common shareBasic and diluted
    
    $
    257,244
    
    
    
    273,254
    
    
    
    410,816
    
    
    
    567,336
    
    
    
    608,189Dividends declared per common share
    
    
    257,253
    
    
    
    274,366
    
    
    
    412,272
    
    
    
    570,141
    
    
    
    615,050
 
 7




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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 2004 declined to $26.6 million from $28.2 million in 2003 due to the
following factors:  
    The average return on earning assets declined to 4.85% from 4.89% a year earlier
due to the low interest rate environment during 2003 and 2004.
    Average outstanding earning assets declined by $32.4 million during 2004 from a
year earlier, to $544.8 million, due to the sale of $15.6 million of mortgage-backed
securities and reduction in interest bearing deposits. During 2004, WPCC purchased $145.9 million of residential loans from Webster Bank. 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. 8




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Financial Condition Total assets, consisting primarily of residential mortgage loans and mortgage-backed securities,
were $537.3 million at December 31, 2004, a decrease of $1.2 million from $538.5 million at
December 31, 2003. Cash flow from mortgage loans and mortgage-backed securities, primarily due to
accelerated prepayments throughout 2004 arising from the low interest rate environment, resulted in
large cash inflows. With the increased cash flow, WPCC purchased $145.9 million in residential
loans from Webster Bank. A summary of the Companys residential mortgage loans by original maturity for the last five years
follows: At December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Fixed-rate loans:15 yr. loans
    
    $
    63,747
    
    
    
    71,217
    
    
    
    55,956
    
    
    
    81,566
    
    
    
    102,34820 yr. loans
    
    
    8,083
    
    
    
    8,261
    
    
    
    3,132
    
    
    
    4,693
    
    
    
    5,10725 yr. loans
    
    
    4,037
    
    
    
    4,414
    
    
    
    2,542
    
    
    
    2,598
    
    
    
    2,89930 yr. loans
    
    
    273,028
    
    
    
    190,888
    
    
    
    138,008
    
    
    
    191,049
    
    
    
    223,438Total fixed-rate loans
    
    
    348,895
    
    
    
    274,780
    
    
    
    199,638
    
    
    
    279,906
    
    
    
    333,792Variable-rate loans:15 yr. loans
    
    
    1,009
    
    
    
    2,351
    
    
    
    1,605
    
    
    
    3,015
    
    
    
    4,70020 yr. loans
    
    
    5,246
    
    
    
    3,176
    
    
    
    3,127
    
    
    
    5,368
    
    
    
    7,50525 yr. loans
    
    
    1,382
    
    
    
    1,843
    
    
    
    2,680
    
    
    
    4,581
    
    
    
    6,21430 yr. loans
    
    
    118,287
    
    
    
    144,728
    
    
    
    173,482
    
    
    
    295,835
    
    
    
    418,461Total variable-rate loans
    
    
    125,924
    
    
    
    152,098
    
    
    
    180,894
    
    
    
    308,799
    
    
    
    436,880Total residential mortgage loans
    
    
    474,819
    
    
    
    426,878
    
    
    
    380,532
    
    
    
    588,705
    
    
    
    770,672Premiums and deferred costs on loans, net
    
    
    3,082
    
    
    
    1,479
    
    
    
    1,164
    
    
    
    2,181
    
    
    
    3,235Less: allowance for loan losses
    
    
    (2,022
    )
    
    
    (2,106
    )
    
    
    (2,106
    )
    
    
    (2,139
    )
    
    
    (2,059
    )Residential mortgage loans, net
    
    $
    475,879
    
    
    
    426,251
    
    
    
    379,590
    
    
    
    588,747
    
    
    
    771,848
 9




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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 2003 and
2004, all loan purchases by the Company were from Webster Bank. As such, the Companys asset
quality is dependent upon Webster Banks ability to maintain conservative underwriting standards.
At December 31, 2004, residential real estate loans comprised the entire loan portfolio. The
Company also invests in government agency or government-sponsored agency issued mortgage-backed
securities. Nonperforming Assets and Delinquencies The following table details the Companys nonperforming assets for the last five years: At December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loans accounted for on a nonaccrual basis:Residential fixed-rate loans
    
    $
    
    
    
    
    185
    
    
    
    247
    
    
    
    120
    
    
    
    231Residential variable-rate loans
    
    
    179
    
    
    
    173
    
    
    
    209
    
    
    
    425
    
    
    
    186Total nonperforming loans
    
    
    179
    
    
    
    358
    
    
    
    456
    
    
    
    545
    
    
    
    417Other real estate owned
    
    
    
    
    
    
    104
    
    
    
    79
    
    
    
    88
    
    
    
    288Total nonperforming assets
    
    $
    179
    
    
    
    462
    
    
    
    535
    
    
    
    633
    
    
    
    705Allowance for loan losses
    
    $
    2,022
    
    
    
    2,106
    
    
    
    2,106
    
    
    
    2,139
    
    
    
    2,059Allowance / nonperforming loans
    
    
    1,130
    %
    
    
    588
    
    
    
    462
    
    
    
    392
    
    
    
    494Allowance / total mortgage loans
    
    
    0.43
    
    
    
    0.49
    
    
    
    0.55
    
    
    
    0.36
    
    
    
    0.27
 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)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Past due 30-89 days:Residential fixed-rate loans
    
    $
    279
    
    
    
    287
    
    
    
    643
    
    
    
    583
    
    
    
    5,809Residential variable-rate loans
    
    
    266
    
    
    
    491
    
    
    
    1,176
    
    
    
    1,749
    
    
    
    12,513Total
    
    $
    545
    
    
    
    778
    
    
    
    1,819
    
    
    
    2,332
    
    
    
    18,322
 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. 10




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##### Table of Contents



A detail of the change in the allowance for loan losses for the periods indicated follows: For the Year Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of the year
    
    $
    2,106
    
    
    
    2,106
    
    
    
    2,139
    
    
    
    2,059
    
    
    
    1,912Provision charged to operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    190Charge-offs
    
    
    (84
    )
    
    
    
    
    
    
    (33
    )
    
    
    (10
    )
    
    
    (43
    )Balance at end of the year
    
    $
    2,022
    
    
    
    2,106
    
    
    
    2,106
    
    
    
    2,139
    
    
    
    2,059
 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
90% of net taxable income for the year be distributed to shareholders. Accelerated prepayments
beginning in 2002 and continuing throughout 2004 resulted in increased cash levels for the Company.
In 2002 and 2003, WPCC declared return of capital dividends in order to return the 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 $20.7 million at December 31, 2004, 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, 2004, 26.5% of the Companys
residential mortgage loans were variable-rate loans. 11




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##### Table of Contents



Results of Operations Net income declined to $26.6 million for the 2004 year from $28.2 million the previous year and
$41.9 million in 2002. This decline is due entirely to declines in interest income as WPCC has no
interest-bearing liabilities and noninterest income and expense are minimal. The decline in interest income of $1.8 million, or 6.4%, from 2003 to 2004 was due to a
combination of a decline in yield on earning assets and a decline in outstanding earning assets.
Due to the low interest rate environment during 2003 and 2004, mortgage asset prepayments
accelerated. These assets were replaced with ones earning a lower yield. The decline in balances
was due to these accelerated prepayments. The declines in 2002 to 2003 resulted from the same
factors; low interest rate environment and a return of capital dividend to shareholders of $90.0
million in 2003. For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    Balance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    Yield
    
    
    Balance
    
    
    Income
    
    
    YieldMortgage loans, net
    
    $
    455,756
    
    
    
    24,206
    
    
    
    5.31
    %
    
    $
    412,976
    
    
    
    22,989
    
    
    
    5.57
    %
    
    $
    495,598
    
    
    
    31,161
    
    
    
    6.29
    %Mortgage-backed securities(a)
    
    
    29,927
    
    
    
    1,491
    
    
    
    4.98
    
    
    
    79,825
    
    
    
    4,338
    
    
    
    5.43
    
    
    
    136,517
    
    
    
    8,863
    
    
    
    6.49Interest-bearing deposits
    
    
    59,121
    
    
    
    753
    
    
    
    1.27
    
    
    
    84,394
    
    
    
    922
    
    
    
    1.09
    
    
    
    128,662
    
    
    
    2,231
    
    
    
    1.73Total
    
    $
    544,804
    
    
    
    26,450
    
    
    
    4.85
    %
    
    $
    577,195
    
    
    
    28,249
    
    
    
    4.89
    %
    
    $
    760,777
    
    
    
    42,255
    
    
    
    5.55
    %
   (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 and interest-bearing liabilities have impacted
interest income and interest expense 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 31,2004 v. 2003
    
    
    2003 v. 2002Increase (Decrease) due to
    
    
    Increase (Decrease) due to(In thousands)
    
    Rate
    
    
    Volume
    
    
    Total
    
    
    Rate
    
    
    Volume
    
    
    TotalInterest on interest-earning assets:Loans, net
    
    $
    (1,102
    )
    
    
    2,319
    
    
    
    1,217
    
    
    $
    (3,327
    )
    
    
    (4,845
    )
    
    
    (8,172
    )Mortgage-backed securities
    
    
    (333
    )
    
    
    (2,514
    )
    
    
    (2,847
    )
    
    
    (1,277
    )
    
    
    (3,248
    )
    
    
    (4,525
    )Interest-bearing deposits
    
    
    136
    
    
    
    (305
    )
    
    
    (169
    )
    
    
    (678
    )
    
    
    (631
    )
    
    
    (1,309
    )Net change in fully taxable-equivalent
net interest income
    
    $
    (1,299
    )
    
    
    (500
    )
    
    
    (1,799
    )
    
    $
    (5,282
    )
    
    
    (8,724
    )
    
    
    (14,006
    )
 There was no provision for loan losses for the years ended December 31, 2004, 2003 and 2002. 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. 12




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##### 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 In December 2004, FASB issued SFAS No. 123 (R), Share Based Payment, which requires compensation
cost relating to share-based payment transactions be recognized in the financial statements, based
upon the fair value of the instruments issued. SFAS No. 123 (R) covers a wide range of
share-based compensation arrangements including share options, restricted stock plans,
performance-based awards, share appreciation rights and employee purchase plans. This Statement is
effective for public entities as of the first interim or annual period that begins after June 15,
2005. SFAS No. 123 (R) replaces SFAS No. 123, which established as preferable a fair value based
method of accounting for share-based compensation with employees, but permitted the option of
continuing to apply the guidance of APB No. 25, as long as the footnotes to the financial
statements disclosed the effects of the preferable fair value method. The adoption of SFAS No. 123
(R) will have no impact on WPCCs financial statements. In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.
105, Application of Accounting Principles to Loan Commitments(SAB 105), which provides guidance
about the measurement of loan commitments required to be accounted for as derivative instruments
and recognized at fair value under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose
their accounting policy for those loan commitments including methods and assumptions used to
estimate fair value and associated hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into after June 30, 2004. In May 2004, the FASB issued FASB Staff Position (FSP) 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Act). FSP 106-2, which supersedes FSP No. 106-1, provides guidance on the accounting for the
effects of the Act for employers that sponsor post-retirement health care plans that provide
prescription drug benefits. FSP 106-2 also requires employers to provide certain disclosures
regarding the effect of the Federal subsidy provided by the Act. FSP
106-2 had an immaterial
impact on WPCCs financial statements. In 2003, Emerging Issues Task Force (EITF) of the FASB issued EITF No. 03-01. The EITF reach a
consensus about the criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement of an impairment
loss and how that criteria should be applied to investments accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. EITF 03-01 also included
accounting considerations subsequent to the recognition of an other-than-temporary impairments.
Additionally, EITF 03-01 includes new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, FASB delayed the accounting provisions of EITF 03-01;
however the disclosure requirements remain effective for annual reports ending after June 15, 2004.
WPCC will evaluate the impact of EITF 03-01 once final guidance is issued. 13




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##### 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, 2004 and 2003, 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, 2004 and 2003. Estimated Market Value Impact(In thousands)
    
    Amortized Cost
    
    
    Market Value
    
    
    -100 BP
    
    
    +100 BPAt December 31, 2004Mortgage-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
    )At December 31, 2003Mortgage-backed securities
    
    $
    45,128
    
    
    
    46,116
    
    
    
    1,138
    
    
    
    (1,513
    )Variable-rate residential loans
    
    
    152,098
    
    
    
    152,310
    
    
    
    2,448
    
    
    
    (2,545
    )Fixed-rate residential loans
    
    
    274,780
    
    
    
    284,081
    
    
    
    6,771
    
    
    
    (10,852
    )
 Interest-sensitive assets, when impacted by a minus 100 basis point rate change, results in a
favorable $9.1 million change in market values for 2004 compared to a favorable $10.4 million
market value change in 2003. These changes represent 1.8% of interest-sensitive assets in 2004 and
2.1% in 2003. A plus 100 basis point rate change results in an unfavorable $15.1 million, or 3.0%,
change in 2004, compared to an unfavorable $14.9 million or 3.1%, change in 2003. Based on the Companys asset/liability mix at December 31, 2004, management estimates that a
gradual 200 basis point increase in interest rates would increase net income over the next twelve
months by 3.0%. A gradual 100 basis point decline in interest rates is projected to decrease net
income by 3.6%. These estimates assume that management takes no action to mitigate any negative
effects from changing interest rates. In particular, the Companys interest rate sensitive assets are subject to prepayment risk.
Prepayment risk is inherently difficult to estimate and is dependent upon a number of economic,
financial and behavioral variables. The Company uses a sophisticated mortgage prepayment modeling
system to estimate prepayments and the corresponding impact on market value and net interest
income. The model uses information that includes the instrument type, coupon spread, loan age and
other factors in its projections. These assumptions are inherently uncertain and, as a result, the simulation analyses cannot
precisely estimate the impact that higher or lower rate environments will have on net 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 Websters interest-rate risk position at December
31, 2004, represents a reasonable level of risk. 14




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##### Table of Contents



Item 8.Financial Statements and Supplementary Data Report of Independent Registered 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, 2004 and 2003, 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, 2004. 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 consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. 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, 2004
and 2003, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles. /s/ KPMG LLP Hartford, Connecticut
March 10, 2005 15




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##### Table of Contents



WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF CONDITION At December 31,(Dollars in thousands, except per share data)
    
    2004
    
    
    2003AssetsCash
    
    $
    10,325
    
    
    
    11,976Interest-bearing deposits
    
    
    29,000
    
    
    
    52,000Mortgage-backed securities available for sale, at fair value (Note 2)
    
    
    20,709
    
    
    
    46,116Residential mortgage loans, net (Note 3)
    
    
    475,879
    
    
    
    426,251Accrued interest receivable
    
    
    280
    
    
    
    351Other real estate owned
    
    
    
    
    
    
    104Prepaid expenses and other assets
    
    
    1,153
    
    
    
    1,673Total assets
    
    $
    537,346
    
    
    
    538,471Liabilities and Shareholders EquityAccrued dividends payable
    
    $
    180
    
    
    
    180Accrued expenses and other liabilities
    
    
    6
    
    
    
    56Total liabilities
    
    
    186
    
    
    
    236Shareholders EquitySeries 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
    
    
    
    1,000Common stock, par value $.01 per share; 1,000 shares authorized,
100 shares issued and outstanding
    
    
    1
    
    
    
    1Paid-in capital
    
    
    538,799
    
    
    
    538,799Distributions in excess of accumulated earnings
    
    
    (2,661
    )
    
    
    (2,553
    )Accumulated other comprehensive income
    
    
    21
    
    
    
    988Total shareholders equity
    
    
    537,160
    
    
    
    538,235Total liabilities and shareholders equity
    
    $
    537,346
    
    
    
    538,471
 See accompanying notes to financial statements. 16




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##### Table of Contents



WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF INCOME Years Ended December 31,(In thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002Interest income:Loans (Note 5)
    
    $
    24,206
    
    
    
    22,989
    
    
    
    31,161Securities and interest-bearing deposits
    
    
    2,244
    
    
    
    5,260
    
    
    
    11,094Total interest income
    
    
    26,450
    
    
    
    28,249
    
    
    
    42,255Provision for loan losses (Note 3)
    
    
    
    
    
    
    
    
    
    
    Interest income after provision for loan losses
    
    
    26,450
    
    
    
    28,249
    
    
    
    42,255Noninterest income:Gain on sale of securities
    
    
    536
    
    
    
    268
    
    
    
    Noninterest expenses:Advisory fee expense paid to parent (Note 6)
    
    
    195
    
    
    
    195
    
    
    
    186Other noninterest expense
    
    
    204
    
    
    
    134
    
    
    
    124Total noninterest expense
    
    
    399
    
    
    
    329
    
    
    
    310Net income(Note 7)
    
    
    26,587
    
    
    
    28,188
    
    
    
    41,945Preferred stock dividends
    
    
    863
    
    
    
    863
    
    
    
    863Net income available to common shareholder
    
    $
    25,724
    
    
    
    27,325
    
    
    
    41,082Net income per common share:Basic and diluted
    
    $
    257,244
    
    
    
    273,254
    
    
    
    410,816
 STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002Net income
    
    $
    26,587
    
    
    
    28,188
    
    
    
    41,945Other comprehensive (loss) income:Unrealized net holding (loss) gain on securities
available for sale arising during the year
    
    
    (431
    )
    
    
    (2,973
    )
    
    
    3,017Reclassification adjustment for gains realized during
the year
    
    
    (536
    )
    
    
    (268
    )
    
    
    Other comprehensive (loss) income
    
    
    (967
    )
    
    
    (3,241
    )
    
    
    3,017Comprehensive income
    
    $
    25,620
    
    
    
    24,947
    
    
    
    44,962
 See accompanying notes to financial statements. 17




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##### Table of Contents



WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF SHAREHOLDERS EQUITY Distributions
    
    
    Accumulatedin Excess of
    
    
    OtherPreferred
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive(In thousands, except per share data)
    
    Stock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    TotalBalance, December 31, 2001
    
    $
    1,000
    
    
    
    1
    
    
    
    928,799
    
    
    
    (2,586
    )
    
    
    1,212
    
    
    
    928,426Net income for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,945
    
    
    
    
    
    
    
    41,945Net unrealized gain on available for
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,017
    
    
    
    3,017Dividends declared and paid:Return of capital dividend on common stock
    
    
    
    
    
    
    
    
    
    
    (300,000
    )
    
    
    
    
    
    
    
    
    
    
    (300,000
    )Common stock ($415,330 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,533
    )
    
    
    
    
    
    
    (41,533
    )Preferred stock series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (863
    )
    
    
    
    
    
    
    (863
    )Balance, December 31, 2002
    
    
    1,000
    
    
    
    1
    
    
    
    628,799
    
    
    
    (3,037
    )
    
    
    4,229
    
    
    
    630,992Net income for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,188
    
    
    
    
    
    
    
    28,188Net 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
    
    
    
    538,235Net income for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,587
    
    
    
    
    
    
    
    26,587Net 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
 See accompanying notes to financial statements. 18




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##### Table of Contents



WEBSTER PREFERRED CAPITAL CORPORATION STATEMENTS OF CASH FLOWS Years Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002Operating Activities:Net income
    
    $
    26,587
    
    
    
    28,188
    
    
    
    41,945Adjustments to reconcile net income to net cash provided
by operating activities:Amortization
    
    
    570
    
    
    
    925
    
    
    
    902Gain on sale of securities
    
    
    (536
    )
    
    
    (268
    )
    
    
    Decrease in accrued interest receivable
    
    
    71
    
    
    
    841
    
    
    
    2,370Decrease in total liabilities
    
    
    (50
    )
    
    
    (9
    )
    
    
    (1
    )Decrease (increase) in prepaid expenses and other assets
    
    
    520
    
    
    
    (150
    )
    
    
    4,859Net cash provided by operating activities
    
    
    27,162
    
    
    
    29,527
    
    
    
    50,075Investing Activities:Purchase of mortgage-backed securities
    
    
    
    
    
    
    (30,530
    )
    
    
    Principal repayments on mortgage-backed securities
    
    
    9,270
    
    
    
    81,874
    
    
    
    51,614Proceeds from sales of mortgage-backed securities
    
    
    15,600
    
    
    
    9,248
    
    
    
    Decrease short-term investments
    
    
    23,000
    
    
    
    58,500
    
    
    
    57,000Purchase of loans
    
    
    (145,900
    )
    
    
    (195,140
    )
    
    
    Principal repayments of loans, net
    
    
    95,817
    
    
    
    147,734
    
    
    
    207,957Proceeds from other real estate owned sales
    
    
    95
    
    
    
    175
    
    
    
    192Net cash (used) provided by investing activities
    
    
    (2,118
    )
    
    
    71,861
    
    
    
    316,763Financing Activities:Dividends paid on common and preferred stock
    
    
    (26,695
    )
    
    
    (27,704
    )
    
    
    (42,396
    )Return of capital dividend
    
    
    
    
    
    
    (90,000
    )
    
    
    (300,000
    )Net cash used by financing activities
    
    
    (26,695
    )
    
    
    (117,704
    )
    
    
    (342,396
    )(Decrease) increase in cash and cash equivalents
    
    
    (1,651
    )
    
    
    (16,316
    )
    
    
    24,442Cash and equivalents at beginning of year
    
    
    11,976
    
    
    
    28,292
    
    
    
    3,850Cash and equivalents at end of year
    
    $
    10,325
    
    
    
    11,976
    
    
    
    28,292Supplemental Schedule of Non-Cash Investing Activity:Transfer of residential mortgage loans to other real
estate owned
    
    $
    60
    
    
    
    200
    
    
    
    183
 See accompanying notes to financial statements 19




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##### 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, N.A., 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, 2004, 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 amount of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the date of the financial
statements, and revenues and expenses for the periods presented. The actual results of the Company
could differ from those estimates. 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, net of deferred loan fees and/or costs
and an 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 exempt from the disclosure provisions of the Statement
of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, since the Companys loans are comprised of large groups of
smaller balance loans which are collectively evaluated for impairment. d) Allowance for Loan Losses An allowance for loan losses is established based upon a review of the loan portfolio, loss
experience, specific problem loans, economic conditions and other pertinent factors which, in
managements judgment, deserve current recognition in estimating 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. 20




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##### Table of Contents



e) Mortgage-Backed Securities Mortgage-backed securities are U.S. government agency or government sponsored agency issued
securities and are classified as available for sale. Available for sale securities are carried at
fair value with unrealized gains and losses recorded as adjustments to shareholders equity. The
adjustment to shareholders equity is not tax-effected, as the Company is generally not subject to
federal and state income tax. Management intends to hold these securities for indefinite periods
of time as part of its asset/liability strategy and may sell the securities in response to changes
in interest rates, changes in prepayment risk or other factors. One of the risks inherent when
investing in mortgage-backed securities is the ability of such instruments to incur prepayments of
principal prior to maturity. Because of prepayments, the weighted-average yield of these
securities may also change, which could affect earnings. Realized gains and losses on the sales of
securities are recorded using the specific identification method. Unrealized losses on securities
are charged to earnings when the decline in fair value is judged to be other than temporary. f) Other Real Estate Owned Other real estate owned consists of properties acquired through foreclosure proceedings or
acceptance of a deed in lieu of foreclosure. Other real estate owned is reported at the lower of
fair value less estimated selling expenses or carrying value of the loan at the time of
foreclosure. Operating expenses are charged to current period earnings and gains and losses upon
disposition are reflected in the statement of income when realized. g) Net Income Per Common Share Basic net income per common share is calculated by dividing net income available to common
shareholders by the weighted-average number of shares of common stock outstanding. Diluted net
income per common share is calculated by dividing net income available to common shareholders by
the weighted-average diluted common shares. The Company has no dilutive items. The
weighted-average number of shares used in the computation of basic and diluted earnings per common
share for the years ended December 31, 2004, 2003 and 2002 was 100. h)Comprehensive Income The purpose for reporting comprehensive income is to report a measure of all changes in equity of
an enterprise that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. Comprehensive income includes net
income and certain changes in equity from non-owner sources that are not recognized in the income
statement (such as net unrealized gains and losses on securities available for sale). i) Statement of Cash Flows For purposes of the Statement of Cash Flows, the Company defines cash on hand and in banks to be
cash and cash equivalents. j) Reclassification Certain 2003 financial statement balances as previously reported have been reclassified to conform
to the 2004 financial statement presentation. 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 ValueDecember 31, 2004Available for sale portfolio
    
    $
    20,688
    
    
    
    21
    
    
    
    
    
    
    
    20,709December 31, 2003Available for sale portfolio
    
    $
    45,128
    
    
    
    988
    
    
    
    
    
    
    
    46,116
 During 2004, mortgage-backed
securities were sold for $15.6 million producing a net gain of
$536,000. One fixed mortgage-backed security was sold for $9.2 million generating a net gain of
$268,000 during 2003. There were no sales of mortgage-backed securities for the year ending
December 31, 2002. 21




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##### Table of Contents



Note 3: Residential Mortgage Loans, Net A summary of residential mortgage loans, net, by type and original maturity follows: At December 31,(In thousands)
    
    2004
    
    
    2003Fixed-rate loans:15 yr. loans
    
    $
    63,747
    
    
    
    71,21720 yr. loans
    
    
    8,083
    
    
    
    8,26125 yr. loans
    
    
    4,037
    
    
    
    4,41430 yr. loans
    
    
    273,028
    
    
    
    190,888Total fixed-rate loans
    
    
    348,895
    
    
    
    274,780Variable-rate loans:15 yr. loans
    
    
    1,009
    
    
    
    2,35120 yr. loans
    
    
    5,246
    
    
    
    3,17625 yr. loans
    
    
    1,382
    
    
    
    1,84330 yr. loans
    
    
    118,287
    
    
    
    144,728Total variable-rate loans
    
    
    125,924
    
    
    
    152,098Total residential mortgage loans
    
    
    474,819
    
    
    
    426,878Premiums and deferred fees on loans, net
    
    
    3,082
    
    
    
    1,479Less: allowance for loan losses
    
    
    (2,022
    )
    
    
    (2,106
    )Residential mortgage loans, net
    
    $
    475,879
    
    
    
    426,251
 A detail of the change in the allowance for loan losses follows: Years Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    2,106
    
    
    
    2,106
    
    
    
    2,139Provision charged to operations
    
    
    
    
    
    
    
    
    
    
    Charge-offs
    
    
    (84
    )
    
    
    
    
    
    
    (33
    )Balance at end of year
    
    $
    2,022
    
    
    
    2,106
    
    
    
    2,106
 No loans were considered impaired at either December 31, 2004 or 2003. Nonaccrual loans totaled
$179,000 and $358,000 at December 31, 2004 and 2003, respectively. Note 4 : Redeemable Preferred Stock In December 1997, 1 million shares of Series B 8.625% cumulative redeemable preferred stock was
sold raising $10.0 million, less expenses. The Series B preferred stock was not redeemable prior to
January 15, 2003, except upon the occurrence of a specified tax event. The redemption is at the
option of the Company, which has no current plans to redeem the preferred stock. 22




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##### Table of Contents



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 2004, 2003 and 2002 were $355,000, $326,000
and $387,000, respectively. Servicing fees are included in interest income on the Statement of
Income, as they are classified as a reduction in yield to the Company. The Servicer is entitled to retain any late payment charges, prepayment fees, penalties and
assumption fees collected in connection with mortgage loans serviced by it. The Servicer receives
the benefit, if any, derived from interest earned on collected principal and interest payments
between the date of collection and the date of remittance to the Company and from interest earned
on tax and insurance escrow funds with respect to mortgage loans serviced by it. At the end of
each calendar month, the Servicer is required to invoice the Company for all fees and charges due
to the Servicer. 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 2004 and 2003 and $186,000
in 2002. 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 the following: fees for third party consultants,
attorneys, and external auditors and any other expenses incurred that are not directly related to
the advisory agreement. Note 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. 23




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##### Table of Contents



Note 8: Summary of Estimated Fair Values of Financial Instruments A summary of estimated fair values of financial instruments consist of the following: At December 31,(In thousands)
    
    2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash
    
    $
    10,325
    
    
    
    10,325
    
    
    
    11,976
    
    
    
    11,976Interest-bearing deposits
    
    
    29,000
    
    
    
    29,000
    
    
    
    52,000
    
    
    
    52,000Mortgage-backed securities
    
    
    20,709
    
    
    
    20,709
    
    
    
    46,116
    
    
    
    46,116Residential mortgages
    
    
    477,901
    
    
    
    480,098
    
    
    
    428,357
    
    
    
    436,391Less:
allowance for loan losses
    
    
    (2,022
    )
    
    
    (2,022
    )
    
    
    (2,106
    )
    
    
    (2,106
    )Residential mortgages, net
    
    
    475,879
    
    
    
    478,076
    
    
    
    426,251
    
    
    
    434,285
 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 other than time 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. 24




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##### Table of Contents



Note 9: Selected Quarterly Financial Data (unaudited) 2004
 (In thousands, except share data)
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterNet interest income
    
    $
    6,402
    
    
    
    6,687
    
    
    
    6,666
    
    
    
    6,695Noninterest income
    
    
    
    
    
    
    352
    
    
    
    184
    
    
    
    Noninterest expenses
    
    
    120
    
    
    
    144
    
    
    
    58
    
    
    
    77Net income
    
    
    6,282
    
    
    
    6,895
    
    
    
    6,792
    
    
    
    6,618Preferred dividends
    
    
    216
    
    
    
    215
    
    
    
    216
    
    
    
    216Net income available to common
shareholder
    
    $
    6,066
    
    
    
    6,680
    
    
    
    6,576
    
    
    
    6,402Net income per common shareBasic and diluted
    
    $
    60,660
    
    
    
    66,800
    
    
    
    65,760
    
    
    
    64,024
 2003
 (In thousands, except share data)
    
    First Quarter
    
    
    Second Quarter
    
    
    Third Quarter
    
    
    Fourth QuarterNet interest income
    
    $
    8,201
    
    
    
    7,183
    
    
    
    6,343
    
    
    
    6,522Noninterest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268Noninterest expenses
    
    
    80
    
    
    
    80
    
    
    
    75
    
    
    
    94Net income
    
    
    8,121
    
    
    
    7,103
    
    
    
    6,268
    
    
    
    6,696Preferred dividends
    
    
    216
    
    
    
    215
    
    
    
    216
    
    
    
    216Net income available to common
shareholder
    
    $
    7,905
    
    
    
    6,888
    
    
    
    6,052
    
    
    
    6,480Net income per common shareBasic and diluted
    
    $
    79,048
    
    
    
    68,880
    
    
    
    60,520
    
    
    
    64,806
 A copy of Webster Preferred Capital Corporations 2004 Annual Report will be provided to
shareholders upon request. 25




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##### Table of Contents



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. The Company has 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, 2004. 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 Commissions rules and forms. There were no changes made in the Companys internal controls over financial reporting that
occurred during the Companys most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. 
 Item 9B.Other Information The Company has no disclosures required to be disclosed in a report on Form 8-K which has not been
reported during the fourth quarter of 2004. 26




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##### 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, 2004
    
    Position and Offices HeldWilliam T. Bromage
    
    
    59
    
    
    President and DirectorHarriet Munrett Wolfe
    
    
    51
    
    
    DirectorWilliam J. Healy
    
    
    60
    
    
    DirectorGregory S. Madar
    
    
    42
    
    
    Senior Vice President, Treasurerand Assistant SecretaryJohn D. Benjamin
    
    
    57
    
    
    Senior Vice President and Secretary
 The following is a summary of the experience of the officers and directors of the Company: William T. Bromagewas 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 Wolfehas 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. Healyhas 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. Madarhas been the Senior Vice President, Treasurer and Assistant Secretary of the
Company since 2001 and an executive officer of the Company since March 2004. He served as the
Secretary of the Company from March 1997 to March 1999 and Assistant Secretary 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. John D. Benjaminhas served as Secretary of the Company since March 1999 and an executive officer
since March 2004. He is also Assistant Secretary and Senior Compliance Officer of Webster and
Senior Vice President, Assistant Secretary and Senior Compliance Officer of Webster Bank, positions
he has held since 1996. Mr. Benjamin joined Webster Banks predecessor, First Federal Savings and
Loan Association of Waterbury, in 1970. He has served in various management positions and was
elected Vice President in 1984 and Senior Vice President in 1991. 27




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##### Table of Contents



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. 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, 2004, 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. 28




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The Advisory Agreement provides that the liability of the Advisor to the Company for any loss due
to the Advisors performing or failing to perform the services under the Advisory Agreement shall
be limited to those losses sustained by the Company which are a direct result of the Advisors
negligence or willful misconduct. It also provides that under no circumstances shall the Advisor
be liable for any consequential or special damages and that in no event shall the Advisors total
combined liability to the Company for all claims arising under or in connection with the Advisory
Agreement be more than the total amount of all fees payable by the Company to the Advisor under the
Advisory Agreement during the year immediately proceeding the year in which the first claim giving
rise to such liability arises. The Advisory Agreement also provides that to the extent that third
parties make claims against the Advisor arising out of the services provided thereunder, the
Company will indemnify the Advisor against all loss arising therefrom. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of February 28, 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. Amount ofName and Address of Beneficial
    
    BeneficialOwner
    
    Ownership
    
    Percent of Class of Outstanding SharesWebster 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, Treasurer and
Assistant Secretary
    
    300 shares
    
    Series B Preferred Stock*John D. Benjamin
Senior Vice President and Secretary
    
    -0-
    
    -0-All Officers and Directors as a group
    
    300 shares
    
    Series B Preferred Stock*
   *
    
    Less then one percent 
 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 as part of Items 8 and 11. 29




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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, 2004 and
December 31, 2003 and fees billed for other services rendered by KPMG LLP during those periods. 2004
    
    
    2003Audit Fees (1)
    
    $
    26,800
    
    
    
    25,000Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    $
    26,800
    
    
    
    25,000
   (1)
    
    Audit Fees consist of fees billed for professional services rendered for the audit of
the Companys consolidated annual financial statements and review of the interim
consolidated financial statements included in quarterly reports and services that are
normally provided by KPMG LLP in connection with statutory and regulatory filings or
engagements.Before the independent accountant is engaged by the Company to render audit or non-audit
services, the engagement is approved by the Companys Board of Directors. 30




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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
    
    Description3.1
    
    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. 31




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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 CORPORATIONRegistrantBY:
    
    /s/ William T. BromageWilliam T. Bromage, President and DirectorDate: March 10, 2005
 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 10, 2005. By:
    
    /s/ William T. BromageWilliam T. Bromage, President and Director(Principal Executive Officer)By:
    
    /s/ Gregory S. MadarGregory S. Madar, Senior Vice President,Treasurer and Assistant Secretary(Principal Financial and Accounting Officer)By:
    
    /s/ William J. HealyWilliam J. Healy, DirectorBy:
    
    /s/ Harriet M. WolfeHarriet Munrett Wolfe, Director
 32