UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

     [X]  Annual  Report  Pursuant  to  Section  13 or 15(d)  of the  Securities
          Exchange Act of 1934 For the fiscal year ended December 31, 1997 OR

     [ ]  Transition  Report  Pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 For the transition period from ___ to __________

          Commission File Number: 0-23513

                      WEBSTER PREFERRED CAPITAL CORPORATION
                      -------------------------------------
             (Exact name of registrant as specified in its charter)

         CONNECTICUT                                       06-1478208
         -----------                                       ----------
  (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                      Identification No.)

 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:
                          Preferred Stock, $1 par value
                          -----------------------------
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
                                              -
     Indicate by check mark 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. X
           -
         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant is not applicable.

     The number of shares  outstanding  of each of the  registrant's  classes of
common stock, as of the latest practicable date is: 100 shares


<PAGE>



                      WEBSTER PREFERRED CAPITAL CORPORATION
                          1997 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

                                     PART I

ITEM  1.     Business.......................................................  3

                  General...................................................  3
                  Asset Quality ............................................  3
                  Nonaccrual Assets.........................................  4
                  Residential Mortgage Loans................................  4
                  Allowance for Loan Losses.................................  5
                  Investment Activities.....................................  5
                  Liquidity and Capital Resources...........................  6
                  Regulation................................................  6
                  Taxation..................................................  7

ITEM  2.     Properties.....................................................  8
ITEM  3.     Legal Proceedings..............................................  8
ITEM  4.     Submission of Matters to a Vote of Security Holders............  8

                                     PART II

ITEM  5.     Market for the Registrant's Common Equity and
               Related Stockholder Matters..................................  9
ITEM  6.     Selected Financial Data........................................ 10
ITEM  7.     Management's Discussion and Analysis
               of Financial Condition and Results of Operations ............ 11
ITEM  7A.    Quantitative and Qualitative Disclosures
               About Market Risk ..........................................  14
ITEM  8.     Financial Statements and Supplementary Data.................... 15
ITEM  9.     Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure....................... 26

                                    PART III

ITEM 10.     Directors and Executive Officers of the Registrant............. 27
ITEM 11.     Executive Compensation......................................... 28
ITEM 12.     Security Ownership of Certain Beneficial Owners
               and Management............................................... 29
ITEM 13.     Certain Relationships and Related Transactions................. 29

                                     PART IV

ITEM 14.     Exhibits, Financial Statement Schedules, and
             Reports on Form 8-K ........................................... 30

                                        2


<PAGE>







                                     PART I

ITEM 1.  BUSINESS

GENERAL

             Webster  Preferred   Capital   Corporation  (the  "Company")  is  a
Connecticut  corporation  incorporated  in March 1997. The Company was formed by
Webster  Bank to  provide a  cost-effective  means of raising  funds,  including
capital,  on a consolidated basis for Webster Bank. The Company's strategy is to
acquire,  hold and manage  real  estate  mortgage  assets  ("Mortgage  Assets"),
including  but  not  limited  to  residential  mortgage  loans,  mortgage-backed
securities  and  commercial   mortgage  loans.  In  March  1997,   Webster  Bank
contributed $617.0 million, net, of Mortgage Assets, as part of the formation of
the Company.  In November 1997,  Webster Bank contributed  approximately  $120.4
million  in cash to the  Company,  which  was used to  purchase  mortgage-backed
securities.  As of December 31, 1997,  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  primarily
for income,  thereby  seeking to  generate  net income for  distribution  to its
stockholders  based on the spread  between the  interest  income 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"). As of December 31, 1997, approximately 35.3% of the
Company's  residential  mortgage  loans  are  fixed  rate  loans  and  64.7% are
adjustable rate loans.

     All of the Company's  common stock is owned by 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  in respect  of,  shares of its common  stock to the
extent such  redemptions,  payments or  distributions  would cause the Company's
total stockholders'  equity (as determined in accordance with generally accepted
accounting  principles) to be less than 250% of the aggregate  liquidation value
of the issued and outstanding  preferred  shares.  The preferred  shares are not
exchangeable  into capital stock or other  securities of Webster Bank or Webster
Financial Corporation ("Webster"),  the parent company of Webster Bank, and will
not constitute regulatory capital of either Webster Bank or Webster.

     The Company elected to be treated as a REIT under the Internal Revenue Code
(the  "Code").  The  Company  will  generally  not be  subject  to  federal  and
Connecticut  state income tax to the extent that it distributes  its earnings to
its stockholders and maintains its  qualification  as a REIT.  Furthermore,  the
Company and Webster Bank will benefit  significantly  from federal and state tax
treatment of dividends paid by the Company as a result of its qualification as a
REIT.  The  dividends  payable on the preferred  shares will be  deductible  for
federal  income tax  purposes as a result of the  Company's  qualification  as a
REIT.

ASSET QUALITY

     The Company  maintains asset quality by acquiring  residential  real estate
loans  that  have  been  conservatively   underwritten,   aggressively  managing
nonaccrual  assets and maintaining  adequate reserve  coverage.  At December 31,
1997, residential real estate loans comprised 100% of the total loan portfolio.

                                        3


<PAGE>




NONACCRUAL ASSETS

The aggregate amount of nonaccrual assets was $1.3 million at December 31, 1997.
The  following  table details the  Company's  nonaccrual  assets at December 31,
1997:

(In Thousands)                                              At December 31, 1997
--------------------------------------------------------------------------------
Nonaccrual Assets:
      Residential Fixed Rate Loans                                        $  158
      Residential Variable Rate Loans                                      1,145
--------------------------------------------------------------------------------
           Total                                                          $1,303
--------------------------------------------------------------------------------

At December 31, 1997 the allowance for loan losses was $1.5 million,  or 118% of
nonaccrual  assets and .24% of total mortgage loans,  net.  Management  believes
that the allowance for loan losses is adequate to cover  expected  losses in the
portfolio.

RESIDENTIAL MORTGAGE LOANS

A summary of the Company's  carrying amount and fair market value of residential
mortgage loans at December 31, 1997 follows:

                                                                        Carrying
(In Thousands)                                                           Amount
--------------------------------------------------------------------------------

Fixed-Rate Loans:
         Fixed-Rate 15 yr Loans                                         $59,631
         Fixed-Rate 20 yr Loans                                           1,636
         Fixed-Rate 25 yr Loans                                             813
         Fixed-Rate 30 yr Loans                                         161,884
-------------------------------------------------------------------------------

              Total Fixed-Rate Loans                                    223,964
-------------------------------------------------------------------------------
Variable-Rate Loans:
         Variable-Rate 15 yr Loans                                        4,896
         Variable-Rate 20 yr Loans                                        4,004
         Variable-Rate 25 yr Loans                                        8,553
         Variable-Rate 30 yr Loans                                      393,924
-------------------------------------------------------------------------------

              Total Variable-Rate Loans                                 411,377
-------------------------------------------------------------------------------
        Total Residential Mortgage Loans                               $635,341
        Premiums and Deferred Fees on Loans, Net                          1,831
        Less Allowance for Loan Losses                                   (1,538)
-------------------------------------------------------------------------------

               Residential Mortgage Loans, Net                         $635,634
-------------------------------------------------------------------------------

In March 1997, Webster Bank contributed approximately $617.0 million of Mortgage
Assets,  net as  part  of the  formation  of the  Company.  The  $617.0  million
consisted of $215.8 million of fixed rate loans, $401.3 million of variable rate
loans, net of premiums, deferred fees on loans and an allowance for loan losses.

                                        4


<PAGE>



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 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 changes in
economic conditions.  In addition,  various regulatory agencies,  as an integral
part of their examination  process of Webster Bank,  periodically may review the
Company's  allowance  for loan losses.  Such agencies may require the Company to
recognize  additions  to the  allowance  for  loan  losses  based  on  judgments
different from those of management.

     A detail of the  change in the  allowance  for loan  losses  for the period
ending December 31, 1997 follows:

                                                          For the Period from
                                                            March 17, 1997
                                                          (Date of Inception)
(In Thousands)                                           to December 31, 1997
--------------------------------------------------------------------------------
Balance at Beginning of Period                              $        -
Allowance for Loan Losses on Acquired Loans                      1,544
Provisions Charged to Operations                                     -
Charge-offs                                                        (6)
Recoveries                                                           -
--------------------------------------------------------------------------------
           Balance at End of Period                             $1,538

--------------------------------------------------------------------------------

INVESTMENT ACTIVITIES

     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 the Federal Home Loan Mortgage Corporation
("FHLMC") or Fannie Mae. Under current  guidelines,  effective  January 1, 1998,
the maximum principal balance allowed on conforming  residential  mortgage loans
ranges  from  $227,150  ($340,725  for  residential  mortgage  loans  secured by
mortgaged   properties   located  in  either  Alaska  or  Hawaii)  for  one-unit
residential loans to $436,600  ($654,900 for residential  mortgage loans secured
by  mortgaged  properties  located in either  Alaska or  Hawaii)  for four- unit
residential loans.  Nonconforming  residential  mortgage loans do not qualify in
one or more  respects for  purchase by Fannie Mae or FHLMC under their  standard
programs.  The  nonconforming   residential  mortgage  loans  that  the  Company
purchases generally have original principal balances which exceed the limits for
FHLMC or Fannie Mae 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.
At December 31, 1997, less than 1% of the Company's  residential  mortgage loans
were nonconforming.

     Each  residential  mortgage  loan will be 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.

     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.

                                        5


<PAGE>



     The  Company  intends  to  acquire  only  investment-grade  mortgage-backed
securities  issued or guaranteed by Fannie Mae,  FHLMC 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, 1997 the Company did not hold any commercial mortgage loans.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's  principal  liquidity need will be to fund the acquisition of
additional  Mortgage  Assets to replace  such assets that are repaid and to fund
dividends on outstanding  capital stock. The acquisition of additional  Mortgage
Assets will be funded with the proceeds of interest and principal  repayments on
the Company's portfolio of Mortgage Assets. The Company does not anticipate that
it will have any other material capital expenditures.  The Company believes that
cash generated from the payment of interest and principal on its Mortgage Assets
will provide  sufficient  funds to meet its  operating  requirements  and to pay
dividends  in  accordance  with the  requirements  to be taxed as a REIT for the
foreseeable  future. To the extent that the Company accumulates cash in order to
meet its dividend requirements, it may invest such cash in short-term securities
or money market instruments.

REGULATION

     Webster Bank,  which owns 100% of the Company's common stock, is subject to
supervision  and regulation by, among others,  the Office of Thrift  Supervision
(the "OTS") and the FDIC.  Because the Company is a subsidiary  of Webster Bank,
such federal banking  regulatory  authorities will have the right to examine the
Company and its  activities.  If Webster Bank becomes  "undercapitalized"  under
"prompt  corrective  action"  initiatives of the federal bank  regulators,  such
regulatory  authorities  have the  authority  to require,  among  other  things,
Webster Bank or the Company to alter,  reduce or terminate any activity that the
regulator  determines  poses an excessive risk to Webster Bank. The Company does
not believe that its activities presently do, or in the future will, pose a risk
to  Webster  Bank;  however  there  can be no  assurance  in  that  regard.  The
regulators also could restrict transactions between Webster Bank and the Company
including  the transfer of assets;  require  Webster Bank to divest or liquidate
the Company; or require that Webster Bank be sold. Webster Bank could further be
directed to take any other action that the  regulatory  agency  determines  will
better carry out the purpose of prompt corrective action.  Webster Bank could be
subject to these prompt  corrective  action  restrictions if federal  regulators
determined  that Webster Bank was in an unsafe or unsound  condition or engaging
in an unsafe or  unsound  practice.  In light of Webster  Bank's  control of the
Company,  as well as the  Company's  dependence  and reliance upon the skill and
diligence of Webster Bank officers and  employees,  some or all of the foregoing
actions and  restrictions  could have an adverse effect on the operations of the
Company, including causing the Company's failure to qualify as a REIT.

     Pursuant to OTS regulations and the Company's Certificate of Incorporation,
the Company is required to maintain a separate corporate  existence from Webster
Bank,  notwithstanding that Webster Bank owns all of the common stock and all of
the  directors  and officers of the Company are Webster Bank  employees.  In the
event  Webster  Bank  should  be  placed  into   receivership  by  federal  bank
regulators,  such federal bank  regulators  would be in control of Webster Bank.
There can be no assurance that they would not cause Webster Bank, as sole holder
of the common stock, to take action adverse to holders of preferred shares.

                                        6


<PAGE>


TAXATION

     The Company  elected to be treated as a REIT under Sections 856 through 860
of the Code,  commencing  with its taxable year ended  December  31, 1997.  As a
REIT, the Company generally will not be subject to federal and Connecticut state
income tax on 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 95% 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,  commencing  with its
taxable year ended December 31, 1997. Although the Company believes that it will
be owned,  organized  and will operate in such a manner as to qualify as a REIT,
no assurance  can be given as to the  Company's  ability to qualify as a REIT or
remain so qualified.  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 or new 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 stockholders 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.

                                        7


<PAGE>


ITEM 2.  PROPERTIES

         Not Applicable.

ITEM 3.  LEGAL PROCEEDINGS

         At December  31,  1997,  there were no legal  proceedings  to which the
Company was a party or to which any of its property was the subject.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         In December 1997, the sole common shareholder of the Company, acting by
written  consent  dated  December  17,  1997,  approved the amended and restated
certificate of incorporation of the Company.

                                        8


<PAGE>




                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         All of the  Company's  common  stock  is  owned by  Webster  Bank,  and
consequently  there  is no  market  for such  securities.  The  2000  shares  of
preferred stock issued to Webster Bank, as part of the Company's  formation were
redeemed  on  December  22,  1997.  The  Company's  Series A  7.375%  Cumulative
Redeemable  Preferred  Stock  ("Series A Preferred  Stock") is not listed on any
exchange or approved for  quotation on the Nasdaq Stock  Market.  The  Company's
Series B 8.625%  Cumulative  Redeemable  Preferred  Stock  ("Series B  Preferred
Stock")  is traded  over-the-counter  and quoted on the  Nasdaq  Stock  Market's
National Market Tier under the symbol "WBSTP."

          Dividends  declared  and paid on the  common  stock for the year ended
     1997 in December 1997 totaled  $38,047,000.00.  Dividends declared and paid
     on the 2,000 preferred shares held by Webster Bank totaled  $149,192.00 for
     the period March 17, 1997 through December 22, 1997.  Dividends declared on
     the  Series A  Preferred  Stock  for the  fourth  quarter  of 1997  totaled
     $65,555.55  Dividends  declared on Series B Preferred  Stock for the fourth
     quarter of 1997 totaled $19,166.67. The dividend calculation for the fourth
     quarter for the Series A Preferred  Stock and the Series B Preferred  Stock
     was based on eight days,  December  24, 1997 (date of delivery of preferred
     shares) through December 31, 1997.

         The  market  price  for the  Series A  Preferred  Shares  and  Series B
Preferred  Shares  remained  unchanged  at $999.35 and $10,  respectively,  from
December 24, 1997 to December 31, 1997, the eight days of the fourth quarter for
which the stocks were outstanding.

         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  stockholders.  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 Preferred Shares are
not  expected  to  exceed  15% of the  Company's  capitalization,  and (iii) the
Company does not anticipate incurring any indebtedness.

     The  Company's  Registration  Statement on Form S-11,  as amended (File No.
333-38685) was declared effective by the Securities and Exchange Commission (the
"SEC") on December  18, 1997,  and  Post-Effective  Amendment  No. 1 thereto was
delcared  effective  on December  19, 1997.  The date of the  Company's  initial
public offering of Series A Preferred  Shares and Series B Preferred  Shares was
December 24, 1997.  The Company  registered  40,000 shares of Series A Preferred
Stock and 1,000,000 shares of Series B Preferred Stock. The offering  terminated
after all such shares were sold.  The managing  underwriter  was Merrill Lynch &
Co. The  aggregate  price to the  public of the Series A and Series B  Preferred
Shares offered was $49,974,000.

     From  December  19,  1997 to  December  31,  1997,  the amount of  expenses
incurred  for  the  Company's  account  in  connection  with  the  issuance  and
distribution  of the  Series A and  Series B  Preferred  Shares  registered  for
underwriting   discounts  was  $865,000,   other  expenses   (including   legal,
accounting,  printing,  registration, and miscellaneous) were $600,000 and total
expenses were $1,465,000.  No such payments were direct or indirect  payments to
directors,  officers,  general  partners  of the  Company  or their  associates,
persons owning 10% or more of any of the Company's  classes of equity securities
or to affiliates of the Company.  The net offering proceeds to the Company after
deducting the total expenses  described above were $48.5 million.  Approximately
$38.4 million of net proceeds of its initial  public  offering were used to fund
payments to Webster bank of cash  dividends of the Company's 1997 net income and
the  remaining  net  proceeds  were  used to  fund  operations  and to  purchase
additional Mortgage Assets.

                                        9


<PAGE>


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  financial  statements and notes thereto
appearing  elsewhere  herein.  The Company's  financial  statements for the year
ended  December  31,  1997  have  been  audited  by  the  Company's  independent
accountants.

 FINANCIAL CONDITION DATA:

BALANCE SHEET DATA
 (In Thousands)                                            At December 31, 1997
--------------------------------------------------------------------------------
Available for Sale Securities                                            120,090

Total Mortgage Loans, Net                                                635,634

Total Assets                                                             787,561

Total Liabilities                                                            909

Mandatorily Redeemable Preferred Stock                                    40,000

Total Shareholders' Equity                                               746,652
--------------------------------------------------------------------------------


INCOME STATEMENT DATA:                                       For the Period from
                                                                 March 17, 1997
                                                             (Date of Inception)
(In Thousands)                                              to December 31, 1997
--------------------------------------------------------------------------------


Net Interest Income                                              $        38,065

Provision for Loan Losses                                                      -
                                                                 ---------------
Net Interest Income After
 Provision for Loan Losses                                                38,065

Noninterest Expenses                                                         220
                                                                 ---------------
Income Before Taxes                                                       37,845

Income Taxes                                                                   -
                                                                 ---------------
Net Income                                                                37,845

Preferred Stock Dividends                                                    168
                                                                 ---------------
Net Income Available to Common Shareholder                       $        37,677
                                                                 ===============

--------------------------------------------------------------------------------


                                       10


<PAGE>




SIGNIFICANT STATISTICAL DATA*

--------------------------------------------------------------------------------
Net Income per Common Share:

     Basic                                             $         376,770.00

     Diluted                                           $         376,770.00

Dividends Declared per Common Share                    $         380,470.00
--------------------------------------------------------------------------------


* No ratio of earnings to fixed charges is presented  because the Company has no
fixed charges.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The Company is a  subsidiary  of Webster Bank and was  incorporated  in
March  1997 to  provide  a  cost-effective  means of  raising  funds,  including
capital,  on a consolidated  basis for Webster Bank. In March 1997, Webster Bank
contributed  approximately $617.0 million of mortgage assets, net as part of the
formation of the Company.  In November 1997, Webster  contributed  approximately
$120.4  million  in cash  which the  Company  used to  purchase  mortgage-backed
securities.  Total assets at December 31, 1997 were $787.6  million,  consisting
primarily of residential mortgage loans and mortgage-backed securities.

         The  Company  has  elected  to be  treated as a REIT under the Code and
generally is not subject to federal income tax to the extent that it distributes
its earnings to its stockholders and maintains its  qualification as a REIT. The
Company and Webster Bank will also benefit  significantly from federal and state
tax treatment of dividends paid by the Company as a result of its  qualification
as a REIT.  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.

PUBLIC OFFERING

         On  December  24,  1997,  the Company  completed  an offering of 40,000
shares of Series A Preferred Stock, liquidation preference $1,000 per share, and
1,000,000  shares of Series B Preferred  Stock,  liquidation  preference $10 per
share. The total net proceeds from the offering amounted to $48.5 million.

ASSET QUALITY

         The Company  maintains  asset  quality by  acquiring  residential  real
estate loans that have been conservatively  underwritten,  aggressively managing
nonaccrual  assets and maintaining  adequate reserve  coverage.  At December 31,
1997,  residential  real estate loans comprised the entire loan  portfolio.  The
Company also invests in highly rated mortgage-backed securities.

                                       11


<PAGE>




NONACCRUAL ASSETS

         The aggregate amount of nonaccrual  assets was $1.3 million at December
31,  1997.  The  following  table  details the  Company's  nonaccural  assets at
December 31, 1997:

NONACCRUAL ASSETS:
--------------------------------------------------------------------------------
(In Thousands)                                            At December 31, 1997
--------------------------------------------------------------------------------
Loans Accounted for on a Nonaccrual Basis:

      Residential Fixed-Rate Loans                                      $  158

      Residential Variable-Rate Loans                                    1,145
--------------------------------------------------------------------------------
           Total                                                        $1,303
--------------------------------------------------------------------------------

         At December 31, 1997 the allowance for loan losses was $1.5 million, or
118% of  nonaccrual  assets.  Management  believes  that the  allowance for loan
losses is adequate to cover expected losses in the portfolio.

LIQUIDITY AND CAPITAL RESOURCES

         The  primary  sources of  liquidity  for the Company are net cash flows
from operating activities,  investing activities and financing  activities.  Net
cash flows from operating  activities  primarily include net income, net changes
in  prepaid  expenses  and  other  assets,   accrued  interest   receivable  and
adjustments  for  noncash  items  such as  amortization  on  deferred  fees  and
premiums,  and  mortgage-backed  securities net amortization and accretion.  Net
cash  flows  from  investing  activities  primarily  include  the  purchase  and
repayments of residential real estate loans and mortgage backed  securities that
are classified as available for sale.  Net cash flows from financing  activities
primarily  include net changes in capital  generally  related to stock issuances
and dividend payments.

         While  scheduled loan  amortization,  maturing  securities,  short-term
investments and securities repayments are predictable sources of funds, loan and
mortgage-backed  security prepayments are greatly influenced by general interest
rates,  economic  conditions  and  competition.  One of the  inherent  risks  of
investing  in  loans  and  mortgage-backed  securities  is the  ability  of such
instruments to incur  prepayments  of principal  prior to maturity at prepayment
rates  different  than those  estimated at the time of purchase.  This generally
occurs  because of  changes  in market  interest  rates.  The  market  values of
fixed-rate loans and mortgage-backed securities are sensitive to fluctuations in
market  interest  rates,  declining in value as interest rates rise. If interest
rates  decrease,  the market value of loans generally will tend to increase with
the level of prepayments also normally increasing.

         Dividends  on the Series A  Preferred  Stock are payable at the rate of
7.375%  per  annum (an  amount  equal to $73.75  per annum per  share),  and the
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, commencing January 15, 1998.

                                       12


<PAGE>




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 must provide for  sufficient  liquidity  for daily  operations.  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 and as such the market values of
certain of the  Company's  financial  assets are  sensitive to  fluctuations  in
market  interest  rates.  Changes in interest  rates can affect the value of its
loans and other  interest-earning  assets.  At December 31,  1997,  64.7% of the
Company's  residential  mortgage loans were  variable-rate  loans. The Company's
management  believes these  residential  mortgage loans are less likely to incur
prepayments of principal.

         The  following  table  summarizes  the  estimated  market  value of the
Company's  interest-  sensitive  assets and  interest-sensitive  liabilities  at
December 31, 1997,  and the projected  change to market values if interest rates
instantaneously increase or decrease by 100 basis points.
<TABLE>
<CAPTION>

                                                                                       Estimated Market Value
                                                                                               Impact
                                                                                   -----------------------------
(In Thousands)                                    Book Value      Market Value        -100 BP          +100 BP
----------------------------------------------------------------------------------------------------------------
Interest Sensitive Assets:

<S>                                         <C>               <C>               <C>                  <C>
      Mortgage-Backed Securities            $     120,026     $     120,090     $      1,478         $(2,765)

      Variable Rate Residential Loans             411,377           423,140            3,776          (5,932)

      Fixed Rate Residential Loans                223,964           229,150            4,421          (8,152)

Interest Sensitive Liabilities:

      Series A Preferred Stock                     40,000            40,000            1,179          (2,534)
----- ----------------------------------------------------------------------------------------------------------
</TABLE>


RESULTS OF OPERATIONS

         From March 17, 1997 (date of  inception)  to  December  31,  1997,  the
Company reported net income of $37.9 million,  or $376,770 per common share on a
diluted  basis.  Because  the  Company  was formed in March  1997,  there are no
comparable  results from previous periods.  Total interest income for the period
amounted to $38.1 million,  net of servicing  fees. The average balance of total
mortgage loans, net for the period was $624.5 million, and the average yield was
7.52%.  There were no  provisions  for loan losses for the  period.  Noninterest
expenses amounted to $220,000 and included advisory fees,  dividends on Series A
Stock and amortization of start-up costs. No income tax expense was recorded for
the period.

IMPACT OF INFLATION AND CHANGING PRICES

         The financial  statements and related data  presented  herein have been
prepared in accordance  with 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 are critical to the
maintenance of acceptable performance levels.

                                       13


<PAGE>




RECENT FINANCIAL ACCOUNTING STANDARDS

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 131,  "Disclosures about
Segments of an Enterprise and Related  Information." This statement  establishes
standards for the method in which public business enterprises report information
about operating segments in annual financial  statements and requires that those
enterprises  report selected  information  about  operating  segments in interim
reports issued to  shareholders.  This statement  requires that public  business
enterprises report quantitative and qualitative information about its reportable
segments,  including profit or loss,  certain specific revenue and expense items
and segment  assets.  This SFAS does not apply to the Company  since the Company
has only one reportable operating segment.

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income."  This  statement  establishes  standards  for  reporting and display of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial statements.  The objective of this statement is to report a measure of
all changes in equity of an enterprise that result from  transactions  and other
economic events of the period other than transactions with owners. Comprehensive
income is the total of net  income  and all other  non-owner  changes in equity.
This statement is effective for fiscal years  beginning  after December 15, 1997
and  reclassification of financial statements of earlier periods for comparative
purposes is required.

         In  February  1997,  the FASB  issued  SFAS  No.  129,  "Disclosure  of
Information about Capital Structure." This statement  establishes  standards for
disclosing  information about an entity's capital  structure.  This statement is
effective for financial  statements issued for periods ending after December 15,
1997.

         In February 1997,  the FASB issued SFAS No. 128,  "Earnings per Share."
This statement  simplifies  the standards for computing and presenting  earnings
per share  previously  found in APB Opinion No. 15 and makes them  comparable to
international  standards.  It replaces the  presentation of primary earnings per
share  with a  presentation  of basic  earnings  per  share  and  requires  dual
presentation  of basic and diluted  earnings per share on the face of the income
statement for all entities with complex  capital  structures.  This statement is
effective for financial  statements issued for periods ending after December 15,
1997, including interim periods.

YEAR 2000 IMPACT

         The "Year 2000" issue refers to the potential  impact of the failure of
computer  programs  and  equipment  to give proper  recognition  of dates beyond
December 31, 1999 and other issues related to the Year 2000 century date change.
Since the Company  depends on Webster Bank as Advisor and Servicer,  the Company
will be reliant  on  Webster  Bank and its  parent  company,  Webster  Financial
Corporation ("Webster"), to ensure proper date recognition.

         Webster Bank reports that it has completed its  assessment of Year 2000
issues  and has  developed  and begun  implementing  a plan to modify or replace
software and hardware systems to ensure proper date recognition. Webster Bank is
utilizing internal and external resources for this purpose.

         Webster Bank has initiated formal  communications  with all significant
vendors to determine  the extent to which  vendors will be Year 2000  compliant.
Webster Bank requires compliance as a condition of future business.  Contingency
plans for vendors'  failure to comply are  incorporated  in Webster  Bank's Year
2000 plan.  There can be no  guarantee  that the  systems  on which the  Company
relies will be in compliance.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

                                       14


<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of
Webster Preferred Capital Corporation
Waterbury, Connecticut

We have audited the  accompanying  statement  of condition of Webster  Preferred
Capital  Corporation (a subsidiary of Webster Bank) as of December 31, 1997, and
the related statements of income,  shareholders'  equity, and cash flows for the
period March 17, 1997 (date of inception) to December 31, 1997.  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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1997,  and the results of its operations and its
cash flows for the period  March 17, 1997 (date of  inception)  to December  31,
1997 in conformity with generally accepted accounting principles.

/s/ KPMG Peat Marwick LLP
January 20, 1998
Hartford, Connecticut

                                       15


<PAGE>




WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CONDITION
<TABLE>
<CAPTION>

(Dollars in thousands, except per share data)                                 December 31, 1997
                                                                        ----------------------------

ASSETS
<S>                                                                                          <C>
Cash                                                                                         $26,167

Mortgage-Backed  Securities Available for Sale (Note 2)                                      120,090


Residential Mortgage Loans, Net (Note 3)                                                     635,634


Accrued Interest Receivable                                                                    4,525
Prepaid Expenses and Other Assets                                                              1,145

                                                                                    ----------------
            TOTAL ASSETS                                                                    $787,561
                                                                                    ================


LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued Dividends Payable                                                                        491
Accrued Expenses and Other Liabilities                                                           418
                                                                                   -----------------
            TOTAL LIABILITIES                                                                    909
                                                                                    ----------------


MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 4):
     Series A 7.375% Cumulative Redeemable Preferred Stock,
            liquidation preference $1,000 per share,  par value $1.00 par
            share;  40,000 shares authorized, issued and outstanding                          40,000

SHAREHOLDERS' EQUITY (NOTE 5):
       Common Stock, par value $.01 per share:
             Authorized - 1,000 shares
             Issued and Outstanding - 100 shares                                                   1
       Series B 8.625% Cumulative Redeemable Preferred Stock,
            liquidation preference $10 per share, par value $1.00 per share;
            1,000,000 shares authorized, issued and outstanding                                1,000
     Paid-In Capital                                                                         745,957
     Distributions in Excess of Accumulated Earnings                                           (370)
     Unrealized Gains on Securities, Net                                                          64
                                                                                  ------------------
            TOTAL SHAREHOLDERS' EQUITY                                                       746,652
                                                                                  ------------------
            TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                      $787,561
                                                                                  ==================
</TABLE>

See accompanying notes to financial statements

                                       16


<PAGE>




WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF INCOME
(In Thousands, Except Share Data)

                                                         For the Period from
                                                           March 17, 1997
                                                         (Date of Inception)
                                                         to December 31,1997
                                                    ----------------------------

Interest Income:

Loans (Note 6)                                                       $37,177

Securities                                                               888
                                                               -------------



       Total Interest Income                                           38,065

Provision For Loan Losses                                                  -
                                                               -------------


Interest Income After Provision

       for Loan Losses                                                 38,065
                                                               --------------


Noninterest Expenses:

Advisory Fee Expense Paid to Parent (Note 7)                             127
Dividends on Mandatorily Redeemable Preferred Stock                       66
Amortization of Start-up Costs                                            17
Other Noninterest Expenses                                                10
                                                               -------------
       Total Noninterest Expenses                                        220

Income Before Taxes                                                   37,845
Income Taxes (Note 8)                                                      -
                                                               -------------

NET INCOME                                                            37,845
Preferred Stock Dividends                                                168
                                                               -------------

Net Income Available to Common Shareholder                           $37,677
                                                               =============

Net Income Per Common Share:

             Basic                                                   $376,770
                                                               ==============
             Diluted                                                 $376,770
                                                               ==============


See accompanying notes to financial statements

                                       17


<PAGE>




WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>



                                                  Preferred      Common          Paid-In
                                                    Stock         Stock          Capital
                                                ------------- -------------  ---------------
<S>               <C> <C>                         <C>           <C>            <C>
Balance, March 17, 1997                           $         -   $        -     $          -

Contributions by Webster Bank                           2,000            1          735,382

Net Income                                                  -            -                -
Preferred Stock Redeemed                              (2,000)            -            2,000
Net Proceeds from Sale of
 Preferred Stock Series B                               1,000            -            8,575

Dividends Paid or  Accrued:
     Common Stock ($380,470 per share)                      -            -                -
     Preferred Stock ($74.60 per share)                     -            -                -
     Preferred Stock Series B ($0.019 per share)            -            -                -

Unrealized Gain on
Securities Available for Sale                               -            -                -
                                                --------------------------------------------

Balance, December 31, 1997                        $     1,000   $        1     $    745,957
                                                ============================================
<CAPTION>
                                                   Distributions in
                                                       Excess of       Unrealized
                                                      Accumulated       Gains on
                                                       Earnings      Securities, Net      Total
                                                   ----------------- -------------- ------------------
<S>               <C> <C>                               <C>             <C>                <C>
Balance, March 17, 1997                                 $         -     $        -        $        -

Contributions by Webster Bank                                     -              -           737,383

Net Income                                                   37,845              -            37,845
Preferred Stock Redeemed                                          -              -                 -
Net Proceeds from Sale of
 Preferred Stock Series B                                         -              -             9,575

Dividends Paid or  Accrued:
     Common Stock ($380,470 per share)                      (38,047)             -          (38,047)
     Preferred Stock ($74.60 per share)                        (149)             -             (149)
     Preferred Stock Series B ($0.019 per share)                (19)             -              (19)

Unrealized Gain on
Securities Available for Sale                                     -             64               64
                                                  ----------------------------------------------------

Balance, December 31, 1997                              $      (370)    $       64         $746,652
                                                  ====================================================

See accompanying notes to financial statements




</TABLE>

                                       18

<PAGE>



WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>

                                                                   For the Period from
                                                                      March 17, 1997
                                                                    (Date of Inception)
                                                                   to December 31, 1997
                                                               ----------------------------
Operating Activities:
<S>                                                                           <C>
Net Income                                                                    $37,845
Adjustments to Reconcile Net Cash Provided (Used) by
Operating Activities:
       Accretion of Securities Discount                                         (215)
       Amortization of Deferred Fees and Premiums                                 444
       Increase in Accrued Interest Receivable                                (4,525)
       Increase in Accrued Liabilities                                            909
       Increase in Prepaid Expenses and Other Assets                            (129)
                                                                     ----------------
Net Cash Provided by Operating Activities                                      34,329
                                                                     ----------------

Investing Activities:
       Purchase of Securities                                               (119,971)
       Principal Collected on Securities                                          160
       Purchase of Loans                                                     (98,835)
       Principal Repayments of Loans                                           79,776
                                                                     ----------------
Net Cash Used by Investing Activities                                       (138,870)
                                                                     ----------------

Financing Activities:
       Dividends Paid on Common and Preferred Stock                          (38,215)
       Net Proceeds from Issuance of Preferred Stock                           48,562
       Contributions from Webster Bank                                        120,361
                                                                     ----------------
Net Cash Provided by Financing Activities                                     130,708
                                                                     ----------------

Increase in Cash and Cash Equivalents                                          26,167
Cash and Cash Equivalents at Beginning of Period                                    -
                                                                     ----------------
Cash and Cash Equivalents at End of Period                                    $26,167
                                                                     ================
</TABLE>


                                       19

<PAGE>

<TABLE>
<CAPTION>


SUPPLEMENTAL DISCLOSURES
(In Thousands):

       <S>                                                               <C>
       Income Taxes Paid                                                 $               0

       Interest Paid                                                     $               0

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITY:

       Contribution of Mortgage Assets, net by Webster Bank
       in exchange for 100 shares of common stock and 2,000
       shares of 10% Cumulative Non-Convertible Preferred Stock          $         617,022

       On December 22, 1997 the Company  redeemed from Webster Bank
       2,000 shares of preferred stock; Webster Bank concurrently
       contributed the proceeds to the Company as additional
       paid-in capital                                                    $          2,000
</TABLE>

See accompanying notes to financial statements

                                       20


<PAGE>




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,  which
is a wholly-owned  subsidiary of Webster Financial Corporation.  The Company was
organized to provide a cost-effective  means of raising funds,  including equity
capital,  on a consolidated basis for Webster Bank. The company acquires,  holds
and manages real estate  mortgage  assets  ("mortgage  assets").  In March 1997,
Webster Bank contributed  approximately  $617.0 million, of mortgage assets, net
as part of the formation of the Company.  As of December 31, 1997,  the 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.  Although the Company may acquire and hold a variety
of  mortgage  assets,  its  present  intention  is to acquire  only  residential
mortgage loans and certain mortgage-backed securities.

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
savings 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  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 as of
the date of the  balance  sheets  and  revenues  and  expenses  for the  periods
presented.  The actual results of the Company could differ from those estimates.
A material  estimate  that is  susceptible  to  near-term  changes  includes the
determination of the allowance for loan losses.

C) 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 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 changes in
economic conditions.  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.

D) FORECLOSED PROPERTIES
Foreclosed   properties  consist  of  properties  acquired  through  foreclosure
proceedings  or  acceptance  of  a  deed  in  lieu  of  foreclosure.  Foreclosed
properties  are  reported  at the lower of fair  value  less  estimated  selling
expenses or cost with an allowance  for losses to provide for declines in value.
Operating  expenses are charged to current period  earnings and gains and losses
upon disposition are reflected in the statement of income when realized.

E) LOANS
Loans are stated at the  principal  amounts  outstanding.  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,  premiums and discounts on loans purchased are
recognized  in  interest  income  over  the  lives of the  loans  using a method
approximating the interest method.

                                       21


<PAGE>




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.

F) MORTGAGE-BACKED SECURITIES
Mortgage-backed  securities  are  U.S.  government  agency  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 similar 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.

G) PREPAID EXPENSES
Prepaid expenses are primarily organization costs which were incurred during the
formation of the Company.  These  expenses are being  amortized  over periods of
either 3 or 5 years.

H) STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company  considers cash on hand
and in banks to be cash equivalents.

I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of securities  (Note 2) is estimated based on prices published in
financial  newspapers or quotations  received from securities dealers or pricing
services.

In  estimating  the fair  value of  residential  mortgage  loans  (Note 3),  the
portfolio was  classified  into two  categories,  fixed-rate  mortgage loans and
variable-rate mortgage loans. The categories were further segmented into 15, 20,
25,  and 30 year  contractual  maturities.  The fair value of each  category  is
calculated by discounting  scheduled cash flows through estimated maturity using
market discount rates.

The  calculation of fair value  estimates of financial  instruments is dependent
upon certain  subjective  assumptions  and involves  significant  uncertainties,
resulting in  variability in estimates  with changes in  assumptions.  Potential
taxes and other  expenses that would be incurred in an actual sale or settlement
are not  reflected  in the  amounts  disclosed.  Fair  value  estimates  are not
intended to reflect the liquidation value of the financial instruments.

NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

In  November  1997,  Webster  Bank  contributed  $120.4  million  in cash to the
Company,  which was used to purchase  Government  National Mortgage  Association
("GNMA")  mortgage-backed  securities.  The  following  table sets forth certain
information regarding the mortgage-backed securities at December 31, 1997:
<TABLE>
<CAPTION>

Mortgage-Backed Securities
-----------------------------------------------------------------------------------------------
                                       Amortized      Unrealized    Unrealized     Estimated
(In Thousands)                           Cost           Gains         Losses       Fair Value
-----------------------------------------------------------------------------------------------

<S>                                <C>              <C>          <C>           <C>
Available for Sale Portfolio:      $    120,026     $       64   $       -     $    120,090

 -----------------------------------------------------------------------------------------------
</TABLE>

All mortgage-backed securities have a contractual maturity of over 10 years. The
weighted  average yield at December 31, 1997 is 6.93% and the average  remaining
life is less  than 11  years.  Although  the  stated  final  maturity  of  these
obligations are long-term,  the weighted  average life generally is much shorter
due to prepayments. There were no sales of mortgage-backed securities from March
17, 1997 (date of inception) through the period ended December 31, 1997.

                                       22


<PAGE>




NOTE 3:  RESIDENTIAL  MORTGAGE LOANS

A summary of the Company's  carrying amount and fair market value of residential
mortgage loans at December 31, 1997 follows:

                                                         Carrying    Fair Market
(In Thousands)                                            Amount       Value
--------------------------------------------------------------------------------
Fixed-Rate Loans:
         Fixed-Rate 15 yr Loans                       $    59,631  $   60,794
         Fixed-Rate 20 yr Loans                              1,636      1,679
         Fixed-Rate 25 yr Loans                                813        830
         Fixed-Rate 30 yr Loans                            161,884    165,847
-----------------------------------------------------------------------------

              Total Fixed-Rate Loans                      223,964     229,150
-----------------------------------------------------------------------------
Variable-Rate Loans:
         Variable-Rate 15 yr Loans                           4,896      5,011
         Variable-Rate 20 yr Loans                           4,004      4,102
         Variable-Rate 25 yr Loans                           8,553      8,750
         Variable-Rate 30 yr Loans                         393,924    405,277
-----------------------------------------------------------------------------
               Total Variable-Rate Loans                   411,377    423,140
-----------------------------------------------------------------------------
        Total Residential Mortgage Loans              $    635,341 $  652,290
-----------------------------------------------------------------------------

        Premiums and Deferred Fees on Loans, Net            1,831
        Less Allowance for Loan Losses                    (1,538)
-----------------------------------------------------------------

               Residential Mortgage Loans, Net           $635,634
-----------------------------------------------------------------


In March  1997,  Webster  Bank  contributed  approximately  $617.0  million,  of
mortgage assets, net as part of the formation of the Company. The $617.0 million
consisted of $215.8 million of fixed rate loans, $401.3 million of variable rate
loans, net of premiums, deferred fees on loans and an allowance for loan losses.
As of  December  31,  1997,  approximately  35.3% of the  Company's  residential
mortgage loans are fixed-rate loans and approximately  64.7% are adjustable-rate
loans.

The following table sets forth certain information regarding the Company's loans
accounted for on a nonaccrual basis at December 31, 1997.

(In Thousands)                                             At  December 31, 1997
--------------------------------------------------------------------------------

Residential mortgage loans accounted
 for on a nonaccrual basis                                                $1,303
Real estate acquired through foreclosure                                       -
--------------------------------------------------------------------------------
           Total                                                          $1,303
--------------------------------------------------------------------------------


                                       23


<PAGE>


A detail of the change in the  allowance  for loan losses for the period  ending
December 31, 1997 follows:

                                                     For the Period from March
                                                             17, 1997
                                                       (Date of Inception)
(In Thousands)                                         to December 31, 1997
--------------------------------------------------------------------------------
Balance at Beginning of Period                                   $     -
Allowance for Loan Losses on Acquired Loans                        1,544
Provisions Charged to Operations                                       -
Charge-offs                                                          (6)
Recoveries                                                             -
--------------------------------------------------------------------------------
           Balance at End of Period                               $1,538
--------------------------------------------------------------------------------


NOTE 4: MANDATORILY REDEEMABLE PREFERRED STOCK

On December 24, 1997, the Company raised $40 million,  less expenses in a public
offering of 40,000 shares of its Series A 7.375% cumulative redeemable preferred
stock, liquidation preference $1,000 per share.

The Company is required to redeem all outstanding  Series A Preferred  Shares on
January 15, 2001 at a  redemption  price of $1,000 per share,  plus  accrued and
unpaid dividends.

The Series A  Preferred  Shares are not  redeemable  prior to January  15,  1999
except upon the  occurrence of a tax event.  A tax event can occur when a change
in existing laws and  regulations  results in a substantial  risk that dividends
paid by the Company will no longer be fully  deductible  for federal  income tax
purposes or that dividends paid by the Company to Webster Bank will no longer be
fully deductible for state income tax purposes.  Upon the occurrence of such tax
event, during the period January 15, 1999 through January 14, 2001, the Series A
Preferred Shares may be redeemed at the option of the Company.

NOTE 5:  SHAREHOLDER'S EQUITY

On March 17, 1997,  the Company's  date of inception,  Webster Bank  contributed
$617.0  million of mortgage  assets,  net in exchange for 100 shares of $.01 par
value common stock and 2,000 shares of $.01 par value ($1,000  stated value) 10%
cumulative nonconvertible preferred stock.

On November 24, 1997, Webster Bank contributed  approximately  $120.4 million in
cash  to  the  Company,   which  was  used  by  the  Company  to  purchase  GNMA
mortgage-backed securities (Note 2).

On December 15, 1997,  Webster Bank  redeemed all 2,000 shares of $.01 par value
($1,000  stated  value)  10%  cumulative   nonconvertible  preferred  stock  and
concurrently  contributed  the  proceeds  to the Company as  additional  paid-in
capital.

On December 24, 1997, the Company raised $10 million,  less expenses in a public
offering  of  1,000,000  shares  of its  Series B 8.625%  cumulative  redeemable
preferred stock, liquidation preference $10 per share.

NOTE 6: 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 will receive fees at an annual rate of (i) 8 basis points for fixed
rate loan servicing and


                                       24


<PAGE>


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 Servicer is entitled to retain any late payment  charges,  prepayment  fees,
penalties  and  assumption  fees  collected in connection  with  mortgage  loans
serviced by it. The Servicer receives the benefit, if any, derived from interest
earned  on  collected  principal  and  interest  payments  between  the  date of
collection and the date of remittance to the Company and from interest earned on
tax and insurance  impound funds with respect to mortgage  loans serviced by it.
At the end of each  calendar  month,  the  Servicer  is  required to invoice the
Company for all fees and charges due to the Servicer.

NOTE 7: 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 real estate  mortgage
assets,  advise with  respect to the  acquisition,  management,  financing,  and
disposition of real estate 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 is entitled to receive an annual fee of
$150,000 with respect to the advisory services provided to the Company.

Operating  expenses  outside the scope of the 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 8: INCOME TAXES

The Company has elected to be treated as a REIT under  Sections  856 through 860
of the Code,  commencing  with its taxable year ending  December  31, 1997,  and
believes that its  organization  and proposed method of operation will enable it
to 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  Stock 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 95% 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.

                                       25


<PAGE>


NOTE 9: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>

                   1997
     (In Thousands, Except Share Data)          First Quarter*       Second Quarter        Third Quarter       Fourth Quarter
--------------------------------------------------------------------------------------------------------------------------------

<S>                                                        <C>                 <C>                  <C>                  <C>
Net Interest Income                                        $1,852              $11,785              $11,766              $12,662
Noninterest Expense                                            13                   45                   51                   45
                                            ------------------------------------------------------------------------------------
NET INCOME                                                  1,839               11,740               11,715               12,617
Preferred Dividends                                             8                   50                   50                  126
                                            ------------------------------------------------------------------------------------
Net Income for Common Shareholders                         $1,831              $11,690              $11,665              $12,491
                                            ------------------------------------------------------------------------------------
Earnings Per Share:

      Basic                                               $18,310             $116,900             $116,650             $124,910
                                            ------------------------------------------------------------------------------------
      Diluted                                             $18,310             $116,900             $116,650             $124,910
                                            ------------------------------------------------------------------------------------
</TABLE>

         * First Quarter information is for the period of March 17, 1997
(date of inception) through March 31, 1997.



ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE.

          Not Applicable.

                                       26


<PAGE>




                                    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. The Company has no other employees.

     The persons who are current directors and executive officers of the Company
are as follows:

NAME                          AGE                    POSITION AND OFFICES HELD
----                          ---                    -------------------------
John V. Brennan               45             President and Director
Ross M. Strickland            48             Director
Harriet Munrett Wolfe         44             Director
Gregory S. Madar              35             Vice President and Secretary
Peter J. Swiatek              39             Vice President and Treasurer


         The following is a summary of the experience of the executive  officers
and directors of the Company:

         John V. Brennan is the President  and a director of the Company.  He is
also the Executive  Vice  President,  Chief  Financial  Officer and Treasurer of
Webster and Webster Bank. Mr. Brennan,  a certified  public  accountant,  joined
Webster  Bank in 1986 as Senior Vice  President  and  Treasurer.  He was elected
Chief Financial  Officer in 1990 and Executive Vice President in 1991.  Prior to
joining  Webster Bank, he was a senior manager with the accounting  firm of KPMG
Peat Marwick LLP.

         Ross M.  Strickland  is a  director  of the  Company.  He is  also  the
Executive  Vice  President  -- Mortgage  Banking of Webster  and  Webster  Bank,
positions he has held since his  employment  in 1991.  Prior to joining  Webster
Bank, he was Executive  Vice  President of  Residential  Lending with the former
Northeast  Savings,  F.A.,  Hartford,  Connecticut,  from 1988 to 1991. Prior to
joining  Northeast  Savings,  he was National  Sales Manager,  Credit  Resources
Group, for Shearson Lehman Brothers.

         Harriet  Munrett  Wolfe is a director of the  Company.  She is also the
Senior Vice  President,  Counsel and Secretary of Webster and Webster Bank.  Ms.
Wolfe joined Webster and Webster Bank in March 1997 as Senior Vice President and
Counsel,  and was appointed Secretary in June 1997. Prior to joining Webster and
Webster Bank, she was in private  practice.  From November 1990 to January 1996,
she was Vice  President and Senior  Counsel of Shawmut Bank  Connecticut,  N.A.,
Hartford, Connecticut. Prior to joining Shawmut, she was Associate Legal Counsel
and Assistant Secretary of the former Citytrust, Bridgeport, Connecticut.

          Gregory S. Madar is the Vice  President  and Secretary of the Company.
He is also Vice  President  and Tax  Manager  of  Webster  Bank.  Mr.  Madar,  a
certified  public  accountant,  joined  Webster  Bank in 1995.  Prior to joining
Webster Bank, he was  Controller of Millane  Nurseries,  Inc. from 1993 to 1995.
Prior to joining Millane Nurseries,  he was a tax manager with KPMG Peat Marwick
LLP in Hartford. He was associated with KPMG from 1987 to 1993.

          Peter J. Swiatek is the Vice  President  and Treasurer of the Company.
He is also Senior Vice  President and  Controller of Webster Bank and Controller
of Webster.  Mr. Swiatek joined Webster in 1990 as Vice President of Accounting.
He was elected  Controller in 1992 and Senior Vice  President in 1993.  Prior to
joining  Webster Bank,  Mr.Swiatek  was the Controller of the former The Bank of
Hartford.

                                       27


<PAGE>


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 officers and persons who own more than 10%
of its Series A Preferred Stock or 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 Decmeber 31, 1997, all Section 16(a) filing  requirements  applicable
to the Company's officers, directors and more than 10% owners were compiled 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  Agreement  described below
under "The Advisor." Each officer of the Company currently is also an officer of
Webster Bank. The Company will maintain  corporate records and audited financial
statements  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 intend to pay the  directors  of the Company fees
for their services as directors. Although no direct compensation will be paid by
the Company,  under the Advisory Services Agreement,  the Company will reimburse
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  has an initial term of two years,  and will be
renewed   automatically  for  additional   one-year  periods  unless  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 will be entitled to receive an advisory fee equal to
$150,000 per year with respect to the  advisory  services  provided by it to the
Company.  The fee may be revised to reflect changes in the actual costs incurred
by the Advisor in providing services.

         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

                                       28


<PAGE>


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  executive  officers  and  directors  of the Company do not own any
shares of stock in the Company or Webster Bank.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  Company is  organized  as a  subsidiary  of Webster  Bank,  and is
controlled by and, through advisory and servicing agreements, 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 6 and 7 to the Company's Financial Statements included as
part of Item 8.

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  will advise the Company in the  selection  of  Mortgage  Assets,  and
provide loan  servicing  oversight.  The finance  department  will assist in the
administrative  operations of the Company.  The Advisor may subcontract all or a
portion  of its  obligations  under  the  Advisory  Agreement  to  one  or  more
affiliates,  and under  certain  conditions to  non-affiliates,  involved in the
business  of  managing  Mortgage  Assets.  The  Advisor may assign its rights or
obligations under the Advisory Agreement, and the Servicer may assign its rights
and obligations under the Servicing  Agreement,  to any affiliate of the Company
involved in the  business of managing  real estate  mortgage  assets.  Under the
Advisory  Agreement,  the Advisor may  subcontract  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.

                                        29



<PAGE>




                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1)    The following  financial  statements  are filed as a part of this
               Report:

               Statement of Condition at December 31, 1997

               Statement  of Income for the Period from March 17, 1997  (Date of
               Inception) to December 31, 1997

               Statement  of  Shareholders'  Equity from March 17, 1997 (Date of
               Inception) to December 31, 1997

               Statement  of Cash Flows for the Period from March 17, 1997 (Date
               of Inception) to December 31, 1997

               Notes to Financial Statements

               Independent Auditors' Report

     (a)(2)    There are no financial  statement schedules which are required to
               be filed as part of this form.

     (a)(3)    See (c) below for all exhibits  filed  herewith  and the Index to
               Exhibits.

     (b)       Reports on Form 8-K. Not applicable.

     (c)       Exhibits.

               The following  exhibits either are filed as a part of this Report
               or are incorporated herein by reference:



EXHIBIT NUMBER                    DESCRIPTION
--------------                    -----------

        3.1     Amended and Restated  Certificate  of  Incorporation  of Webster
                Preferred Capital Corporation (the "Company").

        3.2     Certificate  of  Amendment  for the  Series A 7.375%  Cumulative
                Redeemable Preferred Stock of the Company.

        3.3     Certificate  of  Amendment  for the  Series B 8.625%  Cumulative
                Redeemable Preferred Stock of the Company.

        3.4     Amended and Restated By-Laws of the Company.

        4.1     Specimen  of  certificate   representing  the  Series  A  7.375%
                Cumulative Redeemable Preferred Stock of the Company.

        4.2     Specimen  of  certificate   representing  the  Series  B  8.625%
                Cumulative Redeemable Preferred Stock of the Company.

        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.

        21      Subsidiaries of the Company.

        27      Financial Data Schedule.

       (d)     There  are  no  financial   statements  and  financial  statement
               schedules which were excluded from this Report which are required
               to be included herein.

                                       30


<PAGE>



                                   SIGNATURES

        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   WEBSTER PREFERRED CAPITAL CORPORATION
                                                 Registrant

                                   BY:       /s/ John V. Brennan
                                     ------------------------------------------
                                        John V. Brennan, President and Director

                                   Date: March 30, 1998


        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 noted as of March 30, 1998.


By:        /s/ John V. Brennan
           -----------------------------------------
                 John V. Brennan, President and
                 Director
                 Principal Executive Officer

By:        /s/ Peter J. Swiatek
           -----------------------------------------
                  Peter J. Swiatek,  Vice President and Treasurer
                  Principal Financial Officer and Principal
                  Accounting Officer


By:        /s/ Ross M. Strickland
           -----------------------------------------
                  Ross M. Strickland, Director


By:        /s/ Harriet Munrett Wolfe
           -----------------------------------------
                  Harriet Munrett Wolfe,
                  Director

                                       31


<PAGE>




                                INDEX TO EXHIBITS




    EXHIBIT NUMBER                 DESCRIPTION
    --------------                 -----------

        3.1     Amended and Restated  Certificate  of  Incorporation  of Webster
                Preferred Capital Corporation (the "Company").

        3.2     Certificate  of  Amendment  for the  Series A 7.375%  Cumulative
                Redeemable Preferred Stock of the Company.

        3.3     Certificate  of  Amendment  for the  Series B 8.625%  Cumulative
                Redeemable Preferred Stock of the Company.

        3.4     Amended and Restated By-Laws of the Company.

        4.1     Specimen  of  certificate   representing  the  Series  A  7.375%
                Cumulative Redeemable Preferred Stock of the Company.

        4.2     Specimen  of  certificate   representing  the  Series  B  8.625%
                Cumulative Redeemable Preferred Stock of the Company.

        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.

        21      Subsidiaries of the Company

        27      Financial Data Schedule.

                                       32