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, 1998

                                       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 Number)


                  145 BANK STREET, WATERBURY, CONNECTICUT 06702
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code: (203) 578-2286

          Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

           Securities registered pursuant to Section 12(g) of the Act:
                          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   common  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

                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                                                            PAGE

                                     PART I

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

                  General....................................................  3
                  Changes in Financial Condition.............................  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 ..... 15
ITEM  8.     Financial Statements and Supplementary Data..................... 16
ITEM  9.     Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure........................ 27

                                    PART III

ITEM 10.     Directors and Executive Officers of the Registrant.............. 28
ITEM 11.     Executive Compensation.......................................... 29
ITEM 12.     Security Ownership of Certain Beneficial Owners
               and Management................................................ 30
ITEM 13.     Certain Relationships and Related Transactions.................. 30

                                     PART IV

ITEM 14.     Exhibits, Financial Statement Schedules, and
             Reports on Form 8-K ............................................ 31


                                       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 and
during 1998,  Webster Bank contributed  approximately  $120.4 million and $182.8
million,  respectively,  of cash which the Company used to purchase  residential
mortgage loans and mortgage-backed securities. As of December 31, 1998 and 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 to generate net income for  distribution to its shareholders
based on the spread  between the interest  income earned on the Mortgage  Assets
and the cost of its capital and  operations.  The Company may invest up to 5% of
the total value of its portfolio in assets other than residential mortgage loans
and  mortgage-backed  securities  eligible to be held by real estate  investment
trusts ("REITs"). As of December 31, 1998,  approximately 38.2% of the Company's
residential  mortgage loans are fixed-rate  loans and 61.8% 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 shareholders'  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 do
not constitute regulatory capital of either Webster Bank or Webster.

     The Company has 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 shareholders 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 paid on the preferred  shares will be deductible for federal
income tax purposes as a result of the Company's qualification as a REIT.

CHANGES IN FINANCIAL CONDITION

     Total  assets were  $971.0  million at December  31,  1998,  an increase of
$183.4  million from $787.6  million at December 31, 1997. The increase in total
assets was due primarily to additional  capital  contributions  by Webster Bank.
Shareholder's  equity was $929.7 million at December 31, 1998 and $746.7 million
at December 31, 1997.

ASSET QUALITY

     The Company  maintains  high 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,
1998,  residential  real estate loans comprised the entire loan  portfolio.  The
Company also invests in highly rated mortgage-backed securities.


                                       3
<PAGE>



NONACCRUAL ASSETS

The aggregate  amount of  nonaccrual  assets was  approximately  $1.3 million at
December 31, 1998 and 1997. The following table details the Company's nonaccrual
assets at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
(Dollars In Thousands)                                          1998                1997
---------------------------- ------------------------------------------------------------
<S>                                                          <C>                 <C>
Nonaccrual Assets:
       Residential Fixed-Rate Loans                           $   71              $  158
       Residential Variable-Rate Loans                         1,206               1,145
-----------------------------------------------------------------------------------------
             Total                                           $ 1,277             $ 1,303
=========================================================================================
</TABLE>

At December 31, 1998 and 1997 the  allowance  for loan losses was  approximately
$1.6 million and $1.5  million,  or 121% and 118%,  respectively,  of nonaccrual
assets,  and  .19%  and  .24%,  respectively,  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 of  residential  mortgage  loans at
December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
(Dollars In Thousands)                                                  1998                 1997
--------------------------------------------------------------------------------------------------
<S>                                                                <C>                   <C>
Fixed-Rate Loans:
       15 yr. Loans                                                $ 114,924             $ 59,631
       20 yr. Loans                                                    3,213                1,636
       25 yr. Loans                                                    1,849                  813
       30 yr. Loans                                                  192,490              161,884
--------------------------------------------------------------------------------------------------
              Total Fixed-Rate Loans                                 312,476              223,964
--------------------------------------------------------------------------------------------------
Variable-Rate Loans:
       15 yr. Loans                                                    5,222                4,896
       20 yr. Loans                                                    6,504                4,004
       25 yr. Loans                                                    8,578                8,553
       30 yr. Loans                                                  484,824              393,924
--------------------------------------------------------------------------------------------------
              Total Variable-Rate Loans                              505,128              411,377
--------------------------------------------------------------------------------------------------
       Total Residential Mortgage Loans                            $ 817,604            $ 635,341
       Premiums and Deferred Fees on Loans, Net                        3,585                1,831
       Less: Allowance for Loan Losses                                (1,555)              (1,538)
--------------------------------------------------------------------------------------------------
              Residential Mortgage Loans, Net                      $ 819,634            $ 635,634
==================================================================================================
</TABLE>

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,  and  $401.3  million  of
variable-rate  loans,  net of premiums,  deferred fees on loans and an allowance
for loan losses. During 1998, Webster Bank contributed $182.8 million of cash to
the Company, of which $131.0 million was used to purchase additional residential
mortgage loans.



                                       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 periods
indicated follows:

<TABLE>
<CAPTION>
                                                                           For the Period from
                                                                           March 17, 1997 (Date
                                                         Year Ended          of Inception) to
(In Thousands)                                        December 31, 1998     December 31, 1997
-------------------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>
Balance at Beginning of Period                             $ 1,538               $    --
Allowance for Loan Losses on Acquired Loans                     --                 1,544
Provision Charged to Operations                                300                    --
Charge-offs                                                   (284)                   (6)
Recoveries                                                       1                    --
-------------------------------------------------------------------------------------------------
       Balance at End of Period                            $ 1,555               $ 1,538
=================================================================================================
</TABLE>

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. 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.

     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.

     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.



                                       5
<PAGE>



     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, 1998 and 1997, the Company did not hold any commercial mortgage loans.


LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  principal  liquidity  need  will  be to fund  dividends  on
outstanding capital stock. 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 Federal Deposit Insurance Corporation (the "FDIC").  Because
the Company is a subsidiary of Webster  Bank,  such federal  banking  regulatory
authorities 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 is
owned,  organized  and  operates  in such a manner as to qualify  as a REIT,  no
assurance  can be given as to the  Company's  ability to remain  qualified  as a
REIT.  Qualification  as a REIT involves the application of highly technical and
complex  Code   provisions  for  which  there  are  only  limited   judicial  or
administrative interpretations. The determination of various factual matters and
circumstances,  not  entirely  within  the  Company's  control,  may  affect the
Company's ability to qualify as a REIT. Although the Company is not aware of any
proposal in Congress to amend the tax laws in a manner that would materially and
adversely affect the Company's ability to operate as a REIT, no assurance can be
given that new legislation 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

         None.

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

         No matter  was submitted  during the fourth  quarter of the fiscal year
         1998 to security holders for a vote.






                                       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 (the "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 (the "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 in 1998 and 1997 totaled
$58.2 million and $38.0 million,  respectively.  Dividends  declared and paid on
the 2,000  preferred  shares  held by Webster  Bank  totaled  $149,192  in 1997.
Dividends declared on the Series A Preferred Stock in 1998 and 1997 totaled $3.0
million  and  $65,556,  respectively.  Dividends  declared on Series B Preferred
Stock in 1998 and 1997 totaled $862,500 and $19,167,  respectively. The dividend
calculation in 1997 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 Series B Preferred Stock averaged $10.597 for the year
ended December 31, 1998. Series B Preferred Stock reached a low of $10.125 and a
high of $11,  during the year ended  December 31, 1998. The market price for the
Series B Preferred  Stock remained  unchanged at $10 from December 24, 1997 (the
date of issuance) to December 31, 1997.

     Dividends  will be declared  at the  discretion  of the Board of  Directors
after considering the Company's distributable funds, financial requirements, tax
considerations and other factors. The Company's distributable funds will consist
primarily of interest and principal  payments on the Mortgage Assets held by it,
and the Company  anticipates that a significant portion of such assets will bear
interest at  adjustable  rates.  Accordingly,  if there is a decline in interest
rates,  the  Company  may  experience  a  decrease  in  income  available  to be
distributed to its  shareholders.  However,  the Company  currently expects that
both its cash  available for  distribution  and its "REIT  taxable  income" will
exceed the amount needed to pay dividends on the Preferred  Shares,  even in the
event  of a  significant  decline  in  interest  rate  levels,  because  (i) the
Company's Mortgage Assets are  interest-bearing,  (ii) the Series A and Series B
Preferred Stock are not expected to exceed 15% of the Company's  capitalization,
and (iii) the Company does not anticipate incurring any indebtedness.


                                       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  audited  financial  statements and notes
thereto appearing elsewhere herein.

FINANCIAL CONDITION DATA:

<TABLE>
<CAPTION>
BALANCE SHEET DATA                                                 At December 31,
                                               ---------------------------------------------
(In Thousands)                                        1998                   1997
-------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>
Available for Sale Securities, at Fair Value             $  118,262             $  120,090
Residential Mortgage Loans, Net                             819,634                635,634
Total Assets                                                970,961                787,561
Total Liabilities                                             1,243                    909
Mandatorily Redeemable Preferred Stock                       40,000                 40,000
Total Shareholders' Equity                                  929,718                746,652
===========================================================================================
<CAPTION>
                                                                     For the Period from
                                                                        March 17, 1997
INCOME STATEMENT DATA                            For Year Ended     (Date of Inception) to
(In Thousands)                                  December 31, 1998     December 31, 1997
-------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>
Total Interest Income                                     $  62,134              $  38,065
Provision for Loan Losses                                       300                      -
Gain on Sale of Securities                                      261                      -
Noninterest Expenses                                          3,836                    220
-------------------------------------------------------------------------------------------
Income Before Taxes                                          58,259                 37,845
Income Taxes                                                      -                      -
-------------------------------------------------------------------------------------------
Net Income                                                   58,259                 37,845
Preferred Stock Dividends                                       862                    168
===========================================================================================
Net Income Available to Common Shareholders               $  57,397              $  37,677
===========================================================================================
<CAPTION>
-------------------------------------------------------------------------------------------
                                                                     For the Period from
                                                                       March 17, 1997
                                                 For Year Ended      (Date of Inception)
SIGNIFICANT STATISTICAL DATA*                  December 31, 1998    to December 31, 1997
-------------------------------------------------------------------------------------------
<S>                                                  <C>                     <C>
Net Income per Common Share
       Basic                                         $  573,970.00           $  376,770.00
       Diluted                                       $  573,970.00           $  376,770.00
Dividends Declared per Common Share                  $  582,250.00           $  380,470.00
===========================================================================================
</TABLE>

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


                                       10
<PAGE>



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,  and during  1998,  Webster  Bank  contributed
approximately  $120.4 million, and $182.8 million,  respectively,  of cash which
the Company used to purchase mortgage-backed securities and residential mortgage
loans.  Total  assets at December  31,  1998 and  December  31,1997  were $971.0
million and $787.6 million,  respectively,  consisting  primarily of residential
mortgage loans and mortgage-backed securities.

     The  Company  has  elected  to be treated as a REIT under the Code and will
generally  not be subject to federal  income tax for as long as it maintains its
qualification  as a REIT,  requiring  among  other  things,  that  it  currently
distribute  to  stockholders  at least 95% of its  "REIT  taxable  income"  (not
including  capital gains and certain items of noncash  income).  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  high 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,
1998  and  1997,  residential  real  estate  loans  comprised  the  entire  loan
portfolio. The Company also invests in highly rated mortgage-backed securities.


NONACCRUAL ASSETS

     The aggregate amount of nonaccrual assets at December 31, 1998 and December
31,  1997 was  approximately  $1.3  million.  The  following  table  details the
Company's nonaccrual assets at December 31, 1998 and December 31, 1997:

<TABLE>
<CAPTION>
NONACCRUAL ASSETS:
(In Thousands)                                                      1998           1997
----------------------------------------------------------------------------------------
<S>                                                                <C>           <C>
Loans Accounted for on a Nonaccrual Basis:
        Residential Fixed-Rate Loans                               $  71         $  158
        Residential Variable-Rate Loans                            1,206          1,145
----------------------------------------------------------------------------------------
              Total                                              $ 1,277        $ 1,303
========================================================================================
</TABLE>

     At December 31, 1998 and December  31, 1997 the  allowance  for loan losses
was   approximately   $1.6  million  and  $1.5  million,   or  121%  and  118%,
respectively,  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

                                       11
<PAGE>



include net changes in capital  generally  related to stock  issuances,  capital
contributions from Webster Bank 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.


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,  1998,  61.8% 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.


RESULTS OF OPERATIONS

     For the year ended  December 31, 1998,  the Company  reported net income of
$58.3 million,  or $573,970 per common share on a diluted basis.  From March 17,
1997 (date of inception) to December 31, 1997,  the Company  reported net income
of $37.8 million, or $376,770 per common share on a diluted basis.

     Total interest income for 1998 amounted to $62.1 million,  net of servicing
fees, an increase of $24.0 million from $38.1 million, net of servicing fees, in
1997.  The average  balance of total  mortgage  loans,  net,  for the year ended
December  31, 1998 and for the period of March 17, 1997 (date of  inception)  to
December 31, 1997 was $755.7 million and $624.5 million,  respectively,  and the
yield was 6.95% and 7.52%, respectively.

     The  provision  for loan  losses  for the year  ended  December  31,  1998,
amounted to $300,000.  There was no provision  for loan losses for the period of
March 17, 1997 (date of inception) to December 31, 1997.  The provision for loan
losses reflects the increase in the total residential mortgage loan portfolio.

     Noninterest  expenses  for the year  ended  December  31,  1998 and for the
period of March 17, 1997 (date of  inception)  to December 31, 1997  amounted to
$3.8 million and $220,000,  respectively,  and included advisory fees, dividends
on Series A Preferred  Stock and  amortization  of start-up costs. No income tax
expense was recorded for either period.


                                       12
<PAGE>



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.


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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities." This
statement   establishes   accounting  and  reporting  standards  for  derivative
instruments,   including  certain  derivative   instruments  imbedded  in  other
contracts, (collectively referred to as derivatives) and for hedging activities.
The  accounting  for  changes in the fair value of a  derivative  depends on the
intended  use of the  derivative  and  the  resulting  designation.  Under  this
statement,  an entity  that  elects to apply  hedge  accounting  is  required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness  of the  hedging  derivative  and  the  measurement  approach  for
determining  the ineffective  aspect of the hedge.  This SFAS is not expected to
impact the Company  since the Company does not engage in hedging  activities  or
utilize derivative instruments.

     In April 1998, the AICPA Accounting  Standards  Executive  Committee issued
Statement of Position 98-5,  Reporting on the Cost of Start-up  Activities ("SOP
98-5"). SOP 98-5 is applicable to all non-government  entities and requires that
costs of  start-up  activities,  including  organization  costs,  be expensed as
incurred.  SOP 98-5 is  effective  for  financial  statements  for fiscal  years
beginning after December 15, 1998.  Restatement of previously  issued  financial
statements is not permitted. Initial application of SOP 98-5 should be as of the
beginning  of the  fiscal  year in which the SOP 98-5 is first  adopted  and the
unamortized  portion of previously  capitalized  start-up cost should be written
off.  The Company  wrote off the  remaining  amount of  organizational  costs of
$114,330 in December 1998 due to the adoption of SOP 98-5.



                                       13
<PAGE>



YEAR 2000 READINESS DISCLOSURE STATEMENT

     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.

I.   The Company's State Of Readiness

     The  Company  has  assessed  the issues  regarding  Year 2000 and since the
Company  depends on Webster Bank as Advisor and Servicer,  as agreed upon in the
Advisory Service Agreement and the Master Service Agreement, the Company will be
reliant on Webster Bank and its parent company,  Webster,  to ensure proper date
recognition.

     The  Company  has  reviewed  documentation  provided  by  Webster  and  has
determined  that  Webster is taking the  appropriate  steps to become  Year 2000
compliant.

II.  The Costs To Address The Company's Year 2000 Issues

     The  Company  currently  pays a monthly  servicing  and  managerial  fee to
Webster as agreed upon in the Advisory Service  Agreement and the Master Service
Agreement.  The Company is not expected to incur any costs  associated with Year
2000 issues that are not covered  under the Advisory  Service  Agreement and the
Master Service Agreement.  The Advisory Service Agreement and the Master Service
Agreement include  technical  support,  and  administrative  services,  in which
Webster  monitors  and  supervises  the  performance  of all  parties  who  have
contracts to perform services for the Company.

III. The Risks Of The Company's Year 2000 Issues

     The Company is in the process of identifying and evaluating  potential Year
2000 related worst case scenarios that could result from 1) Webster's failure to
identify,  test,  and validate  all critical  date  dependent  applications  and
embedded  microchips  that affect core business  processes and 2) the failure of
external forces,  such as third party vendors,  and utilities,  to have properly
remediated their systems.

     Potential  worst  case  scenarios  being   addressed,   include:   extended
electrical power outage,  extended telephone communication outage, and excessive
media speculation and community fear.

     The Company is unable to estimate lost revenue  related to Year 2000 issues
due to the  uncertainties of the impact and effects of external forces and their
potential extended disruptions.

IV.  The Company's Contingency Plans

     A  contingency  plan is  being  drafted  by the  Company  to  address  each
identified  potential  worst case scenario.  Alternative  solutions for business
resumption  and  approaches  to minimize  the impact of each  scenario are being
formulated.   Proposed   approaches  to  address  potential  scenarios  include:
designating  alternate  offices as  emergency  locations  with  alternate  power
sources and identifying alternate communication methods.

Availability Of Webster's Disclosure

     Webster's Year 2000 Readiness  Disclosure  Statement is available in detail
in its December 31, 1998, Form 10-K.



                                       14
<PAGE>



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The following table  summarizes the estimated market value of the Company's
interest-sensitive  assets and  interest-sensitive  liabilities  at December 31,
1998 and  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
---------------------------------------------------------------------------------------------------------------
<S>                                            <C>               <C>                <C>              <C>
AT DECEMBER 31, 1998
Interest Sensitive Assets:
      Mortgage-Backed Securities               $ 117,146         $ 118,262          $ 1,734          $ (3,169)
      Variable-Rate Residential Loans            505,128           521,221            5,472            (7,572)
      Fixed-Rate Residential Loans               312,476           320,623            4,285            (9,575)
Interest-Sensitive Liabilities:
      Series A Preferred Stock                    40,000            40,000              348            (3,638)
---------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997
Interest-Sensitive Assets:
      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>


FORWARD LOOKING STATEMENTS

     Statements in Management's Discussion and Analysis in the section captioned
"Year 2000 Readiness Disclosure  Statement" and in "Quantitative and Qualitative
Disclosures about Market Risk" are forward-looking statements within the meaning
of the Securities Exchange Act of 1934, as amended. Actual results,  performance
or  developments  may differ  materially from those expressed or implied by such
forward-looking  statements  as a  result  of  market  uncertainties  and  other
factors. Some important factors that would cause actual results that differ from
those in any  forward-looking  statements  include changes in interest rates and
general economics in the Connecticut market area where a substantial  portion of
the real estate securing the Company's loans is located. Such developments could
have an  adverse  impact on the  Company's  financial  position  and  results of
operations.



                                       15
<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  statements of condition of Webster  Preferred
Capital  Corporation  (a subsidiary of Webster Bank) as of December 31, 1998 and
1997, and the related statements of income, shareholders' equity, and cash flows
for the year ended  December  31, 1998 and the period of 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 audits.

We  conducted  our  audits  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 audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Webster  Preferred  Capital
Corporation  as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the year ended  December 31, 1998 and the period of March
17, 1997 (date of inception) to December 31, 1997 in conformity  with  generally
accepted accounting principles.


/s/ KPMG LLP
---------------------
Hartford, Connecticut
January 21, 1999



                                       16
<PAGE>



WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CONDITION
(Dollars in Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                    --------------------------------
                                                                                        1998                1997
------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                <C>
ASSETS
Cash                                                                                 $  26,964          $  26,167
Mortgage-Backed Securities Available for Sale, at Fair Value (Note 2)                  118,262            120,090
Residential Mortgage Loans, Net (Note 3)                                               819,634            635,634
Accrued Interest Receivable                                                              5,422              4,525
Prepaid Expenses and Other Assets                                                          679              1,145
------------------------------------------------------------------------------------------------------------------
     TOTAL ASSETS                                                                    $ 970,961          $ 787,561
==================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Accrued Dividends Payable                                                            $   1,019           $    491
Accrued Expenses and Other Liabilities                                                     224                418
------------------------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES                                                                   1,243                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 per
         share; 40,000 shares authorized, issued and outstanding                        40,000             40,000

SHAREHOLDERS' EQUITY (NOTE 5)
     Series  B  8.625%  Cumulative   Redeemable  Preferred  Stock,   Liquidation
         preference $10 per share; par value $1.00 per
         share; 1,000,000 shares authorized, issued and outstanding                      1,000              1,000
     Common Stock, par value $.01 per share:
         Authorized - 1,000 shares
         Issued and Outstanding - 100 shares                                                 1                  1
     Paid-in Capital                                                                   928,799            745,957
     Distributions in Excess of Accumulated Earnings                                    (1,198)              (370)
     Accumulated Other Comprehensive Income                                              1,116                 64
------------------------------------------------------------------------------------------------------------------
     TOTAL SHAREHOLDERS' EQUITY                                                        929,718            746,652
------------------------------------------------------------------------------------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                     $  970,961          $ 787,561
==================================================================================================================
</TABLE>

See accompanying notes to financial statements



                                       17
<PAGE>




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

<TABLE>
<CAPTION>
                                                                                            For the Period from
                                                                                           March 17, 1997 (Date
                                                                      For the Year Ended     of Inception) to
                                                                       December 31, 1998     December 31, 1997
------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                    <C>
Interest Income:
Loans                                                                       $  52,486              $  37,177
Securities                                                                      9,648                    888
-------------------------------------------------------------------------------------------------------------
        Total Interest Income                                                  62,134                 38,065
Provision for Loan Losses (Note 3)                                                300                      -
-------------------------------------------------------------------------------------------------------------
Interest Income After Provision for Loan Losses                                61,834                 38,065

Noninterest Income:
Gain on Sale of Securities                                                        261                      -

Noninterest Expenses:
Advisory Fee Expense Paid to Parent (Note 7)                                      150                    127
Dividends on Mandatorily Redeemable Preferred Stock                             2,950                     66
Amortization of Start-up Costs                                                    630                     17
Other Noninterest Expenses                                                        106                     10
-------------------------------------------------------------------------------------------------------------
        Total Noninterest Expenses                                              3,836                    220

Income Before Taxes                                                            58,259                 37,845
Income Taxes (Note 8)                                                               -                      -
-------------------------------------------------------------------------------------------------------------
NET INCOME                                                                     58,259                 37,845
Preferred Stock Dividends                                                         862                    168
-------------------------------------------------------------------------------------------------------------

Net Income Available to Common Shareholders                                 $  57,397              $  37,677
=============================================================================================================

Net Income Per Common Share
        Basic                                                              $  573,970              $ 376,770
        Diluted                                                            $  573,970              $ 376,770
=============================================================================================================
</TABLE>

See accompanying notes to financial statements




                                       18
<PAGE>



WEBSTER PREFERRED CAPITAL  CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                           Distributions     Accumulated
                                                                           in Excess of         Other
                                       Preferred    Common      Paid-In     Accumulated     Comprehensive
                                         Stock       Stock      Capital      Earnings           Income         Total
-------------------------------------------------- ----------- ---------- ---------------- ----------------- ----------
<S>                                       <C>         <C>           <C>            <C>            <C>           <C>
Balance, March 17, 1997
(date of inception)                       $    -      $    -        $    -         $    -         $   -         $    -

Comprehensive Income:
   Net Income for 1997                         -           -             -         37,845             -         37,845
   Net unrealized gains on Available
      for Sale Securities, net of
      reclassification adjustments                                                                   64             64
                                                                                                         --------------
Total Comprehensive Income                                                                                      37,909
                                                                                                         --------------

Contributions by Webster Bank              2,000           1       735,382              -             -        737,383
Preferred Stock Redeemed                  (2,000)                    2,000              -             -              -
Net Proceeds from Sale of Preferred
   Stock Series B                          1,000           -         8,575              -             -          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)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997               $ 1,000       $   1     $ 745,957        $  (370)        $  64      $ 746,652
========================================================================================================================

Comprehensive Income:
Net Income for 1998                            -           -             -         58,259             -         58,259
Net unrealized gains on Available
      for Sale Securities, net of
      reclassification adjustments                                                                1,052          1,052
                                                                                                         --------------
Total Comprehensive Income                                                                                      59,311
                                                                                                         --------------

Contributions by Webster Bank                  -           -       182,842              -             -        182,842
Dividends Paid or Accrued:
      Common Stock ($582,250 per share)        -           -             -        (58,225)            -        (58,225)
      Preferred Stock Series B
      ($0.8625 per share)                      -           -             -           (862)            -           (862)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998               $ 1,000       $   1     $ 928,799       $ (1,198)      $ 1,116      $ 929,718
========================================================================================================================
</TABLE>

See accompanying notes to financial statements


                                       19
<PAGE>




WEBSTER PREFERRED CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(Dollars In Thousands)

<TABLE>
<CAPTION>
                                                                                                For the Period from
                                                                                                   March 17, 1997
                                                                         For the Year Ended     (Date of Inception)
                                                                          December 31, 1998     to December 31, 1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                    <C>
OPERATING ACTIVITIES:
Net Income                                                                       $ 58,259               $ 37,845
Adjustments to Reconcile Net Cash Provided by Operating Activities:
         Provision for Loan Losses                                                    300                      -
         Accretion of Securities Discount                                          (1,493)                  (215)
         Amortization of Deferred Loan Fees and Premiums                            1,467                    444
         Gain on Sale of Securities                                                  (261)                     -
         Increase in Accrued Interest Receivable                                     (897)                (4,525)
         Increase in Accrued Liabilities                                            2,756                    909
         Increase (Decrease) in Prepaid Expenses and Other Assets                     466                   (129)
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities                                          60,597                 34,329
----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of  Mortgage-Backed Securities                                           (51,682)              (119,971)
Principal Collected on Mortgage-Backed Securities                                   7,233                    160
Proceeds from Sales of Mortgage-Backed Securities                                  49,083                      -
Purchase of Loans                                                                (389,123)               (98,835)
Principal Repayments of Loans, Net                                                203,356                 79,776
----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities                                            (181,133)              (138,870)
----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Dividends Paid on Common and Preferred Stock                                      (61,509)               (38,215)
Net Proceeds from Issuance of Preferred Stock                                           -                 48,562
Contributions from Parent                                                         182,842                120,361
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities                                         121,333                130,708
----------------------------------------------------------------------------------------------------------------------

Increase in Cash and Cash Equivalents                                                 797                 26,167
Cash and Cash Equivalents at Beginning of Year                                     26,167                      -
----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year                                         $ 26,964               $ 26,167
======================================================================================================================
SUPPLEMENTAL DISCLOSURES:
       Income Taxes Paid                                                         $      -               $      -
       Interest Paid                                                             $      -               $      -
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, 1998,  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.

     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 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.  As of
December  31,  1998 and 1997,  there  was no  foreclosed  property  owned by the
Company.



                                       21
<PAGE>



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.

     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. Gains and losses on the sales of securities
are recorded using the specific identification method.

G) NET INCOME PER COMMON SHARE

     Basic net income per common  share is  calculated  by  dividing  net income
available to common  shareholders  by the  weighted-average  number of shares of
common stock  outstanding.  Diluted net income per common share is calculated by
dividing adjusted net income by the weighted-average  diluted common shares. The
Company has no dilutive items. The weighted-average number of shares used in the
computation  of basic and diluted  earnings per common share for the years ended
December 31, 1998 and 1997 was 100.

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.

J) COMPREHENSIVE INCOME

     The Company  adopted the  provisions  of Statement of Financial  Accounting
Standard ("SFAS") No. 130. "Reporting  Comprehensive Income" on January 1, 1998.
SFAS  No.  130   establishes   standards   for  the  reporting  and  display  of
comprehensive  income and its  components  (such as  changes  in net  unrealized
securities gains and losses).  Comprehensive  income includes net income and any
changes in equity from non-owner sources that bypass the income  statement.  The
purpose for reporting comprehensive income is to report a measure of all changes
in equity of an enterprise  that result from recognized  transactions  and other
economic  events of the period  other  than  transactions  with  owners in their
capacity as owners.



                                       22
<PAGE>



Applications of SFAS No. 130 will not impact amounts previously reported for net
income or affect the comparability of previously issued financial statements.

K) RECLASSIFICATION

     Certain  financial  statement  balances as  previously  reported  have been
reclassified to conform to the 1998 Financial Statement Presentation.


NOTE 2: MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

     In November 1997 and March 1998,  Webster Bank  contributed  $120.4 million
and  $51.8  million,  respectively,  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:

<TABLE>
<CAPTION>
(In Thousands)                                                          Mortgage-Backed Securities
----------------------------------------------------------------------------------------------------------------------
                                                       Recorded Value  Unrealized Gains    Unrealized       Estimated
December 31, 1998                                                                              Losses      Fair Value
----------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>              <C>        <C>
      Available for Sale Portfolio:                         $ 117,146           $ 1,116          $  -       $ 118,262
======================================================================================================================
<CAPTION>
                                                      Recorded  Value  Unrealized Gains    Unrealized       Estimated
December 31, 1997                                                                              Losses      Fair Value
----------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                   <C>            <C>        <C>
      Available for Sale Portfolio:                         $ 120,026             $  64          $  -       $ 120,090
======================================================================================================================
</TABLE>


     During 1998, the Company sold $48.8 million of  mortgage-backed  securities
which  resulted in a gain of  $261,431.  There were no sales of  mortgage-backed
securities during the period ended December 31, 1997.

     All  mortgage-backed  securities  have a  contractual  maturity  of over 10
years.  The weighted  average yield at December 31, 1998 is 6.75%.  Although the
stated final maturity of these  obligations are long-term,  the weighted average
life is much shorter due to scheduled repayments and prepayments.



                                       23
<PAGE>



NOTE 3:  RESIDENTIAL  MORTGAGE LOANS, NET

A summary of the carrying  amount and fair market value of residential  mortgage
loans, net follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                   ------------------------------------------------------------------
                                                                  1998                             1997
                                                   ------------------------------------------------------------------
                                                     Carrying Amount    Fair Market      Carrying       Fair Market
(In Thousands)                                                             Value          Amount          Value
---------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>             <C>
Fixed-Rate Loans:
       15 yr. Loans                                       $  114,924      $ 117,278       $ 59,631        $ 60,794
       20 yr. Loans                                            3,213          3,315          1,636           1,679
       25 yr. Loans                                            1,849          1,906            813             830
       30 yr. Loans                                          192,490        198,124        161,884         165,847
---------------------------------------------------------------------------------------------------------------------

        Total Fixed-Rate Loans                               312,476        320,623        223,964         229,150
---------------------------------------------------------------------------------------------------------------------
Variable-Rate Loans:
       15 yr. Loans                                            5,222          5,367          4,896           5,011
       20 yr. Loans                                            6,504          6,716          4,004           4,102
       25 yr. Loans                                            8,578          8,820          8,553           8,750
       30 yr. Loans                                          484,824        500,318        393,924         405,277
---------------------------------------------------------------------------------------------------------------------

        Total Variable-Rate Loans                            505,128        521,221        411,377         423,140
---------------------------------------------------------------------------------------------------------------------

       Total Residential Mortgage Loans                    $ 817,604      $ 841,844       $635,341        $652,290

       Premiums and Deferred Fees on Loans, Net                3,585                         1,831
       Less: Allowance for Loan Losses                        (1,555)                       (1,538)
---------------------------------------------------------------------------------------------------------------------

        Residential Mortgage Loans, Net                    $ 819,634                     $ 635,634
=====================================================================================================================
</TABLE>


     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,  and  $401.3  million  of
variable-rate  loans,  net of premiums,  deferred fees on loans and an allowance
for loan losses.  During 1998,  Webster Bank contributed $182.8 million of cash,
to the  Company,  of  which  $131.0  million  was  used to  purchase  additional
residential loans. As of December 31, 1998, approximately 38.2% of the Company's
residential  mortgage loans are  fixed-rate  loans and  approximately  61.8% are
adjustable-rate loans.

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

<TABLE>
<CAPTION>
                                                                             For the Period from
                                                                             March 17, 1997 (Date
                                                         Year Ended            of Inception) to
(In Thousands)                                        December 31, 1998       December 31, 1997
---------------------------------------------------------------------------------------------------
<S>                                                     <C>                         <C>
Balance at Beginning of Period                          $ 1,538                     $    --
Allowance for Loan Losses on Acquired Loans                  --                       1,544
Provision Charged to Operations                             300                          --
Charge-offs                                                (284)                         (6)
Recoveries                                                    1                          --
---------------------------------------------------------------------------------------------------
  Balance at End of Period                              $ 1,555                     $ 1,538
===================================================================================================
</TABLE>



                                       24
<PAGE>



NOTE 4: MANDATORILY REDEEMABLE PREFERRED STOCK

On December 24, 1997,  the Company raised $40.0  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  beginning  January 15, 1999 through January 14, 2001,
the Series A Preferred Shares may be redeemed at the option of the Company.


NOTE 5:  SHAREHOLDERS' 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. The Series B Preferred
Shares may be  redeemed  at the option of the  Company on or after  January  15,
2003.

During 1998,  Webster Bank contributed  $182.8 million,  of cash to the Company,
which was used to purchase additional mortgage-backed securities and residential
mortgage loans.


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  receives  fees  at an  annual  rate  of (i) 8  basis  points  for
fixed-rate loan servicing and collection,  (ii) 8 basis points for variable-rate
loan servicing and collection and (iii) 5 basis points for all other services to
be provided,  as needed, in each case based on the daily outstanding balances of
all the Company's loans for which the Servicer is responsible.

The 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.



                                       25
<PAGE>



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 advisory agreement are paid directly
by the Company. Such expenses include but are not limited to the following: fees
for third party  consultants,  attorneys,  and  external  auditors and any other
expenses incurred that are not directly related to the advisory agreement.


NOTE 8: INCOME TAXES

The Company has elected to be treated as a REIT under  Sections  856 through 860
of the Code, and believes that its organization and method of operation meet the
requirements for  qualification as a REIT. As a REIT, the Company generally will
not be  subject to federal  income tax on net income and  capital  gains that it
distributes to the holders of its Common 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.


NOTE 9: OTHER COMPREHENSIVE INCOME

The  following   table   summarizes   reclassification   adjustments  for  other
comprehensive  income and the related  tax effects for the years ended  December
31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                      BEFORE             INCOME TAX
                                                                       TAX               (EXPENSE)          NET-OF-TAX
  (In Thousands)                                                      AMOUNT             OR BENEFIT           AMOUNT
  -----------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                                     <C>
  Unrealized gain on available for sale securities:
     Unrealized holding gains arise during the period                  $  1,313                -               $   1,313

     Less: Reclassification adjustment for gains
        Realized during the period                                          261                -                     261
  -----------------------------------------------------------------------------------------------------------------------

      Other comprehensive income at December 31, 1998                  $  1,052                -               $   1,052
  =======================================================================================================================

  Unrealized gain on available for sale securities:
     Unrealized holding gains arise during the period                  $     64                -               $      64
     Less: Reclassification adjustment for gains
        Realized during the period                                            -                -                       -
  -----------------------------------------------------------------------------------------------------------------------

      Other comprehensive income at December 31, 1997                  $     64                -               $       64
  =======================================================================================================================
</TABLE>




                                       26
<PAGE>



NOTE 10: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
1998
(In Thousands, Except Share Data)             First Quarter      Second Quarter    Third Quarter    Fourth Quarter
----------------------------------------- -------------------------------------------------------------------------
<S>                                                <C>                 <C>              <C>               <C>
Net Interest Income                              $   14,154           $   16,035       $  16,158         $  15,787
Provision for Loan Losses                                 -                   -              150               150
Gain on Sale of Securities                                -                   -              261                 -
Noninterest Expenses                                    925                  946             933             1,032
                                          =========================================================================
NET INCOME                                           13,229               15,089          15,336            14,605
Preferred Dividends                                     216                  216             216               214
                                          -------------------------------------------------------------------------
Net Income Available to Common                                                                     
       Shareholders                               $  13,013           $   14,873       $  15,120         $  14,391
                                          =========================================================================
Net Income Per Common Share                                                                        
       Basic                                      $ 130,130           $  148,730       $ 151,200         $ 143,908
                                          =========================================================================
       Diluted                                    $ 130,130           $  148,730       $ 151,200         $ 143,908
                                          =========================================================================

<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 Expenses                                     13                   45              51                45
                                          -------------------------------------------------------------------------
NET INCOME                                            1,839               11,740          11,715            12,617
Preferred Dividends                                       8                   50              50               126
                                          -------------------------------------------------------------------------
Net Income Available to Common                                                                        
       Shareholders                                $  1,831           $   11,690       $  11,665          $ 12,491
                                          =========================================================================
Net Income Per Common 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.



                                       27
<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 four
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               46          President and Director

Ross M. Strickland            49          Director

Harriet Munrett Wolfe         45          Director

Gregory S. Madar              36          Vice President and Assistant Secretary

Peter J. Swiatek              40          Vice President and Treasurer

John D. Benjamin              51          Secretary


     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 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  Assistant  Secretary  of the
Company.  He served as the  Secretary  of the  Company  from March 1997 to March
1999. 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 LLP ("KPMG")
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  of Webster  and  Webster  Bank in 1992 and Senior Vice
President of Webster Bank in 1993.  Prior to joining  Webster Bank,  Mr. Swiatek
was the Controller of the former The Bank of Hartford.

                                       28
<PAGE>



     John D.  Benjamin has served as Secretary of the Company  since March 1999.
He is also  Assistant  Secretary  and Senior  Compliance  Officer of Webster and
Senior Vice  President,  Assistant  Secretary and Senior  Compliance  Officer of
Webster Bank,  positions he has held since 1996.  Mr.  Benjamin  joined  Webster
Bank's predecessor,  First Federal Savings and Loan Association of Waterbury, in
1970. He has served various management  positions and was elected Vice President
in 1984 and Senior Vice President in 1991.


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 December 31, 1998, 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 four  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.



                                       29
<PAGE>



     The Advisory  Agreement  provides  that the liability of the Advisor to the
Company for any loss due to the  Advisor's  performing or failing to perform the
services under the Advisory Agreement shall be limited to those losses sustained
by the Company which are a direct result of the Advisor's  negligence or willful
misconduct.  It also provides that under no  circumstances  shall the Advisor be
liable for any  consequential  or special damages and that in no event shall the
Advisor's  total combined  liability to the Company for all claims arising under
or in  connection  with the Advisory  Agreement be more than the total amount of
all fees  payable by the Company to the  Advisor  under the  Advisory  Agreement
during the year immediately  proceeding the year in which the first claim giving
rise to such liability arises.  The Advisory Agreement also provides that to the
xtent 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.


                                       30
<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:

          Statements of Condition at December 31, 1998 and 1997

          Statements  of Income for year ended  December 31, 1998 and the period
          from March 17, 1997 (date of inception) to December 31, 1997

          Statements of  Shareholders'  Equity for year ended  December 31, 1998
          and the period from March 17, 1997 (date of inception) to December 31,
          1997

          Statements  of Cash Flows for year  ended  December  31,  1998 and 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")  (incorporated
                    herein by reference from Exhibit 3.1 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.2       Certificate of Amendment for the Series A 7.375%  Cumulative
                    Redeemable  Preferred  Stock  of the  Company  (incorporated
                    herein by reference from Exhibit 3.2 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.3       Certificate of Amendment for the Series B 8.625%  Cumulative
                    Redeemable  Preferred  Stock  of the  Company  (incorporated
                    herein by reference from Exhibit 3.3 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.4       Amended and  Restated  By-Laws of the Company  (incorporated
                    herein by reference from Exhibit 3.4 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          4.1       Specimen  of  certificate  representing  the Series A 7.375%
                    Cumulative   Redeemable   Preferred  Stock  of  the  Company
                    (incorporated  herein by  reference  from Exhibit 4.1 to the
                    Company's  Annual  Report on Form 10-K for the  fiscal  year
                    ended December 31, 1997).



                                       31
<PAGE>



          4.2       Specimen  of  certificate  representing  the Series B 8.625%
                    Cumulative   Redeemable   Preferred  Stock  of  the  Company
                    (incorporated  herein by  reference  from Exhibit 4.2 to the
                    Company's  Annual  Report on Form 10-K for the  fiscal  year
                    ended December 31, 1997).

          10.1      Mortgage Assignment Agreement, made as of March 17, 1997, by
                    and  between  Webster  Bank  and the  Company  (incorporated
                    herein  by  reference  from  Exhibit  10.1 to the  Company's
                    Registration  Statement  on Form S-11  (File No.  333-38685)
                    filed  with the  Securities  and  Exchange  Commission  (the
                    "SEC") on October 24, 1997).

          10.2      Master  Service  Agreement,  dated March 17,  1997,  between
                    Webster  Bank  and  the  Company   (incorporated  herein  by
                    reference  from Exhibit 10.2 to the  Company's  Registration
                    Statement on Form S-11 (File No.  333-38685)  filed with the
                    SEC on October 24, 1997).

          10.3      Advisory Service Agreement,  made as of October 20, 1997, by
                    and  between  Webster  Bank  and the  Company  (incorporated
                    herein  by  reference  from  Exhibit  10.3 to the  Company's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1997).

          21        Subsidiaries   of  the  Company   (incorporated   herein  by
                    reference from Exhibit 21 to the Company's  Annual Report on
                    Form 10-K for the fiscal year ended December 31, 1997).

          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.



                                       32
<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, 1999


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated as of March 30, 1999.

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




                                       33
<PAGE>




                                INDEX TO EXHIBITS

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

          3.1       Amended and Restated Certificate of Incorporation of Webster
                    Preferred Capital Corporation (the "Company")  (incorporated
                    herein by reference from Exhibit 3.1 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.2       Certificate of Amendment for the Series A 7.375%  Cumulative
                    Redeemable  Preferred  Stock  of the  Company  (incorporated
                    herein by reference from Exhibit 3.2 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.3       Certificate of Amendment for the Series B 8.625%  Cumulative
                    Redeemable  Preferred  Stock  of the  Company  (incorporated
                    herein by reference from Exhibit 3.3 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          3.4       Amended and  Restated  By-Laws of the Company  (incorporated
                    herein by reference from Exhibit 3.4 to the Company's Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1997).

          4.1       Specimen  of  certificate  representing  the Series A 7.375%
                    Cumulative   Redeemable   Preferred  Stock  of  the  Company
                    (incorporated  herein by  reference  from Exhibit 4.1 to the
                    Company's  Annual  Report on Form 10-K for the  fiscal  year
                    ended December 31, 1997).

          4.2       Specimen  of  certificate  representing  the Series B 8.625%
                    Cumulative   Redeemable   Preferred  Stock  of  the  Company
                    (incorporated  herein by  reference  from Exhibit 4.2 to the
                    Company's  Annual  Report on Form 10-K for the  fiscal  year
                    ended December 31, 1997).

          10.1      Mortgage Assignment Agreement, made as of March 17, 1997, by
                    and  between  Webster  Bank  and the  Company  (incorporated
                    herein  by  reference  from  Exhibit  10.1 to the  Company's
                    Registration  Statement  on Form S-11  (File No.  333-38685)
                    filed  with the  Securities  and  Exchange  Commission  (the
                    "SEC") on October 24, 1997).

          10.2      Master  Service  Agreement,  dated March 17,  1997,  between
                    Webster  Bank  and  the  Company   (incorporated  herein  by
                    reference  from Exhibit 10.2 to the  Company's  Registration
                    Statement on Form S-11 (File No.  333-38685)  filed with the
                    SEC on October 24, 1997).

          10.3      Advisory Service Agreement,  made as of October 20, 1997, by
                    and  between  Webster  Bank  and the  Company  (incorporated
                    herein  by  reference  from  Exhibit  10.3 to the  Company's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1997).

          21        Subsidiaries   of  the  Company   (incorporated   herein  by
                    reference from Exhibit 21 to the Company's  Annual Report on
                    Form 10-K for the fiscal year ended December 31, 1997).

          27        Financial Data Schedule.


                                       34