Webster Preferred Capital 10Q 2010 Q3 Quarterly report

Webster Preferred Capital (WBSTP) Inactive 10-Q2010 Q3 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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 incorporation or organization)		(I. R. S. Employer Identification Number)

Webster Plaza, Waterbury, Connecticut		06702
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (860) 751-7185

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of outstanding shares of the registrant’s common stock, $.01 par value per share, as of October 29, 2010 was 100 shares.

WEBSTER PREFERRED CAPITAL CORPORATION

INDEX


		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

Item 4.	Controls and Procedures	21

PART II – OTHER INFORMATION		22

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3.	Defaults Upon Senior Securities	22

Item 4.	[Removed and Reserved]	22

Item 5.	Other Information	22

Item 6.	Exhibits	23

SIGNATURES		24

EXHIBIT INDEX		25

PART I. – FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED BALANCE SHEETS


	September 30,			December 31,
*(In thousands, except share and per share data)*	2010			2009
	(unaudited)
Assets

Cash	$	4,447		$	6,374
Residential mortgage loans		133,705			153,102
Allowance for loan losses		(1,756	)		(2,183	)

Residential mortgage loans, net		131,949			150,919
Accrued interest receivable		483			575
Other real estate owned		447			—
Other assets		10			—

Total assets	$	137,336		$	157,868


Liabilities

Accrued dividends payable to preferred shareholders	$	180		$	180
Accrued expenses and other liabilities		726			102

Total liabilities		906			282


Shareholders’ Equity
Series B 8.625% cumulative redeemable preferred stock, liquidation preference $10 per share; par value $1.00 per share:
1,000,000 shares authorized, issued and outstanding		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		138,800			159,800
Distributions in excess of accumulated earnings		(3,371	)		(3,215	)

Total shareholders’ equity		136,430			157,586

Total liabilities and shareholders’ equity	$	137,336		$	157,868

See accompanying notes to condensed financial statements.

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
*(In thousands, except per share data)*	2010		2009		2010		2009
Interest income:
Loans, net of servicing fees	$	1,540	$	2,082	$	5,037	$	6,878

Total interest income		1,540		2,082		5,037		6,878
Provision for loan losses		—		187		—		717

Total interest income after provision for loan losses		1,540		1,895		5,037		6,161

Non-interest expense:
Advisory fee expense paid to Parent		55		55		165		161
Foreclosed property expenses		12		3		25		3
Other		31		20		90		97

Total non-interest expense		98		78		280		261

Net income		1,442		1,817		4,757		5,900
Preferred stock dividends		216		216		647		647


Net income available to common shareholder	$	1,226	$	1,601	$	4,110	$	5,253


Basic net income per common share:	$	12,260	$	16,010	$	41,100	$	52,530

See accompanying notes to condensed financial statements.

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


	Nine months ended September 30,
*(In thousands) - except for per share data*	2010			2009
Beginning Balance	$	157,586		$	196,971
Net income		4,757			5,900
Return of capital		(21,000	)		(29,000	)
Preferred stock dividends		(647	)		(647	)
Common stock dividends ($42,660 per share and $66,940 per share, respectively)		(4,266	)		(6,694	)

Ending Balance	$	136,430		$	166,530

See accompanying notes to condensed financial statements.

WEBSTER PREFERRED CAPITAL CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended September 30,
*(In thousands)*	2010			2009
Operating Activities:
Net income	$	4,757		$	5,900
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization and accretion		110			42
Provision for loan losses		—			717
Decrease in accrued interest receivable		92			165
Increase in accrued expenses and other liabilities		624			98
Increase in other assets		(10	)		(8	)

Net cash provided by operating activities		5,573			6,914

Investing Activities:
Net decrease in residential mortgage loans		18,413			25,707

Net cash provided by investing activities		18,413			25,707

Financing Activities:
Dividends paid on preferred stock		(647	)		(647	)
Dividends paid on common stock		(4,266	)		(6,694	)
Return of capital		(21,000	)		(29,000	)

Net cash used for financing activities		(25,913	)		(36,341	)

Net decrease in cash		(1,927	)		(3,720	)
Cash at beginning of period		6,374			8,680

Cash at end of period	$	4,447		$	4,960


Noncash investing activities:
Transfer of loans, net to other real estate owned	$	447		$	—

See accompanying notes to condensed financial statements.

WEBSTER PREFERRED CAPITAL CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Summary of Significant Accounting Policies

Nature of Operations

Webster Preferred Capital Corporation (the “Company”) is a Connecticut corporation incorporated in March 1997 and a subsidiary of Webster Bank, National Association, (“Webster Bank”), which is a wholly owned subsidiary of Webster Financial Corporation (“Webster”). The Company acquires, holds and manages real estate related mortgage assets.

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 shareholders and maintains its qualification as a REIT. All of the shares of the Company’s common stock, par value $0.01 per share, are owned by Webster Bank, which is a federally chartered and federally insured commercial bank. Webster Bank has indicated to the Company that, for as long as any of the Company’s preferred shares are outstanding, Webster Bank intends to maintain direct ownership of 100% of the outstanding common stock of the Company.

Basis of Presentation

The Condensed Financial Statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the Condensed Financial Statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s Condensed Financial Statements, and notes thereto, for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2010 (the “2009 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses is particularly subject to change.

Condensed Statements of Cash Flows

For purposes of the Condensed Statements of Cash Flows, the Company defines cash as amounts held in deposit accounts with Webster Bank.

Net Income Per Common Share

Basic net income per common share is calculated by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted net income per common share does not apply since the Company has issued no options or other instruments representing potential common shares.

Comprehensive Income

The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income includes net income and certain changes in equity from non-owner sources that are not recognized in the statements of income (such as net unrealized gains and losses on securities available for sale). For the three and nine months ended September 30, 2010 and 2009, the only component of comprehensive income for the Company was net income.

Accounting Standards Updates

ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”On July 21, 2010, the FASB issued ASU No. 2010-20 which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables by disclosing an evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and non-accrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. ASU 2010-20 will be effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.

Note 2: Residential Mortgage Loans, Net

A summary of residential mortgage loans, net, by type and original maturity follows:


	September 30,			December 31,
*(In thousands)*	2010			2009
Fixed-rate loans:
15 yr. loans	$	3,525		$	5,774
20 yr. loans		3,349			3,864
25 yr. loans		2,114			2,272
30 yr. loans		70,069			77,289

Total fixed-rate loans		79,057			89,199

Adjustable-rate loans:
15 yr. loans		786			854
20 yr. loans		111			117
25 yr. loans		352			390
30 yr. loans		52,816			61,849

Total adjustable-rate loans		54,065			63,210


Premiums and deferred costs on loans, net		583			693

Total residential mortgage loans		133,705			153,102
Less: allowance for loan losses		(1,756	)		(2,183	)


Residential mortgage loans, net	$	131,949		$	150,919

All of the residential mortgage loans held by the Company at September 30, 2010 and December 31, 2009 were acquired from Webster Bank.

There have been no loans acquired from Webster Bank since the first quarter of 2007. There have been no loans transferred to Webster Bank since the fourth quarter of 2008. At September 30, 2010 and December 31, 2009, 59.1% and 58.3%, respectively, of the Company’s residential mortgage loans were fixed rate loans and 40.4% and 41.3%, respectively, were adjustable-rate loans.

Non-Performing/Past Due Loans. Accrual of interest is discontinued if the loan is placed on non-accrual status. Residential loans are placed on non-accrual status at 90 days past due. When a loan is transferred to non-accrual status, unpaid accrued interest is reversed and charged against interest income. Non-accrual loans totaled $5.9 million at September 30, 2010 and $5.6 million at December 31, 2009, respectively and represented 4.38% and 3.63% of gross loans as of September 30, 2010 and December 31, 2009, respectively. Interest on non-accrual loans that would have been recorded as additional interest income for the three and nine months ended September 30, 2010 and 2009 had the loans been current in accordance with their original terms totaled approximately $51 thousand and $123 thousand, and $79 thousand and $153 thousand, respectively.

Impaired Loans. The Company, through its servicing agreement with Webster Bank, individually reviews loans not expected to be collected in accordance with the original terms of the contractual agreement with Webster Bank for impairment based on the fair value of expected cash flows or collateral. At September 30, 2010, impaired loans totaled $4.5 million, including loans of $4.0 million with an impairment allowance of $0.5 million. At December 31, 2009, impaired loans totaled $3.2 million, including loans of $1.6 million with an impairment allowance of $0.3 million.

The following table summarizes impaired loans as of September 30, 2010 and December 31, 2009.


	As of September 30, 2010						As of December 31, 2009
	With						With
	Specific		Without				Specific		Without
*(In thousands)*	Reserves		Reserves		Total		Reserves		Reserves		Total
Loans impaired and still accruing
Fixed-rate residential loans	$	1,120	$	—	$	1,120	$	208	$	357	$	565
Adjustable-rate residential loans		—		—		—		—		349		349

Total loans impaired and still accruing	$	1,120	$	—	$	1,120	$	208	$	706	$	914

Loans impaired and not accruing
Fixed-rate residential loans	$	2,428	$	496	$	2,924	$	1,074	$	1,235	$	2,309
Adjustable-rate residential loans		—		444		444

Total loans impaired and not accruing	$	2,428	$	940	$	3,368	$	1,074	$	1,235	$	2,309

Total impaired loans	$	3,548	$	940	$	4,488	$	1,282	$	1,941	$	3,223

Troubled Debt Restructures. Troubled debt restructurings (“TDRs”) are by definition impaired loans and impairment is recognized and measured in accordance with ASC 310-10-35 after the loans have been contractually modified. The Company individually reviews loans which are deemed to be TDRs for impairment based on the present value of expected cash flows, unless recovery becomes collateral dependent. If recovery becomes collateral dependent, impairment is based on the fair value of the associated collateral. The original contractual interest rate for the loan is used as the discount rate, for fixed rate loans. The current or weighted average rate is used as the discount rate, when the interest rate floats over a specified index. A change in terms or payments would be included in the ASC 310-10-35 impairment calculation. The effect of an actual loan modification is recorded in the period when the loan is contractually modified. Impairment is measured at that time and a specific reserve is established, as appropriate, and at each subsequent reporting period. Loans may be subject to the allowance for loan losses under ASC 450-20, prior to modification, based on the loan’s risk characteristics. For the three and nine months ended September 30, 2010, the Company charged off $12 thousand and $113 thousand, respectively, for the portion of TDRs deemed to be uncollectible. At September 30, 2010 and 2009, there were no commitments to lend any additional funds to debtors in TDRs.

Loan modifications, regardless of loan type, are not placed in temporary or trial periods. Once approved, all modifications are permanent and are recorded and disclosed as TDRs. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. If the modification agreement is violated, the loan is handled by the Company’s asset remediation group for resolution, which may result in foreclosure. At September 30, 2010 and December 31, 2009, the allowance for loan losses included reserves of $0.5 million and $0.3 million, respectively, related to residential loans. There were $0.9 million and $1.9 million loans restructured during the three and nine months ended September 30, 2010, respectively.

All modified loans that are determined to be a TDR are reported as impaired until they demonstrate compliance with the modified terms for a period of no less than six months and the restructuring agreement specifies an interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk. Once a modified loan has demonstrated compliance with the terms of the modified agreement for a period of no less than six months, the loan can return to accrual status. Non-performing TDRs are included in non-performing loans.

At September 30, 2010 and December 31, 2009, the Company had $2.7 million and $2.6 million of TDRs, respectively. In addition the Company has seasoned restructured loans in the loan portfolio. A seasoned restructured loan is one that has performed for a period of more than six months and was modified in a previous fiscal year. At September 30, 2010, the performing seasoned restructured loans were $0.9 million.

Allowance for loan losses.The following table provides detail of activity in the Company’s allowance for loan losses:


	Three months ended September 30,						Nine months ended September 30,
*(In thousands)*	2010			2009			2010			2009
Balance at beginning of period	$	1,947		$	2,633		$	2,183		$	2,183
Provision for loan losses		—			187			—			717
Net charge-offs		(191	)		(187	)		(427	)		(267	)

Balance at end of period	$	1,756		$	2,633		$	1,756		$	2,633

Note 3: Redeemable Preferred Stock

In December 1997, 1,000,000 shares of Series B 8.625% cumulative redeemable preferred stock were issued at $10 per share, raising $9.6 million, net of issuance costs. The Series B preferred stock is redeemable solely at the option of the Company, which has no current plans to redeem the preferred stock. The redemption price is $10 per share.

Note 4: Servicing

The mortgage loans owned by the Company are serviced by Webster Bank pursuant to the terms of an Amended and Restated Service Agreement (the “Service Agreement”). Webster Bank in its role as servicer receives fees at an annual rate of (i) 9.58 basis points for fixed-rate loan servicing and collection, (ii) 9.58 basis points for adjustable-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 Webster Bank is responsible. The services provided to the Company by Webster Bank are at the level of a sub-servicing agreement. As such, the Company estimates that the fees paid to Webster Bank for servicing approximates fees that would be paid if the Company operated as an unaffiliated entity. Servicing fees paid for the three and nine months ended September 30, 2010 and 2009 were approximately $33 thousand and $33 thousand and $95 thousand and $105 thousand, respectively. Servicing fees are netted against interest income in the Condensed Statements of Operations, as they are considered a reduction in yield to the Company.

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

Note 5: 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 or Connecticut income taxes on its net income and capital gains that it distributes to the holders of its common stock and preferred stock. Therefore, because all of the Company’s net income has been distributed to its shareholders, no provision for federal or Connecticut income taxes has been included in the accompanying condensed financial statements.

To maintain REIT status, an entity must meet a number of organizational and operational requirements, including a requirement that it currently distribute to stockholders at least 90% of its “REIT taxable income” (not including capital gains and certain items of non-cash income). If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and Connecticut income taxes at regular corporate rates.

The Company recognizes interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense. No interest or penalties were recognized in its statements of income for the three and nine months ended September 30, 2010 or 2009 or accrued within its balance sheets at September 30, 2010 and December 31, 2009.

The Company’s Federal and Connecticut income tax returns remain open to examination for calendar tax years subsequent to 2007.

Note 6: Fair Value of Financial Instruments

The Company uses fair value to record adjustments to certain assets and liabilities and to prepare required disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using market quotes. However, in many instances, there are no quoted market prices available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

A description of the valuation methodologies used by the Company is presented below.

Cash

The carrying value of cash approximates fair value.

Loans Receivable

The Company employs an independent third party to provide fair value estimates for portfolio loans. Such estimates are calculated using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans are estimated using the net present value of the expected cash flows.

Other Real Estate Owned

Real estate acquired through foreclosure (“REO”) or assets acquired through repossession are carried at the lower of cost or fair value less the estimated costs to sell. Independent appraisals are obtained to substantiate fair value and may be subject to adjustment based upon historical experience or specific geographic trends impacting the property. At the time a loan is referred to foreclosure, the excess of loan balance over fair value less cost to sell is charged off against the allowance for loan loss. Subsequent write-downs in value, maintenance expenses, and losses upon sale are charged to non-interest expense.

There were no loans transferred to other real estate owned during the three months ended September 30, 2010. For the nine months ended September 30, 2010, loans with a carrying value of $0.4 million were transferred to other real estate owned. There were no loans transferred to other real estate owned during the three and nine months ended September 30, 2009. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other real estate owned is separately stated in the accompanying Condensed Consolidated Balance Sheets and totaled $0.4 million at September 30, 2010. There was no other real estate owned at December 31, 2009.

A summary of estimated fair values of significant financial instruments consisted of the following,


	September 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
*(In thousands)*	Amount		Fair Value		Amount		Fair Value
Assets:
Cash	$	4,447	$	4,447	$	6,374	$	6,374
Residential Mortgage loans, net		131,949		135,053		150,919		151,489

WEBSTER PREFERRED CAPITAL CORPORATION

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company is a subsidiary of Webster Bank and has elected to be treated as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company will generally not be subject to federal and Connecticut state income taxes for as long as it maintains its qualification as a REIT, requiring among other things, that it currently distribute to stockholders at least 90% of its “REIT taxable income” (not including capital gains and certain items of noncash income). The following discussion of the Company’s condensed financial condition and results of operations should be read in conjunction with the Company’s financial statements and other financial data included elsewhere herein and in conjunction with the Company’s 2009 Annual Report on Form 10-K.

Forward Looking Statements and Factors that Could Affect Future Results

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may”, “plans”, “estimates” and similar references to future periods, however such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) local, regional, national and international economic conditions; (2) government intervention in the U.S. financial system; (3) changes in the level of non-performing assets and charge-offs; (4) inflation, interest rate, securities market and monetary fluctuations, and management’s estimates and projections of such fluctuations; (5) changes in management’s estimate of the adequacy of the allowance for loan losses; (6) changes in laws, regulations and policies (including tax and securities, regulations and policies); (7) changes in applicable accounting policies and practice; (8) legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (9) the Company’s success at managing the risks involved in the foregoing items; and (10) the other factors that are described in the Company’s Annual Report on Form 10-K under the heading “Risk Factors.” Any forward-looking statement made by the Company in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Summary

Total interest income net of servicing fees was $1.5 million and $5.0 million for the three and nine months ended September 30, 2010, respectively, compared to $2.1 million and $6.9 million for the three and nine months ended September 30, 2009, respectively. Approximately sixty percent of the decrease is due to lower average loan balances and approximately forty percent is due to decreases in interest rates on variable rate loans.

For the three and nine months ended September 30, 2010, average loans outstanding decreased $29.6 million and $31.3 million, respectively, compared to the three and nine months ended September 30, 2009. The yield on average earning assets for the three and nine months ended September 30, 2010 was 4.48% and 4.98%, respectively, compared to 4.66% and 5.23% for the three and nine months ended September 30, 2009, respectively.

Results of Operations

For the three and nine months ended September 30, 2010, the Company reported net income available to the common shareholder of $1.2 million and $4.1 million, respectively, a decrease of approximately $0.4 million and $1.1 million, or 23.4% and 21.8%, respectively, compared to the same periods in 2009. This decrease is due primarily to declining loan balances and lower yields.

Interest income, net of servicing fees for the three months ended September 30, 2010 was $1.5 million, a decrease of $0.6 million, or 26.0%, compared to $2.1 million for the three months ended September 30, 2009. The decrease in interest income was primarily related to a reduction in average interest earning assets of $29.6 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The average yield for residential mortgage loans declined by 50 basis points.

Interest income, net of servicing fees, for the nine months ended September 30, 2010 was $5.0 million, a decrease of $1.9 million, or 26.8%, compared to $6.9 million for the nine months ended September 30, 2009. The decrease in interest income was primarily related to a reduction in average interest earning assets of $31.3 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The average yield for residential mortgage loans declined by 57 basis points.

The following table shows the categories of average interest-earning assets, together with their respective interest income and the rates earned by the Company:


	Three Months Ended September 30, 2010							Three Months Ended September 30, 2009
*(Dollars in thousands)*	Average Balance		Interest Income		Average Yield			Average Balance		Interest Income		Average Yield
Residential mortgage loans	$	137,565	$	1,540		4.48	%	$	167,160	$	2,082		4.98	%

Total	$	137,565	$	1,540		4.48	%	$	167,160	$	2,082		4.98	%


	Nine Months Ended September 30, 2010							Nine Months Ended September 30, 2009
*(Dollars in thousands)*	Average Balance		Interest Income		Average Yield			Average Balance		Interest Income		Average Yield
Residential mortgage loans	$	144,129	$	5,037		4.66	%	$	175,432	$	6,878		5.23	%

Total	$	144,129	$	5,037		4.66	%	$	175,432	$	6,878		5.23	%

Interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets. Rate changes result from increases or decreases in the yields earned on assets. The following table presents a summary of the changes in interest income resulting from changes in the volume of average asset balances and changes in the average yields for the three and nine months ended September 30, 2010 when compared with the comparable periods for the preceding year. If significant, the change in interest income due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.


	Three Months Ended September 30, 2010 v. 2009 Decrease due to									Nine Months Ended September 30, 2010 v. 2009 Decrease due to
*(In thousands)*	Rate			Volume			Total			Rate			Volume			Total
Interest on interest-earning assets:
Residential mortgage loans	$	(197	)	$	(345	)	$	(542	)	$	(698	)	$	(1,143	)	$	(1,841	)

Net change in net interest income	$	(197	)	$	(345	)	$	(542	)	$	(698	)	$	(1,143	)	$	(1,841	)

Financial Condition

The Company had total assets of $137.3 million and $157.9 million at September 30, 2010 and December 31, 2009, respectively. The decrease in total assets of $20.6 million is primarily due to an $19.0 million decrease in the balance of outstanding residential mortgage loans to $131.9 million at September 30, 2010, as compared to $150.9 million at December 31, 2009. The decrease in residential mortgage loans outstanding is primarily due to repayments and the $0.4 million transfer to other real estate owned.

Shareholder’s equity decreased $21.2 million to $136.4 million at September 30, 2010 from $157.6 million at December 31, 2009, due to the $21.0 million return of capital distribution to Webster Bank and the $4.9 million in common and preferred dividends, which was partially offset by $4.8 million of net income for the nine months ended September 30, 2010.

Asset Quality

All loans held by the Company were originated by Webster Bank in the ordinary course of its mortgage lending activities. As such, the Company’s asset quality is dependent upon Webster Bank’s ability to maintain adequate underwriting standards. At September 30, 2010 and December 31, 2009, the loan portfolio was comprised of residential real estate loans. No loans were acquired by the Company from Webster Bank in the three and nine month periods ended September 30, 2010 and for the year ended December 31, 2009.

Non-performing assets, including impaired and restructured loans, loan delinquency and credit losses are considered to be key measures of asset quality. Asset quality is one of the key factors in the determination of the level of the allowance for loan losses. See “Allowance for Loan Losses” contained elsewhere within this section for further information.

Non-performing Assets

The following table details the Company’s non-performing loans


	September 30, 2010					December 31, 2009
*(Dollars in thousands)*	Principal Balance		% of Loans			Principal Balance		% of Loans
Loans accounted for on a non-accrual basis, net
Residential fixed-rate loans	$	3,111		2.33	%	$	3,944		2.58	%
Residential adjustable-rate loans		2,748		2.06			1,614		1.05

Total non-performing loans	$	5,859		4.38	%	$	5,558		3.63	%

Other real estate owned		447					—

Total non-performing assets	$	6,306				$	5,558

It is the Company’s policy that all loans 90 or more days past due are placed in non-accrual status.

Accrual of interest is discontinued if the loan is placed on non-accrual status. Residential loans are placed on non-accrual status at 90 days past due. When a loan is transferred to non-accrual status, unpaid accrued interest is reversed and charged against interest income. Non-accrual loans totaled $5.9 million at September 30, 2010 and $5.6 million at December 31, 2009, and represented 4.38% and 3.63% of gross loans as of September 30, 2010 and December 31, 2009, respectively. Interest on non-accrual loans that would have been recorded as additional interest income for the three and nine months ended September 30, 2010 and 2009 had the loans been current in accordance with their original terms totaled approximately and $51 and $123 thousand and $ 79 and $153 thousand, respectively.

Loan Delinquencies

The following table sets forth information on the Company’s loans past due 30-89 days and still accruing:


*(Dollars in thousands)*	September 30, 2010					December 31, 2009
	Principal Balance		% of Loans			Principal Balance		% of Loans
	Principal Balance		% of Loans			Principal Balance		% of Loans
Past Due 30-89 days
Residential fixed-rate loans	$	630		0.47	%	$	1,942		1.27	%
Residential adjustable-rate loans		540		0.40			660		0.43

Total past due loans	$	1,170		0.87	%	$	2,602		1.70	%

Loans past due for 30-89 days decreased by $1.4 million to $1.2 million at September 30, 2010 compared to $2.6 million at December 31, 2009.

The following table summarizes impaired loans at September 30, 2010 and December 31, 2009.


	As of September 30, 2010						As of December 31, 2009
*(In thousands)*	With Specific Reserves		Without Reserves		Total		With Specific Reserves		Without Reserves		Total
Loans impaired and still accruing
Fixed-rate residential loans	$	1,120	$	—	$	1,120	$	208	$	357	$	565
Adjustable-rate residential loans		—		—		—		—		349		349

Total loans impaired and still accruing	$	1,120	$	—	$	1,120	$	208	$	706	$	914

Loans impaired and not accruing
Fixed-rate residential loans	$	2,428	$	496	$	2,924	$	1,074	$	1,235	$	2,309
Adjustable-rate residential loans		—		444		444

Total loans impaired and not accruing	$	2,428	$	940	$	3,368	$	1,074	$	1,235	$	2,309

Total impaired loans	$	3,548	$	940	$	4,488	$	1,282	$	1,941	$	3,223

Loan modifications, regardless of loan type, are not placed in temporary or trial periods. Once approved, all modifications are permanent and are recorded and disclosed as TDRs. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. If the modification agreement is violated, the loan is handled by the Company’s asset remediation group for resolution, which may result in foreclosure. At September 30, 2010 and December 31, 2009, the allowance for loan losses included reserves of $0.5 million and $0.3 million related to residential loans. There were $0.9 million and $1.9 million loans restructured during the three and nine months ended September 30, 2010.

At September 30, 2010 and December 31, 2009, the Company had $2.7 million and $2.6 million of TDRs, respectively. In addition the Company has seasoned restructured loans in the loan portfolio. A seasoned restructured loan is one that has performed for a period of more than six months and was modified in a previous fiscal year. At September 30, 2010 the performing seasoned restructured loans were $0.9 million.

Allowance for Loan Losses

An allowance for loan losses, in the judgment of management, is necessary to provide for estimated loan losses inherent in the loan portfolio. The allowance for loan losses includes allowance allocations calculated in accordance with FASB ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with FASB ASC Topic 450, “Contingencies.” The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Webster Bank’s Credit Risk Management Committee, in its role as advisor to the Company, meets on a quarterly basis to review and conclude on the adequacy of the allowance. The results are presented to and reviewed by management of the Company.

At September 30, 2010, the allowance for loan losses was $1.8 million, or 1.3% of the total residential mortgage loan portfolio and 30.0% of total non-performing loans. This compares with an allowance of $2.2 million, or 1.4% of the total loan portfolio, and 39.3% of total non-performing loans at December 31, 2009. Gross charge-offs for the three and nine months ended September 30, 2010 were $191 and $427 thousand, respectively, an increase of $4 and $160 thousand, respectively, when compared to charge-offs of $187 thousand and $267 thousand for the three and nine months ended September 30, 2009, respectively. The increase in charge-off activity reflects the focus on non-accrual resolution and updated valuations of non-performing loans.

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


	Three months ended September 30,						Nine months ended September 30,
*(In thousands)*	2010			2009			2010			2009
Balance at beginning of period	$	1,947		$	2,633		$	2,183		$	2,183
Provision for loan losses		—			187			—			717
Net charge-offs		(191	)		(187	)		(427	)		(267	)

Balance at end of period	$	1,756		$	2,633		$	1,756		$	2,633

Liquidity and Capital Resources

The primary sources of liquidity for the Company have historically been principal and interest payments from residential mortgage loans. The primary uses of liquidity are typically purchases of residential mortgage loans and the payment of dividends on the Company’s common stock and preferred stock.

While scheduled loan amortization and short-term investments are predictable sources of funds, loan prepayments can vary greatly and are influenced by factors such as general interest rates, economic conditions and competition. One of the inherent risks of investing in loans is the ability of such instruments to incur prepayments of principal prior to maturity at prepayment rates different than those estimated at the time of purchase. This generally occurs because of changes in market interest rates.

Dividends on the Series B Preferred Stock are payable at the rate of 8.625% per annum (an amount equal to $0.8625 per annum per share), in all cases if, when and as declared by the Board of Directors of the Company. Dividends on the preferred shares are cumulative and, if declared, payable on January 15, April 15, July 15 and October 15 in each year. The Company periodically makes dividend payments on its common stock in accordance with the Company’s by-laws. Common stock dividends are paid to comply with REIT qualification rules. REIT qualification rules require that at least 90% of net taxable income for the year be distributed to shareholders.

In the event that principal and interest payments on its mortgage assets are insufficient to meet its operating needs, the Company has the ability to raise additional funds. The Company’s residential mortgage loans are underwritten to meet secondary market requirements and could be sold or securitized as mortgage-backed securities and used as borrowing collateral.

WEBSTER PREFERRED CAPITAL CORPORATION

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As the majority of the Company’s assets are sensitive to changes in interest rates, the most significant form of market risk is interest rate risk. The primary goal of managing this risk is to maximize net income (short-term risk) and net economic value (long-term risk) over time in changing interest rate environments. An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action.

The Company’s interest rate sensitive assets are subject to prepayment risk. Prepayment risk is inherently difficult to estimate and is dependent upon a number of economic, financial and behavioral variables. Webster Bank, in its role as advisor to the Company, uses a sophisticated mortgage prepayment modeling system to estimate prepayments and the corresponding impact on market value and net interest income. The model uses information that includes the instrument type, coupon spread, loan age and other factors in its projections. Webster Bank 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.

Both Webster Bank and the Company are unable to predict future fluctuations in interest rates. The market values of the Company’s financial assets are sensitive to fluctuations in market interest rates. The market values of fixed-rate loans and mortgage-backed securities tend to decline in value as interest rates rise. If interest rates decrease, the market value of fixed rate loans and mortgage-backed securities generally will tend to increase, with the level of prepayments also typically increasing. The interest income earned on the Company’s adjustable-rate, interest-sensitive instruments, which represent primarily adjustable-rate mortgage loans, may change due to changes in quoted interest-rate indices. The adjustable-rate mortgage loans generally re-price based on a stated margin over U.S. Treasury Securities indices of varying maturities, the terms of which are established at the time that the loan is closed. At September 30, 2010, 40.4% of the Company’s residential mortgage loans were adjustable-rate loans, compared to 41.3% at December 31, 2009.

The following table summarizes the estimated fair values of the Company’s interest-sensitive assets at September 30, 2010 and December 31, 2009, and the projected change to fair values if interest rates instantaneously increase or decrease by 100 basis points. Loans are presented in the following table gross of the allowance for loan losses and exclude premiums and deferred costs as these components are not interest-sensitive assets. The Company had no interest-sensitive liabilities at September 30, 2010 and December 31, 2009.


					Estimated Market Value Impact
*(In thousands)*	Book Value		Market Value		-100 BP		+100 BP
At September 30, 2010
Interest sensitive assets:
Fixed-rate residential loans	$	79,057	$	80,333		N/A	$	(1,883	)
Adjustable-rate residential loans		54,065		54,720		N/A		(326	)

	$	133,122	$	135,053		N/A	$	(2,209	)

At December 31, 2009
Interest sensitive assets:
Fixed-rate residential loans	$	89,199	$	88,360		N/A	$	(4,016	)
Adjustable-rate residential loans		63,210		63,129		N/A		(619	)

	$	152,409	$	151,489		N/A	$	(4,635	)

Interest-sensitive assets, when shocked by an immediate plus 100 basis point rate change, sustain an unfavorable $2.2 million, or 1.6%, change in market value at September 30, 2010, compared to an unfavorable $4.6 million, or 3.1%, change in market value at December 31, 2009. As the federal funds rate was at .25% on September 30, 2010, the -100 basis point scenario has been excluded.

Based on the Company’s asset/liability mix at September 30, 2010, management estimates that a gradual 200 basis point increase in interest rates would increase net income over the next twelve months by 3.2%.

These assumptions are inherently uncertain and, as a result, the simulation analyses cannot precisely estimate the impact that higher or lower rate environments will have on net income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in management’s strategies. Based upon review of the work performed by Webster Bank, Management believes that the Company’s interest-rate risk position at September 30, 2010 represents a reasonable level of risk.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States, 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 investment trust’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, the maturity structure of the Company’s assets is critical to the maintenance of acceptable performance levels.

Item 4.

CONTROLS AND PROCEDURES

As of September 30, 2010, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Principal Executive Officer and its Principal Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incident to its business, to which the Company is a party or of which any of its property is the subject.

Item 1A.

RISK FACTORS

During the third quarter of 2010, there were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2.

UNREGISTERED SALESOF EQUITY SECURITIESAND USEOF PROCEEDS

Not Applicable.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

Item 4.

REMOVEDANDRESERVED

Item 5.

OTHER INFORMATION

None.

Item 6.

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 of Rights and Preferences of 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).

3.3		Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2007).

4.1		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).

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Executive Officer.

32.2		Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Financial Officer.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WEBSTER PREFERRED CAPITAL CORPORATION Registrant

Date: November 8, 2010

	BY:	/s/ Theresa M. Messina
		Theresa M. Messina
		Chief Financial Officer
		(Principal Financial Officer)

EXHIBIT INDEX


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 of Rights and Preferences of 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).

3.3		Amended and Restated By-Laws of the Company (incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 9, 2007).

4.1		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).

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Executive Officer.

32.2		Written Statement pursuant to section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Principal Financial Officer.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company