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Webster Financial 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
WEBSTER FINANCIAL CORP.
Table of Contents

 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

     For the quarterly period ended March 31, 2005.

or

o 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: 001-31486

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)
     
Delaware   06-1187536
     
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
Webster Plaza, Waterbury, Connecticut   06702
     
(Address of principal executive offices)   (Zip Code)

(203) 465-4329


(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

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.

                    þ Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

                    þ Yes o No

The number of shares of common stock outstanding as of April 30, 2005 was 53,772,087.

 
 

 


INDEX


         
    Page No.
    Pending
PART I – FINANCIAL INFORMATION
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    9  
 
       
    23  
 
       
    35  
 
       
    35  
 
       
       
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    36  
 
       
    37  
 
       
    38  
 
       
EXHIBITS
    39  
 EX-31.1 CERTIFICATION
 EX-31.2 CERTIFICATION
 EX-32.1 CERTIFICATION
 EX-32.2 CERTIFICATION

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ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

                 
 
    March 31,     December 31,  
(In thousands, except share and per share data)   2005     2004  
 
Assets:
               
Cash and due from depository institutions
  $ 266,088       248,825  
Short-term investments
    79,676       17,629  
Securities (Note 4):
               
Trading, at fair value
    1,038        
Available for sale, at fair value
    2,591,270       2,494,406  
Held-to-maturity (fair value of $1,201,210 and $1,234,629)
    1,212,934       1,229,613  
Loans held for sale (Note 5)
    352,233       147,211  
Loans, net (Notes 6 and 7)
    11,544,555       11,562,663  
Accrued interest receivable
    67,953       63,406  
Goodwill (Note 8)
    639,512       623,298  
Cash surrender value of life insurance
    230,823       228,120  
Premises and equipment
    161,635       149,069  
Other intangible assets (Note 8)
    74,978       70,867  
Deferred tax asset (Note 9)
    73,981       70,988  
Prepaid expenses and other assets
    116,152       114,502  
 
Total assets
  $ 17,412,828       17,020,597  
 
 
               
Liabilities and Shareholders’ Equity:
               
Deposits (Note 10)
  $ 11,031,835       10,571,288  
Federal Home Loan Bank advances (Note 11)
    2,319,722       2,590,335  
Securities sold under agreement to repurchase and other short-term debt (Note 12)
    1,670,950       1,428,483  
Other long-term debt
    674,240       680,015  
Accrued expenses and other liabilities
    142,910       196,925  
 
Total liabilities
    15,839,657       15,467,046  
 
 
               
Preferred stock of subsidiary corporation
    9,577       9,577  
 
               
Commitments and contingencies (Notes 5 and 6)
               
 
               
Shareholders’ equity (Note 13):
               
Common stock, $.01 par value;
               
Authorized – 200,000,000 shares at March 31, 2005 and December 31, 2004
               
Issued – 53,833,274 shares at March 31, 2005 and 53,639,467 shares at December 31, 2004
    538       536  
Paid-in capital
    610,556       605,696  
Retained earnings
    977,963       942,830  
Less: Treasury stock, at cost; 46,520 shares at March 31, 2005 and 11,000 shares at December 31, 2004
    (2,314 )     (547 )
Accumulated other comprehensive loss
    (23,149 )     (4,541 )
 
Total shareholders’ equity
    1,563,594       1,543,974  
 
Total liabilities and shareholders’ equity
  $ 17,412,828       17,020,597  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                 
 
    Three months ended March 31,  
(In thousands, except per share data)   2005     2004  
 
Interest Income:
               
Loans
  $ 158,787       118,591  
Securities and short-term investments
    40,899       44,608  
Loans held for sale
    2,732       1,070  
 
Total interest income
    202,418       164,269  
 
Interest Expense:
               
Deposits (Note 10)
    35,868       25,830  
Federal Home Loan Bank advances and other borrowings
    28,130       24,435  
Other long-term debt
    10,188       8,198  
 
Total interest expense
    74,186       58,463  
 
Net interest income
    128,232       105,806  
Provision for loan losses (Note 7)
    3,500       5,000  
 
Net interest income after provision for loan losses
    124,732       100,806  
 
Noninterest Income:
               
Deposit service fees
    19,129       17,185  
Insurance revenue
    11,802       11,638  
Loan fees
    8,929       6,649  
Wealth and investment services
    5,395       5,116  
Gain on sale of loans and loan servicing, net
    2,536       1,025  
Increase in cash surrender value of life insurance
    2,238       1,954  
Gain on sale of securities, net
    756       5,500  
Financial advisory services
          3,808  
Other income
    2,243       1,848  
 
Total noninterest income
    53,028       54,723  
 
Noninterest Expenses:
               
Compensation and benefits
    57,902       53,127  
Occupancy
    10,859       8,365  
Furniture and equipment
    10,798       7,641  
Intangible assets amortization (Note 8)
    4,902       4,092  
Marketing
    3,283       2,984  
Professional services
    3,770       2,899  
Conversion and infrastructure costs
    1,134        
Other expenses
    15,126       13,033  
 
Total noninterest expenses
    107,774       92,141  
 
Income before income taxes
    69,986       63,388  
Income taxes
    22,491       21,065  
 
Net Income
  $ 47,495       42,323  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued

                 
   
    Three months ended March 31,  
(In thousands, except per share data)   2005     2004  
 
Net income
  $ 47,495       42,323  
 
Basic earnings per share
  $ 0.89       0.92  
Diluted earnings per share
    0.88       0.90  
Dividends paid per common share
    0.23       0.21  
 
               
Average shares outstanding:
               
Basic
    53,571       46,146  
Diluted
    54,217       47,059  

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

                 
   
    Three months ended March 31,  
(In thousands)   2005     2004  
 
Net Income
  $ 47,495       42,323  
 
               
Other comprehensive (loss) income, net of tax:
               
Unrealized net holding (loss) gain on securities available for sale arising during period (net of income tax (benefit) expense of $(9,849), and $17,657 for 2005 and 2004, respectively)
    (18,292 )     25,900  
Reclassification adjustment for net security gains included in net income (net of income tax expense of $255 and $2,169 for 2005 and 2004, respectively)
    (473 )     (3,271 )
Reclassification adjustment for cash flow hedge gain amortization included in net income
    (42 )     (43 )
Reclassification adjustment for amortization of unrealized loss (gain) upon transfer of securities to held to maturity (net of income tax)
    199       (62 )
 
Other comprehensive (loss) income
    (18,608 )     22,524  
 
Comprehensive income
  $ 28,887       64,847  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)


                                                 
                                    Accumulated        
                                    Other        
    Common     Paid-in     Retained     Treasury     Comprehensive        
(In thousands, except per share data)   Stock     Capital     Earnings     Stock     Income (loss)     Total  
 
 
                                               
Three months ended March 31, 2004:
                                               
Balance, December 31, 2003
  $ 495       412,020       833,357       (112,713 )     19,736       1,152,895  
Net income for the three months ended March 31, 2004
                42,323                   42,323  
Dividends paid:
                                               
$.21 per common share
                (9,276 )                 (9,276 )
Exercise of stock options
          (1,503 )           6,311             4,808  
Common stock repurchased
                      (2,438 )           (2,438 )
Common stock retired
    (1 )     1                          
Stock-based compensation
          1,076             50             1,126  
Net unrealized gain on securities available for sale, net of taxes
                            22,629       22,629  
Amortization of deferred hedging gain
                            (43 )     (43 )
Amortization of unrealized gain on securities transferred to held to maturity, net of taxes
                            (62 )     (62 )
 
Balance, March 31, 2004
  $ 494       411,594       866,404       (108,790 )     42,260       1,211,962  
 
 
                                               
Three months ended March 31, 2005:
                                               
Balance, December 31, 2004
  $ 536       605,696       942,830       (547 )     (4,541 )     1,543,974  
Net income for the three months ended March 31, 2005
                47,495                   47,495  
Dividends paid:
                                               
$.23 per common share
                (12,362 )                 (12,362 )
Exercise of stock options
    2       3,529                         3,531  
Common stock repurchased
                      (3,023 )           (3,023 )
Stock-based compensation
          1,331             1,256             2,587  
Net unrealized loss on securities available for sale, net of taxes
                            (18,765 )     (18,765 )
Amortization of deferred hedging gain
                            (42 )     (42 )
Amortization of unrealized loss on securities transferred to held to maturity, net of taxes
                            199       199  
 
Balance, March 31, 2005
  $ 538       610,556       977,963       (2,314 )     (23,149 )     1,563,594  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

                 
 
    Three months ended March 31,  
(In thousands)   2005     2004  
 
Operating Activities:
               
Net income
  $ 47,495       42,323  
Adjustments to reconcile net income to net cash used by operating activities:
               
Provision for loan losses
    3,500       5,000  
Depreciation and amortization
    5,725       6,525  
Amortization of intangible assets
    4,902       4,092  
Stock-based compensation
    2,587       1,126  
Net gain on sale of foreclosed properties
    (8 )     (141 )
Net gain on sale of securities
    (728 )     (5,440 )
Net gain on sale of loans and loan servicing
    (2,536 )     (1,025 )
Increase in cash surrender value of life insurance
    (2,238 )     (1,954 )
Net gain on trading securities
    (28 )     (60 )
Increase in trading securities
    (1,010 )     (2,230 )
Loans originated for sale
    (503,269 )     (295,151 )
Proceeds from sale of loans originated for sale
    300,783       250,235  
(Increase) decrease in interest receivable
    (3,610 )     1,459  
Decrease (increase) in prepaid expenses and other assets
    4,996       (48,773 )
(Decrease) increase in accrued expenses and other liabilities
    (59,719 )     14,062  
Proceeds from surrender of life insurance contracts
    793      
 
Net cash used by operating activities
    (202,365 )     (29,952 )
 
Investing Activities:
               
Purchases of available for sale securities
    (229,236 )     (698,647 )
Purchases of held to maturity securities
    (18,702 )     (27,828 )
Proceeds from maturities and principal payments of available for sale securities
    89,380       199,713  
Proceeds from maturities and principal payments of held to maturity securities
    35,277       552  
Proceeds from sales of available for sale securities
    15,316       441,365  
Net decrease in short-term investments
    46,429       20,263  
Net decrease (increase) in loans
    111,097       (315,723 )
Proceeds from sale of foreclosed properties
    689       1,563  
Net purchases of premises and equipment
    (14,197 )     (9,029 )
Net cash paid for acquisitions
    (28,998 )     (8,109 )
 
Net cash provided (used) by investing activities
    7,055       (395,880 )
 
Financing Activities:
               
Net increase in deposits
    263,306       265,947  
Proceeds from FHLB advances
    9,350,500       14,706,340  
Repayment of FHLB advances
    (9,618,980 )     (14,780,735 )
Net increase in federal funds purchased and securities sold under agreement to repurchase
    239,601       262,089  
Repayment of other long term debt
    (10,000 )      
Cash dividends to common shareholders
    (12,362 )     (9,276 )
Exercise of stock options
    3,531       4,808  
Common stock repurchased
    (3,023 )     (2,438 )
 
Net cash provided by financing activities
    212,573       446,735  
 
Increase in cash and cash equivalents
    17,263       20,903  
Cash and cash equivalents at beginning of period
    248,825       209,234  
 
Cash and cash equivalents at end of period
  $ 266,088       230,137  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

                 
 
    Three months ended March 31,  
(In thousands)   2005     2004  
 
Supplemental Disclosures:
               
Income taxes paid
  $ 8,344       5,872  
Interest paid
    77,605       59,917  
 
               
Supplemental Schedule of Noncash Investing and Financing Activities:
               
Transfer of loans to foreclosed properties
  $ 647       905  
 
               
Purchase Transactions:
               
Fair value of noncash assets acquired
  $ 235,033       5,027  
Fair value of liabilities assumed
    210,686       188  
 
               
Sale Transaction:
               
Fair value of noncash assets sold
  $       11,743  
Fair value of liabilities sold
          5,292  
 

See accompanying Notes to Consolidated Interim Financial Statements.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1: Basis of Presentation and Principles of Consolidation

The Consolidated Interim Financial Statements include the accounts of Webster Financial Corporation (“Webster” or the “Company”) and its subsidiaries. The Consolidated Interim Financial Statements and Notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant inter-company transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results which may be expected for the year as a whole.

The preparation of the Consolidated Interim Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the Consolidated Interim Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for loan losses and the valuation allowance for the deferred tax asset. These Consolidated Interim Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Webster’s Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 2: Stock-Based Compensation

At March 31, 2005 and 2004, Webster had a fixed stock-based compensation plan that covered employee and non-employee directors. During 2002, effective as of January 1, 2002, the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, were adopted on a prospective basis, for all stock options granted January 1, 2002 and thereafter. Prior to this date, the provisions of APB No. 25 and related interpretations were applied for option grant accounting. Therefore, the expense related to stock-based compensation for the quarter ended March 31, 2004 differs from the expense that would have been recognized if the fair value based method had been applied to all option grants since the original effective date of SFAS No. 123. Awards under the plan, in general, vest over periods ranging from 3 to 4 years. As of January 1, 2005, all stock options granted prior to the implementation of SFAS No. 123 are fully vested. Webster also grants restricted stock to senior management and directors.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all stock option awards.

                 
    Three months ended March 31,
(In thousands, except per share data)   2005     2004  
 
Net income, as reported
  $ 47,495       42,323  
Add: Stock option compensation expense included in reported net income, net of related tax effects
    1,069       490  
Deduct: Total stock option compensation expense determined under fair value based method for all awards, net of related tax effects
    (1,069 )     (449 )
 
Pro forma net income
  $ 47,495       42,364  
 
 
               
Earnings per share:
               
Basic – as reported
  $ 0.89       0.92  
– pro forma
    0.89       0.92  
 
               
Diluted – as reported
  $ 0.88       0.90  
– pro forma
    0.88       0.90  
 

In addition, the cost of restricted stock granted is reflected in compensation and benefits expense and totaled $350,000 and $286,000, net of taxes, for the three months ended March 31, 2005 and 2004.

See Note 18, Recent Accounting Pronouncements, for information regarding a newly released pronouncement concerning stock-based compensation accounting.

NOTE 3: Purchase and Sale Transactions

The following purchase and sale transactions have been completed or announced during 2005. The results of operations of the acquired companies are included in the Consolidated Statements of Income subsequent to the date of the completion of the acquisition.

Eastern Wisconsin Bancshares, Inc.

On September 7, 2004, Webster announced its entry into the health savings account business through a definitive agreement to acquire Eastern Wisconsin Bancshares, Inc., (“EWBI”) the holding company for State Bank of Howards Grove (“State Bank”), headquartered in Howards Grove, Wisconsin. This transaction closed on February 28, 2005. The acquisition makes Webster one of the largest custodians and administrators of health savings accounts in the United States. The purchase price was approximately $27 million in cash. The State Bank had $163 million in assets and $144 million in deposits, including $95 million in health savings account deposits at the time of the agreement.

A definitive agreement was announced on February 8, 2005 whereby Webster would divest State Bank’s two retail branches and related loans and deposits and retain the health savings account operation. The health savings account division operates under the name of HSA Bank, a division of Webster Bank. The branch sale closed on April 15, 2005. See Note 17, Subsequent Events, for further information.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


NOTE 4: Securities

A summary of trading, available for sale and held to maturity securities follows:

                                                                 
    March 31, 2005     December 31, 2004
    Amortized     Unrealized     Estimated     Amortized     Unrealized     Estimated  
(In thousands)   Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Fair Value  
 
Trading:
                                                               
Municipal bonds and notes
                          $ 1,038                             $  
 
Available for Sale:
                                                               
Municipal bonds and notes
  $ 30                   30     $ 390                   390  
Corporate bonds and notes
    189,187       5,417       (1,982 )     192,622       192,076       6,192       (1,895 )     196,373  
Equity securities (a)
    261,914       6,248       (398 )     267,764       262,776       9,893       (18 )     272,651  
Mortgage-backed securities
    2,173,679       22       (42,847 )     2,130,854       2,043,666       212       (18,886 )     2,024,992  
 
Total available for sale
  $ 2,624,810       11,687       (45,227 )     2,591,270     $ 2,498,908       16,297       (20,799 )     2,494,406  
 
 
                                                               
Held to maturity:
                                                               
Municipal bonds and notes
  $ 358,694       5,295       (1,409 )     362,580     $ 342,264       7,494       (550 )     349,208  
Mortgage-backed securities
    854,240             (15,610 )     838,630       887,349       196       (2,124 )     885,421  
 
 
Total held to maturity securities
  $ 1,212,934       5,295       (17,019 )     1,201,210     $ 1,229,613       7,690       (2,674 )     1,234,629  
 

(a)   As of March 31, 2005, the fair value of equity securities consisted of FHLB stock of $190.0 million, FRB stock of $37.9 million and common stock of $39.9 million. The fair value of equity securities at December 31, 2004 consisted of FHLB stock of $190.0 million, FRB stock of $37.9 million and common stock of $44.8 million.

The following table depicts temporarily impaired investment securities:

                                                 
    Less Than Twelve Months     Twelve Months or Longer     Total
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(In thousands)   Value     Losses     Value     Losses     Value     Losses  
 
Available for Sale:
                                               
Corporate bonds and notes
  $ 35,973       (520 )     15,267       (1,462 )     51,240       (1,982 )
Equity securities
    9,915       (398 )                 9,915       (398 )
Mortgage-backed securities
    1,263,364       (20,081 )     845,461       (22,766 )     2,108,825       (42,847 )
 
Total available for sale
  $ 1,309,252       (20,999 )     860,728       (24,228 )     2,169,980       (45,227 )
 
Held to maturity:
                                               
Municipal bonds and notes
  $ 73,564       (1,011 )     8,345       (398 )     81,909       (1,409 )
Mortgage-backed securities
    838,630       (15,610 )                 838,630       (15,610 )
 
Total HTM Securities
  $ 912,194       (16,621 )     8,345       (398 )     920,539       (17,019 )
 

Unrealized losses on fixed income and equity securities result from the cost basis of securities being greater than current market value. This can be caused by an increase in interest rates since the time of purchase or from deterioration in credit quality of the issuer. Forty-eight securities had an unrealized loss for twelve consecutive months or longer due to interest rates being higher at March 31, 2005 than at the time of purchase. Approximately 98 percent of the unrealized loss was concentrated in twenty-six mortgage-backed and three corporate securities. These mortgage-backed securities are rated or carry an implied AAA credit rating. The three corporate securities are unrated but have undergone an internal credit review by Webster. As a result of this credit review of the issuers, Webster has determined that there has been no deterioration in credit quality subsequent to purchase. Based on our experience with these types of investments and our financial strength, Webster has the ability to hold these investments to maturity or full recovery of the unrealized loss.

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Management will continue to evaluate impairments, whether caused by adverse interest rate or credit movements, to determine if they are other-than-temporary. The determination will be based on the severity of unrealized loss, length of time of impairment, and the financial condition and near-term prospects of the issuer.

NOTE 5: Loans Held for Sale

Loans held for sale totaled $352.2 million and $147.2 million at March 31, 2005 and December 31, 2004, respectively. Included in the March balance are approximately $97.8 million of loans which were sold on April 15, 2005, to National Exchange Bank and Trust of Wisconsin, as part of the previously announced branch divestiture.

At March 31, 2005 and December 31, 2004, residential mortgage origination commitments totaled $317.8 million and $284.4 million, respectively. Residential commitments outstanding at March 31, 2005 consisted of adjustable rate and fixed rate mortgages of $67.2 million and $250.6 million, respectively, at rates ranging from 1.0% to 11.0%. Residential commitments outstanding at December 31, 2004 consisted of adjustable rate and fixed rate mortgages of $55.1 million and $229.3 million, respectively, at rates ranging from 1.0% to 8.5%. Commitments to originate loans generally expire within 60 days. At March 31, 2005 and December 31, 2004, Webster also had outstanding commitments to sell residential mortgage loans of $415.9 million and $305.3 million, respectively.

At both March 31, 2005 and December 31, 2004, Webster Bank serviced for others residential and commercial loans totaling approximately $1.6 billion.

NOTE 6: Loans, Net

A summary of loans, net follows:

                                 
(In thousands)   March 31, 2005     December 31, 2004
    Amount     %     Amount     %  
Residential mortgage loans
  $ 4,722,897       40.4 %   $ 4,775,344       40.8 %
Commercial loans:
                               
Commercial non-mortgage
    1,459,787       12.5       1,409,155       12.0  
Asset-based lending
    568,556       4.9       547,898       4.7  
Equipment financing
    646,558       5.5       627,685       5.4  
 
Total commercial loans
    2,674,901       22.9       2,584,738       22.1  
Commercial real estate
    1,690,973       14.4       1,715,047       14.6  
Consumer loans:
                               
Home equity credit loans
    2,577,993       22.0       2,606,161       22.2  
Other consumer
    30,310       0.3       31,485       0.3  
 
Total consumer loans
    2,608,303       22.3       2,637,646       22.5  
 
Total loans
    11,697,074       100.0 %     11,712,775       100.0 %
Less: allowance for loan losses
    (152,519 )             (150,112 )        
 
Loans, net
  $ 11,544,555             $ 11,562,663          
 

At March 31, 2005, loans, net included $18.9 million of net premiums and $32.9 million of net deferred costs, compared with $20.5 million of net premiums and $32.1 million of net deferred costs at December 31, 2004. The unadvanced portions of residential and commercial construction loans totaled $411.9 million and $523.3 million at March 31, 2005 and December 31, 2004, respectively.

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At March 31, 2005 and December 31, 2004 unused portions of home equity credit lines extended were $1.2 billion. Unused commercial and commercial real estate lines of credit, letters of credit, standby letters of credit, equipment financing commitments and outstanding commercial loan commitments totaled $ 2.7 billion at March 31, 2005 and $2.9 billion at December 31, 2004. Consumer loan commitments totaled $80.2 million and $53.3 million at March 31, 2005 and December 31, 2004, respectively.

Webster is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commitments to sell residential first mortgage loans and commercial loans. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Condition. See Note 15 for further discussion.

The estimated fair value of commitments to extend credit is considered insignificant at March 31, 2005 and December 31, 2004. Future loan commitments represent residential and commercial mortgage loan commitments, commercial loan and equipment financing commitments, letters of credit and commercial and home equity unused credit lines. The interest rates for these loans are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate.

A majority of the outstanding letters of credit are performance standby letters of credit within the scope of FASB Interpretation No. (“FIN”) 45. These are irrevocable undertakings by Webster, as guarantor, to make payments in the event a specified third party fails to perform under a nonfinancial contractual obligation. Most of the performance standby letters of credit arise in connection with lending relationships and have a term of one year or less.

The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. At March 31, 2005, Webster’s standby letters of credit totaled $200.1 million. At March 31, 2005, the fair value of stand-by letters of credit is not material to the unaudited interim financial statements.

NOTE 7: Allowance for Loan Losses

The following table provides a summary of activity in the allowance for loan losses:

                 
 
    Three months ended March 31,  
(In thousands)   2005     2004  
 
Balance at beginning of period
  $ 150,112       121,674  
Provisions charged to operations
    3,500       5,000  
 
Subtotal
    153,612       126,674  
 
 
               
Charge-offs
    (2,464 )     (4,155 )
Recoveries
    1,371       1,094  
 
Net charge-offs
    (1,093 )     (3,061 )
 
Balance at end of period
  $ 152,519       123,613  
 
Ratio of net charge-offs to average loans outstanding during the period (annualized)
    0.04 %     0.13 %
 

Included in charge-offs are $629,000 of write-downs of loans transferred to held for sale during the first quarter of 2005.

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NOTE 8: Goodwill and Other Intangible Assets

The following tables set forth the carrying values of goodwill and other intangible assets, net of accumulated amortization:

                 
   
    March 31,     December 31,  
(In thousands)   2005     2004  
 
Goodwill - not subject to amortization
  $ 639,512       623,298  
 
 
               
Other Intangible assets:
               
Balances subject to amortization:
               
Core deposit intangibles
  $ 66,014       61,734  
Other identified intangibles
    7,120       7,289  
Balances not subject to amortization:
               
Pension assets
    1,844       1,844  
 
Total other intangible assets
  $ 74,978       70,867  
 

Changes in the carrying amount of goodwill for the three months ended March 31, 2005 is as follows:

                                 
                    Wealth and        
    Retail     Commercial     Investment        
(In thousands)   Banking     Banking     Services     Total  
 
Balance at December 31, 2004
  $ 587,205       26,583       9,510       623,298  
Purchase price adjustments
    (278 )     4,928             4,650  
Purchase transaction
    11,564                   11,564  
 
Balance at March 31, 2005
  $ 598,491       31,511       9,510       639,512  
 

During the first quarter of 2005, $9.0 million of core deposit intangibles with an amortization period of 7 years were added as a result of the EWBI purchase described in Note 3. Approximately $4.4 million of this addition relates to deposits held in the two retail branches that were divested on April 15, 2005.

Amortization of intangible assets for the three months ended March 31, 2005, totaled $4.9 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

         
(In thousands)  
 
For years ending December 31,
       
2005 (full year)
  $ 19,940  
2006
    15,879  
2007
    7,823  
2008
    4,961  
2009
    4,788  
Thereafter
    20,295  
 

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NOTE 9: Deferred Tax Asset

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31, 2005 and December 31, 2004 are summarized below. Temporary differences result from the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A 100% valuation allowance has been applied to the deferred tax assets applicable to Connecticut, Massachusetts and Rhode Island due to uncertainties of realization.

                 
 
    March 31,     December 31,  
(In thousands)   2005     2004  
 
Deferred tax assets:
               
Allowance for loan losses
  $ 60,377       59,865  
Net unrealized loss on securities available for sale
    11,430       1,325  
Intangible assets
    5,738       5,611  
Net operating loss and tax credit carry forwards
    11,720       13,800  
Compensation and employee benefit plans
    7,611       10,005  
Deductible acquisition costs
    4,857       5,128  
Purchase accounting and fair-value adjustments
          991  
Other
    3,827       4,337  
 
Total deferred tax assets
    105,560       101,062  
Less: valuation allowance
    (16,809 )     (17,578 )
 
Deferred tax assets, net of valuation allowance
    88,751       83,484  
 
 
               
Deferred tax liabilities:
               
Purchase accounting and fair-value adjustments
    779        
Loan discounts
    2,225       2,642  
Equipment financing leases
    5,285       3,386  
Mortgage servicing rights
    3,413       3,619  
Other
    3,068       2,849  
 
Total deferred tax liabilities
    14,770       12,496  
 
Deferred tax asset
  $ 73,981       70,988  
 

Management believes it is more likely than not that Webster will realize its net deferred tax asset, based upon its recent historical and anticipated future levels of pre-tax income. There can be no absolute assurance, however, that any specific level of future income will be generated.

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NOTE 10: Deposits

The following table summarizes the composition of deposits:

                                 
 
    March 31, 2005     December 31, 2004  
            % of             % of  
(In thousands)   Amount     total     Amount     total  
 
Demand deposits
  $ 1,426,798       12.9 %   $ 1,409,682       13.4 %
NOW accounts
    1,535,595       13.9       1,368,213       12.9  
Money market deposit accounts
    1,904,158       17.3       1,996,918       18.9  
Savings accounts
    2,276,623       20.7       2,253,073       21.3  
Certificates of deposit
    3,840,360       34.8       3,543,402       33.5  
Deposits held in divested branches
    48,301       0.4              
 
Total
  $ 11,031,835       100.0 %   $ 10,571,288       100.0 %
 

Interest expense on deposits is summarized as follows:

                 
   
    Three months ended March 31,  
(In thousands)   2005     2004  
 
NOW accounts
  $ 1,227       628  
Money market deposit accounts
    7,606       5,192  
Savings accounts
    4,126       3,164  
Certificates of deposit
    22,909       16,846  
 
Total
  $ 35,868       25,830  
 

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NOTE 11: Federal Home Loan Bank Advances

Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

                                 
 
    March 31, 2005     December 31, 2004
    Total             Total        
(In thousands)   Outstanding     Callable     Outstanding     Callable  
 
Fixed Rate:
                               
1.48% to 7.04% due in 2005
  $ 1,340,909       45,000     $ 1,607,368       45,000  
2.18% to 6.31% due in 2006
    367,412             368,695        
4.09% to 7.45% due in 2007
    244,095             244,648        
4.49% to 5.93% due in 2008
    75,460       74,000       75,571       74,000  
4.98% to 5.96% due in 2009
    138,000       123,000       138,000       123,000  
4.95% to 8.44% due in 2010
    35,356       35,000       35,370       35,000  
3.99% to 6.60% due in 2011
    41,583       40,000       41,635       40,000  
5.22% to 5.49% due in 2013
    49,000       49,000       49,000       49,000  
6.00% due in 2015
    33             34        
5.66% due in 2017
    500             500        
0.00% due in 2022
    425             430        
2.51% to 3.75% due in 2023
    389             391        
 
 
    2,293,162       366,000       2,561,642       366,000  
 
                               
Unamortized premium
    26,560             28,693        
 
Total advances
  $ 2,319,722       366,000     $ 2,590,335       366,000  
 

Webster Bank had additional borrowing capacity of approximately $478.3 million from the FHLB at March 31, 2005 and $651.6 million at December 31, 2004. Advances are secured by a blanket security agreement against certain qualifying assets, principally residential mortgage loans. At March 31, 2005 and December 31, 2004, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at March 31, 2005 and December 31, 2004 would have been increased by an additional $724.8 billion and $913.6 million, respectively. At March 31, 2005 Webster Bank was in compliance with the FHLB collateral requirements.

As of March 31, 2005, $350 million of fixed rate advances had been converted to floating rate through the use of interest rate swaps. See Note 15 for further information on interest rate swaps.

Total callable FHLB advances at March 31, 2005 and December 31, 2004 were $366 million.

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NOTE 12: Securities Sold Under Agreement to Repurchase and Other Short-term Debt

The following table summarizes balances for other borrowings:

                 
 
    March 31,     December 31,  
(In thousands)   2005     2004  
 
Securities sold under agreement to repurchase
  $ 1,056,493       1,117,040  
Federal funds purchased
    192,240       133,780  
Treasury tax and loan
    410,882       164,592  
Other
    100       1,286  
 
 
    1,659,715       1,416,698  
Unamortized premium
    11,235       11,785  
 
Total
  $ 1,670,950       1,428,483  
 

The following table sets forth certain information on short-term borrowings:

                 
 
    March 31,     December 31,  
(In thousands)   2005     2004  
 
Repurchase agreements:
               
Quarter end balance
  $ 466,580       527,127  
Quarter average balance
    506,002       716,617  
Highest month end balance during quarter
    542,726       780,224  
Weighted-average maturity (in months)
    1.16       1.29  
Weighted-average interest rate
    1.91 %     1.86 %

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NOTE 13: Shareholders’ Equity

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) require Webster and its banking subsidiary to maintain certain minimum ratios, as set forth below. At March 31, 2005, Webster and Webster Bank, were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios.

                                                 
    Actual     Capital Requirements     Well Capitalized  
(In thousands)   Amount     Ratio     Amount     Ratio     Amount     Ratio  
 
At March 31, 2005
                                               
Webster Financial Corporation
                                               
Total capital (to risk-weighted assets)
  $ 1,433,261       11.2 %   $ 1,028,381       8.0 %   $ 1,285,477       10.0 %
Tier 1 capital (to risk-weighted assets)
    1,077,972       8.4       514,191       4.0       771,286       6.0  
Tier 1 leverage capital ratio (to average assets)
    1,077,972       6.6       655,524       4.0       819,405       5.0  
Webster Bank, N.A.
                                               
Total capital (to risk-weighted assets)
  $ 1,511,673       11.9 %   $ 1,015,301       8.0 %   $ 1,269,126       10.0 %
Tier 1 capital (to risk-weighted assets)
    1,159,154       9.1       507,650       4.0       761,476       6.0  
Tier 1 leverage capital ratio (to average assets)
    1,159,154       7.1       649,367       4.0       811,708       5.0  
At December 31, 2004
                                               
Webster Financial Corporation
                                               
Total capital (to risk-weighted assets)
  $ 1,410,329       11.2 %   $ 1,010,628       8.0 %   $ 1,263,286       10.0 %
Tier 1 capital (to risk-weighted assets)
    1,055,636       8.4       505,314       4.0       757,971       6.0  
Tier 1 leverage capital ratio (to average assets)
    1,055,636       6.4       663,853       4.0       829,817       5.0  
Webster Bank, N.A.
                                               
Total capital (to risk-weighted assets)
  $ 1,451,810       11.6 %   $ 997,393       8.0 %   $ 1,246,741       10.0 %
Tier 1 capital (to risk-weighted assets)
    1,101,698       8.8       498,696       4.0       748,045       6.0  
Tier 1 leverage capital ratio (to average assets)
    1,101,698       6.7       657,714       4.0       822,143       5.0  

Accumulated other comprehensive loss is comprised of the following components.

                 
 
    March 31,     December 31,  
(In thousands)   2005     2004  
 
Unrealized loss on available for sale securities (net of tax)
  $ (21,226 )     (2,461 )
Unrealized loss upon transfer of available for sale securities to held to maturity (net of tax)
    (3,239 )     (3,438 )
Deferred gain on hedge
    1,316       1,358  
 
Total
  $ (23,149 )     (4,541 )
 

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NOTE 14: Business Segments

Webster has three operating segments for purposes of reporting business line results. These segments include Retail Banking, Commercial Banking and Wealth and Investment Services. The balance of the activity is reflected in Corporate. The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised. The first quarter of 2004 has been restated, to reflect changes in the methodologies adopted and reflected in the results for the first quarter of 2005. The following table presents the statement of income and total assets for Webster’s reportable segments.

Three months ended March 31, 2005

 
                    Wealth and                
    Retail     Commercial     Investment             Consolidated  
(In thousands)   Banking     Banking     Services     Corporate     Total  
 
Net interest income
  $ 95,876       29,408       1,068       1,880       128,232  
Provision for loan losses
    3,174       5,261       81       (5,016 )     3,500  
 
Net interest income after provision
    92,702       24,147       987       6,896       124,732  
Noninterest income
    34,571       6,655       5,549       6,253       53,028  
Noninterest expense
    70,101       13,033       7,325       17,315       107,774  
 
Income (loss) before income taxes
    57,172       17,769       (789 )     (4,166 )     69,986  
Income tax expense (benefit)
    18,375       5,710       (254 )     (1,340 )     22,491  
 
Net income (loss)
  $ 38,797       12,059       (535 )     (2,826 )     47,495  
 
 
Total assets at period end
  $ 9,131,959       3,579,989       125,262       4,575,618       17,412,828  

Three months ended March 31, 2004

 
                    Wealth and                
    Retail     Commercial     Investment             Consolidated  
(In thousands)   Banking     Banking     Services     Corporate     Total  
 
Net interest income
  $ 73,325       25,523       939       6,019       105,806  
Provision for loan losses
    2,240       4,383       71       (1,694 )     5,000  
 
Net interest income after provision
    71,085       21,140       868       7,713       100,806  
Noninterest income
    30,750       10,099       5,182       8,692       54,723  
Noninterest expense
    56,471       18,437       6,295       10,938       92,141  
 
Income (loss) before income taxes
    45,364       12,802       (245 )     5,467       63,388  
Income tax expense (benefit)
    15,075       4,254       (81 )     1,817       21,065  
 
Net income (loss)
  $ 30,289       8,548       (164 )     3,650       42,323  
 
 
Total assets at period end
  $ 7,216,250       2,935,747       109,728       4,828,545       15,090,270  

The Retail Banking segment includes insurance services, business and professional banking, consumer lending and deposit generation, health savings accounts and direct banking activities, which include the operation of automated teller machines and telebanking customer support and sales. The Retail Banking segment also includes the residential real estate lending, loan servicing and secondary marketing activities. The growth in net interest income compared to a year ago can be attributed to the increases in residential and consumer loans and lower cost deposits and the May 2004 acquisition of FIRSTFED AMERICA BANCORP, INC. (“FIRSTFED”). The increase in noninterest income includes deposit services fees from the growth in deposits as a result of the acquisition of FIRSTFED in May 2004 and the continued success of the High Performance Checking product. Noninterest expenses also rose as a result of the FIRSTFED acquisition.

The Commercial Banking segment includes middle market, specialized, equipment financing, asset-based and commercial real estate lending, deposit and cash management activities and financial advisory services. The results for the first three months of 2005 reflect the growth in equipment financing, middle market and commercial real estate loans, which was a primary reason for the 15% increase in net interest income from the 2004 period. Noninterest income and expense declined due to the sale of Duff & Phelps in March 2004.

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


Wealth and Investment Services (“WIA”) includes Webster Financial Advisors, Webster Investment Services and Fleming, Perry and Cox, which combine to provide comprehensive wealth management services for individuals and institutions. Its primary sources of revenue are fees from trust management activities and investment product sales.

Corporate includes the Treasury unit, which is responsible for managing the wholesale investment portfolio and funding needs. It also includes expenses not allocated to the business lines, the residual impact of methodology allocations such as the provision for loan losses and funds transfer pricing offsets.

Management uses certain methodologies to allocate income and expenses to the business lines. Funds transfer pricing assigns interest income and interest expense to each line of business on a matched maturity funding concept based on each business’s assets and liabilities. The provision for loan losses is allocated to business lines on an “expected loss” basis. Expected loss is an estimate of the average loss rate that individual credits will experience over an economic cycle, based on historical loss experiences and the grading assigned each loan. This economic cycle methodology differs from that used to determine our consolidated provision for loan losses, which is based on an evaluation of the adequacy of the allowance for loan losses considering the risk characteristics in the portfolio at a point in time. The difference between the sum of the provisions for each line of business determined using the expected loss methodology and the consolidated provision is included in Corporate. Indirect expenses are allocated to segments. These expenses include administration, finance, technology and processing operations and other support functions. Taxes are allocated to each segment based on the effective rate for the period shown.

NOTE 15: Derivative Financial Instruments

At March 31, 2005, Webster had outstanding interest rate swaps with a notional amount of $803 million. These swaps are hedging FHLB advances, repurchase agreements, senior notes and subordinated debt and qualify for fair value hedge accounting using the short cut method under SFAS No. 133. The swaps are used to transform these liabilities from fixed to floating rate. Of the total, $100 million of the interest rate swaps mature in 2005, $50 million in 2006, $200 million in 2007, $103 million in 2008, $200 million in 2013 and $150 million in 2014 and an equivalent amount of the hedged liabilities mature on these dates.

Additionally, Webster Bank had outstanding $200 million of swaptions, which give it the right, but not the obligation, to enter into $200 million of interest rate swaps, paying 6.15% fixed and receiving one month LIBOR. These swaptions are carried at fair value and mature in 2007. Changes in fair value are reflected in noninterest income.

Webster Bank transacts certain derivative products with its customer base. These customer derivatives are offset with matching derivatives with other counterparties. Exposure with respect to these derivatives is largely limited to nonperformance by either of the parties in the transaction – the customer or the other counterparty. The notional amount of customer derivatives and the offsetting counterparty derivatives each totaled $202.6 million at March 31, 2005. The customer derivatives and the offsetting matching derivatives are marked to market and any difference is reflected in noninterest income.

Certain derivative instruments, primarily forward sales of mortgage-backed securities (“MBSs”), are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to the closing and funds disbursement on a single-family residential mortgage loan, an interest-rate locked commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, which agree to deliver whole mortgage loans to various investors or issue MBSs, are established. At March 31, 2005, outstanding rate locks totaled approximately $203.5 million and the residential mortgage held for sale portfolio totaled $254.4 million. Forward sales, which include mandatory forward commitments of approximately $146.0 million and best efforts forward commitments of approximately $269.9 million at March 31,

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


2005, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. Webster Bank will still have certain execution risk, that is, risk related to its ability to close and deliver to its investors the mortgage loans it has committed to sell.

The interest rate locked loan commitments are recorded at fair value, with changes in fair value recorded in current period earnings. The changes in the fair value of forward sales commitments are also recorded to current period earnings. Loans held for sale are carried at the lower of aggregate cost or fair value. The changes in the fair value of forward sales commitments will be adjusted monthly based upon market interest rates and the level of locked loan commitments and unallocated forward sales commitments.

NOTE 16: Pension and Other Benefits

The following table provides information regarding net benefit costs for the periods shown:

                                 
(In thousands)   Pension Benefits         Other Benefits  
 
Three months ended March 31,   2005     2004     2005     2004  
 
Service cost
  $ 2,044       2,377     $        
Interest cost
    1,470       1,193       75       75  
Expected return on plan assets
    (1,449 )     (1,247 )            
Transition obligation
    (2 )     (2 )            
Amortization of prior service cost
    44       78       16       16  
Amortization of the net loss
    456       253       9       11  
 
Net periodic benefit cost
  $ 2,563       2,652     $ 100       102  
 

Webster plans to contribute at least an amount equal to the greater of the contribution required to meet the minimum funding standards under Internal Revenue Code Section 412 or the amount necessary to avoid an additional minimum liability as defined in SFAS No. 87 and No. 132. Additional contributions will be made as deemed appropriate by management in conjunction with the plan’s actuaries. For the year 2005, the preliminary estimated contribution ranges from $4.0 million to $5.0 million. As of March 31, 2005, no contributions have been made.

NOTE 17: Subsequent Events

On April 15, 2005, Webster Bank completed its previously announced divestiture of the two retail branch offices of State Bank. Webster retained the health savings account business only, which now operates as HSA Bank, a division of Webster Bank.

NOTE 18: Recent Accounting Pronouncements

In April 2005, the Securities and Exchange Commission (“SEC”) issued rules that amend the compliance dates for Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. Under SFAS No. 123R, calendar year companies that are not small business issuers were required to adopt this standard in the third quarter of 2005. However, the new SEC rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of next reporting period, that begins after June 15, 2005. For companies with a calendar year end, the new compliance date is January 1, 2006. As Webster has already adopted the provisions of SFAS No. 123, the delayed compliance date and adoption of SFAS No. 123R are not expected to have an impact on its consolidated financial statements.

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ITEM 2.
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
   

Forward Looking Statements

This report contains forward looking statements within the meaning of the Securities and Exchange Act of 1934, as amended. Actual results could differ materially from management expectations, projections and estimates. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of Webster’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting Webster’s operations, markets, products, services and prices. Some of these and other factors are discussed in Webster’s annual and quarterly reports previously filed with the Securities and Exchange Commission. Such developments could have an adverse impact on Webster’s financial position and results of operations. Except as required by law, Webster does not undertake to update any such forward looking statements.

Description of Business

Webster Financial Corporation (“Webster” or the “Company”), a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Delaware in 1986. Webster, on a consolidated basis, at March 31, 2005 had assets of $17.4 billion and shareholders’ equity of $1.6 billion. Webster’s principal assets are all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”), and Webster Insurance, Inc. (“Webster Insurance”). Webster, through its various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and eastern New York State, and equipment financing, asset-based lending, mortgage origination and insurance premium financing throughout the United States. Webster Bank provides business banking, retail banking, health savings accounts (“HSA”), consumer financing, mortgage banking, trust and investment services through 154 banking offices, 291 ATM’s and its Internet website (www.websteronline.com). In 2004, Webster Bank converted from a federal savings bank to national bank charter, regulated by the Office of the Comptroller of the Currency. Webster’s common stock is traded on the New York Stock Exchange under the symbol of “WBS”. Webster’s financial reports can be accessed through its website within 24 hours of filing with the SEC.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2004 Annual Report on Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, valuation of goodwill/other intangible assets and analysis for impairment, deferred income taxes and pension and other post retirement benefits as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2004 Management’s Discussion and Analysis included in the Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Summary

Webster reported net income of $47.5 million in the first quarter 2005, compared to $42.3 million in the year-ago period, an increase of 12%. Net income per diluted share was $.88 in the first quarter compared to $.90 in the year-ago period. The year over year comparison is impacted by the amount of securities gains and acquisitions. Net income per share included $756,000, or $0.01, from gains on sale of securities in the current first quarter while the year ago period included $5.5 million, or $0.08, of gains. The first quarter of 2005 results are inclusive of Webster’s acquisitions of FIRSTFED, First City Bank and EWBI, all of which were completed subsequent to the 2004 first quarter. These acquisitions added loans of $1.6 billion and deposits of $1.9 billion. Diluted shares outstanding in the first quarter of 2005 included 6.7 million shares issued in the FIRSTFED acquisition.

The increase in net income for the current quarter was driven by a 13% growth in total revenues partially offset by higher operating expenses. The increase in total revenue, consisting of net interest income and total noninterest income, was primarily due to a $22.4 million or 21% increase in net interest income. Total noninterest expenses for the current quarter reflects the impact of acquisitions and continued investments to support Webster’s strategic growth objectives.

Selected financial highlights are presented in the table below.

                 
    At or for the  
    Three months ended March 31,  
(In thousands, except per share data)   2005     2004  
 
Earnings and Per Share Data
               
Net interest income
  $ 128,232       105,806  
Total noninterest income
    53,028       54,723  
Total noninterest expense
    107,774       92,141  
Net income
    47,495       42,323  
 
               
Net income per diluted common share
  $ 0.88       0.90  
Dividends declared per common share
    0.23       0.21  
Book value per common share
    29.07       26.18  
Tangible book value per common share
    16.26       19.60  
 
               
Diluted shares (average)
    54,217       47,059  
 
               
Selected Ratios
               
Return on average assets
    1.11 %     1.15  
Return on average shareholders’ equity
    12.13       14.28  
Net interest margin
    3.32       3.09  
Efficiency ratio (a)
    59.46       57.40  
Tangible capital ratio
    5.08       6.02  
 
               
 


(a)   Noninterest expense as a percentage of net interest income plus noninterest income

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Net Interest Income

Net interest income was $128.2 million in the first quarter of 2005, compared to $105.8 million in the year-ago period an increase of $22.4 million or 21%. The increase over the prior year reflects double-digit growth in the loan portfolio and a higher net interest margin.

The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate.

                         
    Three months ended March 31,  
            2005 v. 2004          
 
    Increase (decrease) due to  
(In thousands)   Rate     Volume     Total  
 
Interest on interest-earning assets:
                       
Loans
  $ 9,750       30,446       40,196  
Loans held for sale
    20       1,642       1,662  
Securities and short-term investments
    3,668       (6,064 )     (2,396 )
 
Total interest income
    13,438       26,024       39,462  
 
Interest on interest-bearing liabilities:
                       
Deposits
    2,816       7,222       10,038  
Borrowings
    7,805       (2,120 )     5,685  
 
Total interest expense
    10,621       5,102       15,723  
 
Net change in fully taxable-equivalent net interest income
  $ 2,817       20,922       23,739  
 

Webster’s net interest margin (annualized tax-equivalent net interest income as a percentage of average earning assets) improved 23 basis points to 3.32% from 3.09% in the year-ago period. The increase reflects the benefit of the balance sheet deleveraging program in the fourth quarter of 2004 and the impact of higher interest rates on earning asset yields. The deleveraging program involved the sale of $750 million of investment securities with the proceeds used to prepay approximately $500 million of FHLB advances and $250 million of overnight borrowing.

Interest Income

Total interest income on a fully tax-equivalent basis for the first quarter of 2005 increased $39.5 million, or 24%, from the prior year. Higher volumes of earning assets accounted for approximately two-thirds of the interest income increase. This increase is primarily due to growth in the loan portfolio, principally a result of the FIRSTFED acquisition. Total loans were $11.7 billion at March 31, 2005, an increase of 23% over the $9.5 billion a year ago. The yield on earning assets also increased, rising 44 basis points from the prior year’s first quarter primarily due to the higher interest rate environment than in the year ago first quarter. The loan portfolio accounted for the majority of the increase, as its yield increased 40 basis points and its contribution to total earning assets increased to 75% from 68% a year earlier.

Interest Expense

Total interest expense for the first quarter of 2005 increased $15.7 million, or 27%, from the prior year. The higher interest rate environment caused the cost of interest bearing liabilities to increase 20 basis points compared to the year ago period, and accounted for two-thirds of the increase in interest expense. The growth of deposits accounted for the remaining third of the increase. Deposit growth in the excess of loans and the deleveraging program reduced the reliance on higher cost borrowings.

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The following table shows the major categories of average assets and liabilities together with their respective interest income or expense and the rates earned or paid by Webster.

                                                 
    Three months ended March 31,  
 
    2005     2004  
                    Fully Tax-                     Fully Tax-  
    Average             Equivalent     Average             Equivalent  
(In thousands)   Balance     Interest(a)     Yield/Rate     Balance     Interest(a)     Yield Rate  
 
Assets
                                               
Interest-earning assets:
                                               
Loans
  $ 11,685,261       158,787       5.45 %   $ 9,368,169       118,591       5.05 %
Securities
    3,750,867       42,690       4.54 (b)     4,331,501       45,161       4.22 (b)
Loans held for sale
    213,952       2,732       5.11       85,276       1,070       5.02  
Short-term investments
    26,855       141       2.10       35,759       66       0.73  
 
                                   
Total interest-earning assets
    15,676,935       204,350       5.22       13,820,705       164,888       4.78  
 
                                       
Noninterest-earning assets
    1,401,298                       889,392                  
 
                                           
Total assets
  $ 17,078,233                     $ 14,710,097                  
 
                                           
 
                                               
Liabilities and shareholders’ equity Interest-bearing liabilities:
                                               
Demand deposits
  $ 1,345,366             %   $ 1,058,849             %
Savings, NOW & money market deposits
    5,604,282       12,959       0.94       4,539,038       8,984       0.80  
Certificates of deposit
    3,692,642       22,909       2.52       2,789,750       16,846       2.43  
 
                                   
Total interest-bearing deposits
    10,642,290       35,868       1.37       8,387,637       25,830       1.24  
 
                                   
 
                                               
Federal Home Loan Bank advances
    2,407,150       18,587       3.09       2,428,829       19,004       3.10  
Repurchase agreements and other short-term debt
    1,659,605       9,543       2.30       2,093,519       5,431       1.03  
Other long-term debt
    681,120       10,188       5.98       532,760       8,198       6.16  
 
                                   
Total borrowings
    4,747,875       38,318       3.23       5,055,108       32,633       2.56  
 
                                   
Total interest-bearing liabilities
    15,390,165       74,186       1.94       13,442,745       58,463       1.74  
 
                                         
 
                                               
Noninterest-bearing liabilities
    112,679                       72,405                  
 
                                           
Total liabilities
    15,502,844                       13,515,150                  
 
                                               
Preferred stock of subsidiary corporation
    9,577                       9,577                  
 
Shareholders’ equity
    1,565,812                       1,185,370                  
 
                                           
Total liabilities and shareholders’ equity
  $ 17,078,233                     $ 14,710,097                  
 
                                           
 
                                               
Fully tax-equivalent net interest income
            130,164                       106,425          
Less: tax equivalent adjustments
            (1,932 )                     (619 )        
 
                                           
 
Net interest income
            128,232                       105,806          
 
                                           
 
                                               
Interest-rate spread
                    3.28 %                     3.04 %
 
                                           
Net interest margin
                    3.32 %                     3.09 %
 
                                           


(a)   On a fully tax-equivalent basis.
 
(b)   For purposes of this computation, unrealized (losses) gains of $(12.9) million and $49.8 million for 2005 and 2004, respectively, are excluded from the average balance for rate calculations.

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Provision for Loan Losses

Management performs a quarterly review of the loan portfolio and based on this review determines the level of provision necessary to maintain an adequate loan loss allowance. Several factors influence the amount of the provision, primarily growth and mix in the loan portfolio, net charge-offs, the risk of loss on nonperforming and classified loans and the level of economic activity. The provision for loan losses was $3.5 million for the quarter, compared to $5.0 million the same period a year ago. The reduction in the provision was primarily the result of improved asset quality and the reduced level of net charge-offs. Net charge-offs in the first quarter of 2005 were $1.1 million, compared to $3.1 million for the same period a year earlier. The annualized net charge-off ratio for the current quarter was 0.04% of average total loans, down from 0.13% a year earlier, an indication of strong asset quality.

At March 31, 2005 and December 31, 2004, the allowance for loan losses totaled $152.5 million and $150.1 million, or 1.30% and 1.28% of total loans, and represented 334% and 416% of nonperforming loans, respectively.

For further information see the “Loan Portfolio Review and Allowance for Loan Loss Methodology”, included in the “Financial Condition – Asset Quality” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 30 through 32 of this report.

Noninterest Income

Total noninterest income of $53.0 million for the three months ended March 31, 2005 declined $1.7 million, or 3%, from the same period a year ago. This decline is the result of lower security gains in the current first quarter of $4.7 million from a year ago and the loss of Duff & Phelps revenue, which totaled to $3.8 million in the 2004 first quarter. Adjusted for these items, noninterest income increased $6.9 million, or 15%, over the year ago quarter.

Revenues from deposit service fees, insurance, loan and loan servicing and wealth management grew 11% compared to a year ago. Contributing to this increase was higher deposit service fees resulting primarily from the growth in the number of accounts. Loan and loan servicing fees rose as a result of increased origination volumes and higher prepayment fees. Gain on sales of loans and loan servicing increased primarily as a result of increased volumes of mortgage originations through Webster’s People’s Mortgage Corporation subsidiary.

Noninterest Expenses

Total noninterest expenses for the first quarter ended March 31, 2005 were $107.8 million, compared with $92.1 million recorded in the same period a year ago. The increase of $15.7 million resulted from $7.4 million of additional expenses relating to the acquisitions of FIRSTFED, First City and EWBI, $1.7 million from additional investment in de novo branch expansion, $1.1 million of expenses related to the core systems conversion and the continued investment in personnel and technology to meet our strategic plan for growth.

Income Taxes

Income tax expense for the first quarter ended March 31, 2005 is higher than the prior year period primarily due to a higher level of income before taxes, partially offset by a lower effective tax rate. The effective tax rates for the three months ended March 31, 2005 and 2004 were approximately 32.1% and 33.2% respectively. The majority of the decline in the effective tax rate can be attributed to a higher level of tax-exempt income during the current period due to an increase in the municipal securities portfolio.

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Financial Condition

Total assets were $17.4 billion at March 31, 2005 compared with $17.0 million at December 31, 2004. Most of the increase occurred in loans held for sale and investment securities. The increase in loans held for sale is attributable to higher mortgage origination volume awaiting delivery into the secondary markets and $98 million of loans from EWBI that were sold on April 15, 2005. Total deposits increased $461 million, including approximately $169 million in health savings account deposits (“HSA”) and $48.3 million of other deposits from EWBI. The remaining growth in deposits was driven by Webster’s High Performance Checking products and continued growth from its de novo branches in Fairfield County, Connecticut and Westchester County, New York.

On April 15, 2005, Webster Bank completed its previously announced divestiture of the two branch offices of EWBI, with deposits other than health savings accounts totaling $48 million and loans of $98 million sold as part of the divestiture. Webster retained the health savings account business only, which now operates as HSA Bank and is a division of Webster Bank.

Total equity was $1.6 billion at March 31, 2005, up $20 million from December 31, 2004. This net increase was primarily due to net income of $47 million that was partially offset by $12 million of dividend payments to common shareholders and a $19 million unfavorable change in unrealized gains (losses) on the available for sale securities portfolio.

Securities Portfolio

Webster maintains an investment portfolio that is primarily structured to provide a source of liquidity for its operating needs, to generate interest income and provide a means to balance interest rate sensitivity. At March 31, 2005 the investment portfolio totaled $3.8 billion, or 21.9% of total assets, compared with $3.7 billion, or 21.9%, at December 31, 2004 and $4.4 billion, or 29.4%, at March 31 a year ago. The increase is a result of purchases of $247.9 million during the quarter consisting mostly of available for sale securities, offset by sales and payments of $124.7 million and $28.1 million of unrealized losses on the available for sale portfolio. At both March 31, 2005 and December 31, 2004, the portfolio consisted primarily of mortgage-backed securities.

Loan Portfolio

At March 31, 2005, total loans were $11.7 billion relatively unchanged from the total at December 31, 2004. Growth in commercial loans of $90.0 million during the quarter was offset by declines in the residential, commercial real estate and consumer portfolios.

Most of the commercial loan growth occurred in Middle Market where loans were up $47.8 million, asset-based loans grew by $20.6 million, equipment finance by $18.9 million and small business by $17.9 million. Commercial Real Estate loans were flat at $1.7 billion as strong fourth quarter activity was partially offset by pay-offs and the sell-down of positions in the first quarter. Residential mortgages declined by 1% or $52.4 million as we allowed the portfolio to decline in this period of rising rates. Consumer loans totaled $2.6 billion and were down $29.3 million as the rising rate environment appeared to cause accelerated prepayments in the home equity line portfolio.

Commercial loans (including commercial real estate) represented 37.3% of the loan portfolio up from 36.7% at year end, while residential mortgage loans declined to 40.4% from 40.8%. The remaining portion of the loan portfolio consisted of home equity and other consumer loans.

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The following paragraphs highlight, by business segment, the lending activities in the various portfolios during the quarter. Refer to Webster’s 2004 Annual Report on Form 10-K, pages 4 and 5 for a more complete description of Webster’s lending activities and credit administration policies and procedures.

Commercial Lending

Middle Market

At March 31, 2005, Middle Market loans, including commercial and owner-occupied commercial real estate, totaled $998.0 million compared to $1.0 billion at December 31, 2004 and $748.6 million at March 31, 2004. Originations for the first quarter of 2005 totaled $101.3 million as compared to $47.2 million for the same period in 2004.

Asset-Based Lending

At March 31, 2005, Webster Business Credit Corporation (“WBCC”), an asset-based lending subsidiary, had total asset-based loans of $568.6 million compared to $547.9 million at year end and $539.3 million at March 31, 2004. In its direct originations, it generally establishes depository relationships with the borrower through cash management accounts. At March 31, 2005 and December 31, 2004, the total of these deposits was $41.7 million and $39.6 million, respectively. During the first quarter of 2005, WBCC funded loans of $71.4 million, with new commitments of $118.9 million compared to funding of $37.0 million with new commitments of $121.1 million for the same period in 2004.

Business and Professional Banking

The Business and Professional Banking Division administered a portfolio of approximately $467.7 million at March 31, 2005, a 5.7% increase from $438.8 million at December 31, 2004. At March 31, 2004, the portfolio totaled $449.8 million. Included in the portfolio is $255.6 million of loans secured by commercial real estate. Originations totaled $74.7 million for the first quarter of 2005 compared to $54.2 million in the same period in 2004. Webster Bank is a leader among Connecticut-based banks for providing loans of $1 million and under to small businesses in the state. At March 31, 2005, small business deposit balances totaled $1.1 billion, compared to $1.2 billion at December 31, 2004.

Equipment Financing

Center Capital Corporation (“Center Capital”), a nationwide equipment financing company, had a portfolio which totaled $646.6 million at March 31, 2005, compared to $627.7 million at December 31, 2004 and $527.0 million a March 31, 2004. Center Capital originated $78.3 million in loans during the first quarter, compared to $66.4 million during the same period a year ago.

Insurance Premium Financing

Budget Installment Corp. (“BIC”) finances commercial property and casualty insurance premiums for businesses throughout the United States. BIC had total loans outstanding of $78.1 million at March 31, 2005 compared to $79.7 million at December 31, 2004, and $63.5 million a year ago. Loans originated in the first quarter of 2005 totaled $15.9 million, compared to $43.9 million for the same period in 2004.

Commercial Real Estate Lending

At March 31, 2005 and December 31, 2004, commercial real estate loans totaled $1.7 billion. Included in these loans are owner-occupied loans originated by the Middle Market and Business and Professional Banking divisions at March 31, 2005 of $577.8 million, $581.7 million at December 31, 2004 and $411.5 million at March 31, 2004. During the first quarter of 2005, originations totaled $24.9 million, a decrease of $65.5 million, or 72.5%, from the same period a year earlier.

Consumer Finance

Mortgage Banking and Residential Mortgage Loans

For the three months ended March 31, 2005, originated residential mortgage loans totaled $548.6 million compared to $419.0 million for the same period in 2004. During the first quarter of 2005, long-term interest rates fell and application activity increased, which will also positively impact the second quarter volume. A majority of this originated loan volume, including servicing, is sold in the secondary market. At March 31, 2005 and December 31, 2004, there were

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$254.4 million and $147.2 million, respectively, of residential mortgage loans held for sale in the secondary market. See Notes 5 and 6 of Notes to Consolidated Interim Financial Statements within this report for further information.

The residential mortgage loan portfolio totaled $4.7 billion and $4.8 billion at March 31, 2005 and December 31, 2004, respectively. At March 31, 2005, approximately $1.1 billion, or 24%, of the total residential mortgage loan portfolio were adjustable rate loans. Adjustable rate mortgage loans are offered at initial interest rates discounted from the fully-indexed rate. Adjustable rate loans originated during 2005 when fully-indexed, will be 2.75% above the constant maturity one-year U.S. Treasury yield index. At March 31, 2005, approximately $3.6 billion, or 76% of the total residential mortgage loan portfolio, was fixed rate.

Consumer Loans

At March 31, 2005, consumer loans totaled $2.6 billion, a decrease of $29.3 million, or 1%, compared to the prior year end. At March 31, 2004, consumer loans were $2.2 billion. Originations during the first quarter of 2005 totaled $183.9 million compared to $188.8 million for the same period a year earlier. The decline occurred primarily in floating rate home equity loans and is attributable to the higher interest rate environment.

Asset Quality

Loan Portfolio Review and Allowance for Loan Loss Methodology

Webster devotes significant attention to maintaining asset quality through conservative underwriting standards, active servicing of loans and aggressive management of nonperforming and classified assets. The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable losses inherent in the current loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, loss experience, specific problem loans, economic conditions and other pertinent factors which, in management’s judgment, deserve current recognition in estimating loan losses. In assessing the specific risks inherent in the portfolio, management takes into consideration the risk of loss on nonperforming loans and classified loans, including an analysis of the collateral for these loans.

The adequacy of the allowance is subject to judgment in its determination. Actual loan losses could differ materially from management’s estimate if actual loss factors and conditions differ significantly from the assumptions utilized. These factors and conditions include the general economic conditions within Webster’s marketplace and nationally, trends within industries where the loan portfolio is concentrated, real estate values, interest rates and the financial condition of individual borrowers. While management believes the allowance for loan losses is adequate at March 31, 2005, actual results in future periods may prove different and these differences could be significant. Management considers the adequacy of the allowance for loan losses to be a critical accounting policy.

See the Allowance for Loan Losses Methodology section within Management’s Discussion and Analysis on pages 28 through 30 of Webster’s 2004 Annual Report on Form 10-K for additional information.

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Nonperforming Assets

The amount of nonperforming assets increased to $49.1 million, or 0.28% of total assets, at March 31, 2005 from $39.2 million, or 0.23% of total assets, at December 31, 2004 and up from $41.3 million, or 0.27% of total assets, at March 31, 2004.

The following table details nonperforming assets:

                         
 
    March 31,     December 31,     March 31,  
(In thousands)   2005     2004     2004  
 
Loans accounted for on a nonaccrual basis:
                       
Commercial:
                       
Commercial banking
  $ 16,172       13,502       16,283  
Equipment financing
    3,800       3,383       5,561  
 
Total commercial
    19,972       16,885       21,844  
Commercial real estate
    15,609       8,431       5,583  
Residential
    7,528       7,796       7,941  
Consumer
    1,586       1,894       604  
 
Total nonaccruing loans
    44,695       35,006       35,972  
Loans past due 90 days or more and accruing:
                       
Commercial
    940       1,122       568  
 
Total nonperforming loans
    45,635       36,128       36,540  
Loans held for sale
    492              
Foreclosed properties
    3,003       3,038       4,722  
 
Total nonperforming assets
  $ 49,130       39,166       41,262  
 

Total nonperforming loans increased $9.5 million during the first quarter, primarily due to three credits, two of which are commercial real estate loans and the third a commercial loan. Management considers each of these loans well secured and does not expect to realize losses from their resolution.

The allowance for loan losses at March 31, 2005 was $152.5 million and represented 334% of nonperforming loans and 1.30% of total loans. This compares with an allowance of $150.1 million that represented 416% of nonperforming loans and 1.28% of total loans at December 31, 2004. The allowance was $123.6 million, or 338% of nonperforming loans and 1.30% of total loans, at March 31, 2004. For additional information on the allowance, see Note 7 of Notes to Consolidated Interim Financial Statements elsewhere in this report.

Not included in the totals above are performing troubled debt restructurings of $441,000, $20,000 and $609,000 at March 31, 2005, December 31, 2004 and March 31, 2004, respectively.

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Other Past Due Loans

The following table sets forth information as to loans past due 30–89 days.

                                                 
    March 31, 2005     December 31, 2004     March 31, 2004  
 
    Principal     Percent of loans     Principal     Percent of loans     Principal     Percent of loans  
(Dollars in thousands)   Balances     total     Balances     total     Balances     total  
 
Past due 30–89 days:
                                               
Residential
  $ 8,187       0.07 %   $ 11,296       0.10 %   $ 7,618       0.08 %
Commercial
    12,694       0.11       21,338       0.18       10,400       0.11  
Commercial real estate
    10,263       0.09       6,611       0.06       19,336       0.20  
Consumer
    3,930       0.03       3,777       0.03       2,050       0.02  
 
Total
  $ 35,074       0.30 %   $ 43,022       0.37 %   $ 39,404       0.41 %
 

The overall decrease in loans past due 30-89 days of $7.9 million at March 31, 2005 from December 31, 2004 is primarily due to decreases of $8.6 million in commercial loans and $3.1 million in residential mortgage loans, partially offset by an increase of $3.7 million in commercial real estate loans.

Deposits

Total deposits increased $460.5 million, or 4%, to $11.0 billion at March 31, 2005 from December 31, 2004 and $2.4 billion, or 28%, from March 31, 2004. The increases occurred in most categories of deposits. The growth since year end was a result of HSA Bank, de novo branches and a funding diversification strategy, which raised deposits through the issuance of institutional certificates of deposit and Eurodollar deposits. The percentage of total deposits representing core deposits decreased to 64.8% at March 31, 2005, from 66.5% at December 31, 2004 and 67.7% at March 31 a year ago. This decline is due to the movement of core deposits into higher yielding certificates of deposit.

Borrowing and Other Debt Obligations

Total borrowed funds, including other long-term debt, decreased $33.9 million, or 1%, to $4.7 billion at March 31, 2005 from December 31, 2004. The decrease is primarily a result of the fourth quarter deleveraging program and deposit growth that was utilized to reduce our reliance on wholesale funding. See Notes 11 and 12 of Notes to Consolidated Interim Financial Statements for additional information.

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Asset/Liability Management and Market Risk

Interest rate risk is the sensitivity of earnings to changes in interest rates and the sensitivity of the economic value of interest-sensitive assets and liabilities over short-term and long-term time horizons. The Asset/Liability Management Committee manages interest rate risk to maximize net income and net economic value over time in changing interest rate environments, within limits set by the Board of Directors. Management measures interest rate risk using simulation analyses to measure earnings and equity at risk. Earnings at risk is defined as the change in earnings from a base scenario due to changes in interest rates. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Economic value is measured as the net present value of future cash flows. Simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk is quantified and appropriate strategies are formulated and implemented.

Interest rate risk simulation analyses cannot precisely measure the impact that higher or lower rate environments will have on net income or net economic value. 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. Results may also vary based upon actual customer loan and deposit behaviors as compared with those simulated. These simulations assume that management does not take any action to mitigate any negative effects from changing interest rates.

The following table summarizes the estimated impact that gradual 100 and 200 basis point changes in interest rates over a twelve month period starting March 31, 2005 and December 31, 2004 might have on Webster’s net income for the subsequent twelve month period.

                                 
    -200 bp     -100 bp     +100 bp     +200 bp  
 
March 31, 2005
    -7.3 %     -2.3 %     +0.2 %     -0.1 %
December 31, 2004
    -9.7 %     -3.3 %     +0.4 %     -0.1 %

Interest rates are assumed to change up or down in a parallel fashion and net income results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Webster is well within policy limits for all scenarios. The policy limit for the -200 basis point scenario was suspended until the first quarter of 2005 due to the low level of interest rates. The reduction in risk to falling rates since the end of 2004 is due primarily to higher interest rates which have reduced mortgage prepayment risk in the securities and loan portfolios. The current interest rate scenario anticipates rates will rise gradually throughout 2005.

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The following table summarizes the estimated economic value of assets, liabilities and off-balance sheet contracts at March 31, 2005 and December 31, 2004 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points.

                                 
            Estimated     Estimated Economic Value  
    Book     Economic     Change  
(In thousands)   Value     Value     -100 BP     +100 BP  
 
March 31, 2005
                               
Assets
  $ 17,412,828       16,674,691       301,028       (370,718 )
Liabilities
    15,849,234       15,068,418       288,930       (253,852 )
Off-balance sheet contracts
            17,181       28,054       (26,629 )
                       
(Decrease) increase in net economic value
                    40,152       (143,495 )
Net change as % of base net economic value
                    2.5 %     (9.0 )%
 
                               
December 31, 2004
                               
Assets
  $ 17,020,597       16,430,957       246,773       (341,144 )
Liabilities
    15,476,623       14,842,477       276,937       (248,603 )
Off-balance sheet contracts
            (1,660 )     24,318       (22,979 )
                       
(Decrease) increase in net economic value
                    (5,846 )     (115,520 )
Net change as % of base net economic value
                    (0.4 )%     (7.3 )%

The book value of assets exceeded the estimated economic value at March 31, 2005 and December 31, 2004 because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $714.5 million and $694.2 million, respectively.

Changes in net economic value are primarily driven by changing durations of assets and liabilities and by changes in long term rates. Short-term rates have risen about 50 basis points since year end while long term rates have risen by about 30 basis points. As noted in the table above, the estimated volatility in economic value of equity has not changed significantly from year end for a 100 basis point rise in interest rates. The increase in long term rates has had a greater effect in the -100 basis point scenario as the economic incentive to prepay mortgage assets has diminished.

Liquidity and Capital Resources

Liquidity management allows Webster to meet its cash needs at a reasonable cost under various operating environments. Liquidity is actively managed and reviewed in order to maintain stable, cost-effective funding to support the balance sheet. Liquidity comes from a variety of sources such as the cash flow from operating activities, including principal and interest payments on loans and investments, unpledged securities, which can be sold or utilized as collateral to secure funding and by the ability to attract new deposits. Webster’s goal is to maintain a strong increasing base of core deposits to support its growing balance sheet.

Management monitors current and projected cash needs and adjusts liquidity, as necessary. Webster has a detailed liquidity contingency plan, which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity risks.

At March 31, 2005 and December 31, 2004, FHLB advances outstanding totaled $2.3 billion and $2.6 billion, respectively. Webster Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $478.3 million and $651.6 million at March 31, 2005 and December 31, 2004 respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $724.8 million at March 31, 2005 or used to collateralize other borrowings, such as repurchase agreements.

The main sources of liquidity at the holding company are dividends from Webster Bank, investment income and net proceeds from capital offerings and borrowings. The main uses of liquidity are the payment of dividends to common stockholders, repurchases of common stock, purchases of investment securities and the payment of interest on borrowings and capital securities. There are certain regulatory restrictions on the payment of dividends by Webster Bank to the holding company. At March 31, 2005, $169.1 million of retained earnings were available for the payment of

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dividends to the holding company. Webster also maintains $75.0 million in available revolving lines of credit with correspondent banks.

On July 23, 2002, Webster announced a stock buyback program of 2.4 million shares, or approximately 5 percent of its 48.0 million shares of outstanding common stock as of the announcement date. Through March 31, 2005, Webster has repurchased 1,871,803 shares of its common stock under the buyback program, with 528,197 remaining shares to be repurchased. On July 22, 2003, a stock buyback program was announced consisting of 2.3 million shares. To date, no shares have been repurchased under this program.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, on pages 33 and 34 under the caption “Asset/Liability Management and Market Risk”.

ITEM 4. CONTROLS AND PROCEDURES

As of March 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing 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.

As part of its ongoing integration activities, Webster is continuing to incorporate its controls and procedures into EWBI, acquired in the first quarter of 2005.

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PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to any purchase made by or on behalf of Webster or any “affiliated purchaser”, as defined by Section 240.10b-18(a)(3) of the Securities and Exchange Act of 1934, of shares of Webster common stock.

                                 
 
                    Total Number of     Maximum Number of  
                    Shares Purchased as     Shares that May Yet  
                    Part of Publicly     Be Purchased under  
    Total Number of     Average Price Paid     Announced Plans or     the Plans or  
       Period   Shares Purchased     Per Share     Programs     Programs  
 
January 1-31, 2005
    35,520     $ 49.73       4,337       2,828,197  
 
February 1-28, 2005
                      2,828,197  
 
March 1-31, 2005
    28,067       44.80             2,828,197  
 
Total
    63,587     $ 47.55       4,337          
 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

                Not applicable.

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

                Not applicable.

ITEM 5. OTHER INFORMATION

                Not applicable.

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ITEM 6. EXHIBITS

     
3.1
  Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Corporation’s Annual Report on Form 10-K filed within the SEC on March 29, 2000 and incorporated herein by reference).
 
   
3.2
  Certificate of Amendment (filed as Exhibit 3.2 to the Corporation’s Annual Report on Form 10-K filed with the SEC on March 29, 2000 and incorporated herein by reference).
 
   
3.3
  Bylaws, as amended effective April 19, 2004 (filed as Exhibit 3.3 to the Corporation’s Quarterly Report on Form 10-Q with the SEC on May 10, 2004 and incorporated herein by reference).
 
   
4.1
  Specimen common stock certificate (filed as Exhibit 4.1 to the Corporation’s Registration Statement on Form S-3 (File No. 333-81563) filed with the SEC on June 25, 1999 and incorporated herein by reference).
 
   
4.2
  Rights Agreement, dated as of February 5, 1996, between the Corporation and Chemical Mellon Shareholder Services, L.L.C. (filed as Exhibit 1 to the Corporation’s Current Report on Form 8-K filed with the SEC on February 12, 1996 and incorporated herein by reference).
 
   
4.3
  Amendment No. 1 to Rights Agreement, entered into as of November 4, 1996, by and between the Corporation and ChaseMellon Shareholder Services, L.L.C. (filed as an exhibit to the Corporation’s Current Report on Form 8-K filed with the SEC on November 25, 1996 and incorporated herein by reference).
 
   
4.4
  Amendment No. 2 to Rights Agreement, entered into as of October 30, 1998, between the Corporation and American Stock Transfer & Trust Company (filed as Exhibit 1 to the Corporation’s Current Report on Form 8-K filed with the SEC on October 30, 1998 and incorporated herein by reference).
 
   
10.1
  Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed with the SEC on February 4, 2005 and incorporated herein by reference).
 
   
10.2
  Form of Non-Competition Agreement, dated as of January 31, 2005, by and between Webster Financial Corporation and the following executives: James C. Smith, William T. Bromage, William J. Healy, Joseph J. Savage, and Jeffrey N. Brown (filed as Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed with the SEC on February 4, 2005 and incorporated herein by reference).
 
   
10.3
  Form of Amendment to Change of Control Agreement, dated as of January 31, 2005, by and between Webster Financial Corporation and the following executives: James C. Smith, William T. Bromage, William J. Healy, Joseph J. Savage, Jeffrey N. Brown, Jo D. Keeler and Harriet Munrett Wolfe (filed as Exhibit 10.3 to the Corporation’s Current Report on Form 8-K filed with the SEC on February 4, 2005 and incorporated herein by reference).
 
   
31.1
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
   
31.2
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
 
   
32.1
  Written Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
   
32.2
  Written Statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

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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 FINANCIAL CORPORATION    
                                    Registrant    
 
           
Date: May 9, 2005
  By:   /s/   William J. Healy    
           
              William J. Healy    
              Executive Vice President and    
              Chief Financial Officer    
              Principal Financial Officer    

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