Webster Financial - 10-Q quarterly report FY

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 June 30, 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) 465-4364

(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 July 31, 2005 was53,861,929.

INDEX


	Page No.
PART I – FINANCIAL INFORMATION

Item 1. Interim Financial Statements (unaudited)

Consolidated Statements of Condition at June 30, 2005 and December 31, 2004		3

Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004		4

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2005 and 2004		6

Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2005 and 2004		7

Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		8

Notes to Consolidated Interim Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures about Market Risk		38

Item 4. Controls and Procedures		38

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 3. Defaults upon Senior Securities		39

Item 4. Submission of Matters to a Vote of Security Holders		40

Item 5. Other Information		40

Item 6. Exhibits		41

SIGNATURE		42

EXHIBITS
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

2

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)


	June 30,			December 31,
(In thousands, except share and per share data)	2005			2004

Assets:
Cash and due from depository institutions	$	322,376			248,825
Short-term investments		13,088			17,629
Securities (Note 4):
Trading, at fair value		1,409			—
Available for sale, at fair value		2,649,930			2,494,406
Held to maturity (fair value of $1,205,985 and $1,234,629)		1,196,368			1,229,613
Loans held for sale (Note 5)		245,174			147,211
Loans (Notes 6 and 7)		11,654,866			11,562,663
Accrued interest receivable		67,380			63,406
Goodwill (Note 8)		642,732			623,298
Cash surrender value of life insurance		233,129			228,120
Premises and equipment		171,579			149,069
Intangible assets (Note 8)		65,655			70,867
Deferred tax asset (Note 9)		63,616			70,988
Prepaid expenses and other assets		144,895			114,502

Total assets	$	17,472,197			17,020,597


Liabilities and Shareholders’ Equity:
Deposits (Note 10)	$	11,579,234			10,571,288
Federal Home Loan Bank advances (Note 11)		2,126,437			2,590,335
Securities sold under agreement to repurchase and other short-term borrowings (Note 12)		1,345,910			1,428,483
Other long-term debt		674,117			680,015
Accrued expenses and other liabilities		126,011			196,925

Total liabilities		15,851,709			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 June 30, 2005 and December 31, 2004
Issued – 53,862,604 shares at June 30, 2005 and 53,639,467 shares at December 31, 2004		539			536
Paid-in capital		612,925			605,696
Retained earnings		1,010,773			942,830
Less: Treasury stock, at cost; 55,213 shares at June 30, 2005 and 11,000 shares at December 31, 2004		(2,613	)		(547	)
Accumulated other comprehensive loss		(10,713	)		(4,541	)

Total shareholders’ equity		1,610,911			1,543,974

Total liabilities and shareholders’ equity	$	17,472,197			17,020,597

See accompanying Notes to Consolidated Interim Financial Statements.

3

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2005		2004		2005		2004

Interest Income:
Loans	$	166,967		129,084	$	325,754		247,675
Securities and short-term investments		42,684		45,162		83,583		89,770
Loans held for sale		2,964		2,139		5,696		3,209

Total interest income		212,615		176,385		415,033		340,654


Interest Expense:
Deposits (Note 10)		44,099		29,172		79,967		55,002
Federal Home Loan Bank advances and other borrowings		28,032		24,793		56,162		49,228
Other long-term debt		10,649		8,953		20,837		17,151

Total interest expense		82,780		62,918		156,966		121,381

Net interest income		129,835		113,467		258,067		219,273
Provision for loan losses (Note 7)		2,000		5,000		5,500		10,000

Net interest income after provision for loan losses		127,835		108,467		252,567		209,273

Noninterest Income:
Deposit service fees		21,747		19,250		40,876		36,435
Insurance revenue		10,562		10,596		22,364		22,234
Loan fees		7,274		7,305		16,203		13,954
Wealth and investment services		6,028		5,849		11,423		10,965
Gain on sale of loans and loan servicing, net		3,012		5,321		5,548		6,346
Increase in cash surrender value of life insurance		2,302		2,177		4,540		4,131
Gain on sale of securities, net		710		5,616		1,466		11,116
Financial advisory services		—		—		—		3,808
Other income		2,013		964		4,256		2,812

Total noninterest income		53,648		57,078		106,676		111,801

Noninterest Expenses:
Compensation and benefits		57,854		53,659		115,756		106,786
Occupancy		10,810		8,402		21,669		16,767
Furniture and equipment		11,611		8,993		22,409		16,634
Intangible assets amortization (Note 8)		5,009		4,582		9,911		8,674
Professional services		3,972		2,938		7,742		5,837
Marketing		3,664		3,630		6,947		6,614
Conversion and infrastructure costs		3,506		—		4,640		—
Other expenses		17,079		14,975		32,205		28,008

Total noninterest expenses		113,505		97,179		221,279		189,320

Income before income taxes		67,978		68,366		137,964		131,754
Income taxes		21,720		22,523		44,211		43,588

Net Income	$	46,258		45,843	$	93,753		88,166

See accompanying Notes to Consolidated Interim Financial Statements.

4

CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued


	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2005		2004		2005		2004

Net income	$	46,258		45,843	$	93,753		88,166

Basic earnings per share	$	0.86		0.92	$	1.75		1.84
Diluted earnings per share		0.85		0.91		1.73		1.81
Dividends paid per common share		0.25		0.23		0.48		0.44

Average shares outstanding:
Basic		53,618		49,699		53,594		47,922
Diluted		54,278		50,475		54,244		48,767

See accompanying Notes to Consolidated Interim Financial Statements.

5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Three months ended June 30,
(In thousands)	2005			2004

Net Income	$	46,258			45,843
Other comprehensive income (loss), net of tax:
Unrealized net holding gain (loss) on securities available for sale arising during period (net of income tax expense (benefit) of $6,723 and $(41,265) for 2005 and 2004, respectively)		12,629			(67,595	)
Reclassification adjustment for net security gains included in net income (net of income tax expense of $232 and $2,112 for 2005 and 2004, respectively)		(427	)		(3,922	)
Reclassification adjustment for cash flow hedge gain amortization included in net income		(42	)		(42	)
Reclassification adjustment for amortization of unrealized loss (gain) upon transfer of securities to held to maturity (net of income tax)		276			(73	)

Other comprehensive income (loss)		12,436			(71,632	)

Comprehensive income (loss)	$	58,694			(25,789	)


	Six months ended June 30,
(In thousands)	2005			2004

Net Income	$	93,753			88,166
Other comprehensive loss, net of tax:
Unrealized net holding loss on securities available for sale arising during year (net of income tax benefit of $(3,128) and $(24,323) for 2005 and 2004, respectively)		(5,661	)		(41,431	)
Reclassification adjustment for net gains included in net income (net of income tax expense of $485 and $4,016 for 2005 and 2004, respectively)		(902	)		(7,457	)
Reclassification adjustment for cash flow hedge gain amortization included in net income		(84	)		(84	)
Reclassification adjustment for amortization of unrealized loss (gain) upon transfer of securities to held to maturity (net of income tax)		475			(136	)

Other comprehensive loss		(6,172	)		(49,108	)

Comprehensive income	$	87,581			39,058

See accompanying Notes to Consolidated Interim Financial Statements.

6

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

Six months ended June 30, 2004:
Balance, December 31, 2003	$	495			412,020			833,357			(112,713	)		19,736			1,152,895
Net income for the six months ended June 30, 2004		—			—			88,166			—			—			88,166
Dividends paid:
$.44 per common share		—			—			(19,926	)		—			—			(19,926	)
Exercise of stock options		—			(826	)		—			6,452			—			5,626
Common stock repurchased		—			—			—			(2,438	)		—			(2,438	)
Common stock issued in acquisition		36			164,110			1			108,650			—			272,797
Common stock retired		(1	)		1			—			—			—			—
Stock-based compensation		—			2,855			—			49			—			2,904
Net unrealized loss on securities available for sale, net of taxes		—			—			—			—			(48,888	)		(48,888	)
Amortization of deferred hedging gain		—			—			—			—			(84	)		(84	)
Amortization of unrealized gain on securities transferred to held to maturities, net of taxes		—			—			—			—			(136	)		(136	)

Balance, June 30, 2004	$	530			578,160			901,598			—			(29,372	)		1,450,916


Six months ended June 30, 2005:
Balance, December 31, 2004	$	536			605,696			942,830			(547	)		(4,541	)		1,543,974
Net income for the six months ended June 30, 2005		—			—			93,753			—			—			93,753
Dividends paid:
$.48 per common share		—			—			(25,810	)		—			—			(25,810	)
Exercise of stock options		3			4,289			—			—			—			4,292
Common stock repurchased		—			—			—			(4,699	)		—			(4,699	)
Stock-based compensation		—			2,940			—			2,633			—			5,573
Net unrealized loss on securities available for sale, net of taxes		—			—			—			—			(6,563	)		(6,563	)
Amortization of deferred hedging gain		—			—			—			—			(84	)		(84	)
Amortization of unrealized loss on securities transferred to held to maturity, net of taxes		—			—			—			—			475			475

Balance, June 30, 2005	$	539			612,925			1,010,773			(2,613	)		(10,713	)		1,610,911

See accompanying Notes to Consolidated Interim Financial Statements.

7

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six months ended June 30,
(In thousands)	2005			2004

Operating Activities:
Net income	$	93,753			88,166
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses		5,500			10,000
Depreciation and amortization		9,890			15,454
Amortization of intangible assets		9,911			8,674
Stock-based compensation		5,573			2,904
Net gain on sale of foreclosed properties		(17	)		(183	)
Net gain on sale of securities		(1,387	)		(11,473	)
Net gain on sale of loans and loan servicing		(5,548	)		(6,346	)
Increase in cash surrender value of life insurance		(4,540	)		(4,131	)
Net (gain) loss on trading securities		(79	)		357
Increase in trading securities		(1,329	)		(1,746	)
Loans originated for sale		(859,732	)		(664,076	)
Proceeds from sale of loans originated for sale		767,317			686,251
Increase in interest receivable		(3,037	)		(6,981	)
Decrease (increase) in prepaid expenses and other assets		(21,088	)		83,937
Decrease in accrued expenses and other liabilities		(76,718	)		(42,120	)
Proceeds from surrender of life insurance contracts		792			—

Net cash (used) provided by operating activities		(80,739	)		158,687

Investing Activities:
Purchases of available for sale securities		(511,125	)		(1,011,873	)
Purchases of held to maturity securities		(42,556	)		(113,758	)
Proceeds from maturities and principal payments of available for sale securities		208,099			569,629
Proceeds from maturities and principal payments of held to maturity securities		75,736			2,505
Proceeds from sales of available for sale securities		139,428			1,513,448
Net decrease in short-term investments		113,017			5,102
Net increase in loans		(2,084	)		(524,487	)
Proceeds from sale of foreclosed properties		1,262			3,037
Net purchases of premises and equipment		(30,678	)		(20,712	)
Net cash paid for acquisitions		(27,846	)		(163,016	)

Net cash (used) provided by investing activities		(76,747	)		259,875

Financing Activities:
Net increase in deposits		810,705			486,554
Proceeds from FHLB advances		17,962,500			35,525,157
Repayment of FHLB advances		(18,421,065	)		(36,054,776	)
Net decrease in federal funds purchased and securities sold under agreement to repurchase		(84,886	)		(465,108	)
Other long-term debt issued		—			149,933
Repayment of other long-term debt		(10,000	)		—
Cash dividends to common shareholders		(25,810	)		(19,926	)
Exercise of stock options		4,292			5,626
Common stock repurchased		(4,699	)		(2,438	)

Net cash provided (used) by financing activities		231,037			(374,978	)

Increase in cash and cash equivalents		73,551			43,584
Cash and cash equivalents at beginning of period		248,825			209,234

Cash and cash equivalents at end of period	$	322,376			252,818

See accompanying Notes to Consolidated Interim Financial Statements.

8

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued


	Six months ended June 30,
(In thousands)	2005		2004

Supplemental Disclosures:
Income taxes paid	$	45,697		35,393
Interest paid		161,881		115,607

Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed properties	$	546		1,114

Purchase Transactions:
Fair value of noncash assets acquired	$	235,693		2,639,554
Fair value of liabilities assumed		210,786		2,568,359
Fair value of common stock issued		—		272,797

Sale Transactions:
Fair value of noncash assets sold	$	105,656		4,562
Fair value of liabilities sold	56,237			983

See accompanying Notes to Consolidated Interim Financial Statements.

9

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 six months ended June 30, 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 June 30, 2005 and 2004, Webster had a fixed stock-based compensation plan that covered employee and non-employee directors. Effective 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 and six months ended June 30, 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.

10

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 June 30,						Six months ended June 30,
(In thousands, except per share data)	2005			2004			2005			2004

Net income, as reported	$	46,258			45,843		$	93,753			88,166
Add: Stock option compensation expense included in reported net income, net of related tax effects		1,211			909			2,281			1,399
Deduct: Total stock option compensation expense determined under fair value based method for all awards, net of related tax effects		(1,211	)		(1,090	)		(2,281	)		(1,491	)

Pro forma net income	$	46,258			45,662		$	93,753			88,074


Earnings per share:
Basic — as reported	$	0.86			0.92		$	1.75			1.84
— pro forma		0.86			0.92			1.75			1.84


Diluted — as reported	$	0.85			0.91		$	1.73			1.81
— pro forma		0.85			0.90			1.73			1.81

In addition, the cost of restricted stock granted is reflected in compensation and benefits expense and totaled $393,000 and $297,000, net of taxes, for the three months ended June 30, 2005 and 2004, respectively, and $743,000 and $583,000, net of taxes for the six months ended June 30, 2005 and 2004, respectively.

See Note 17, 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 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.

J. Bush & Co.

On June 29, 2005, Webster announced the completion of its acquisition of the assets of J. Bush & Co., a New Haven based investment management firm. J. Bush & Co., which will retain its current name and operate as a division of Webster’s wealth and investment advisors group, brings to Webster over $200 million in assets under management.

11

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 4: Securities

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


	June 30, 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								$	1,409								$	—


Available for sale:
Municipal bonds and notes	$	30		—		—			30	$	390		—		—			390
Corporate bonds and notes		201,725		4,837		(3,297	)		203,265		192,076		6,192		(1,895	)		196,373
Equity securities (a)		247,230		6,612		(481	)		253,361		262,776		9,893		(18	)		272,651
Mortgage-backed securities		2,215,364		154		(22,244	)		2,193,274		2,043,666		212		(18,886	)		2,024,992

Total available for sale	$	2,664,349		11,603		(26,022	)		2,649,930	$	2,498,908		16,297		(20,799	)		2,494,406


Held to maturity:
Municipal bonds and notes	$	379,270		12,132		(363	)		391,039	$	342,264		7,494		(550	)		349,208
Mortgage-backed securities		817,098		405		(2,557	)		814,946		887,349		196		(2,124	)		885,421

Total held to maturity	$	1,196,368		12,537		(2,920	)		1,205,985	$	1,229,613		7,690		(2,674	)		1,234,629


(a)		As of June 30, 2005, the fair value of equity securities consisted of FHLB stock of $150.0 million, FRB stock of $37.9 million, common stock of $45.5 million and preferred stock of $20.0 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 as of June 30, 2005, segregated by length of time in a continuous unrealized loss position.


	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	$	31,037		(970	)		20,173		(2,327	)		51,210		(3,297	)
Equity securities		8,524		(481	)		—		—			8,524		(481	)
Mortgage-backed securities		1,108,128		(6,250	)		967,985		(15,994	)		2,076,113		(22,244	)

Total available for sale	$	1,147,689		(7,701	)		988,158		(18,321	)		2,135,847		(26,022	)

Held to maturity:
Municipal bonds and notes	$	20,956		(177	)		10,845		(186	)		31,801		(363	)
Mortgage-backed securities		656,957		(2,557	)		—		—			656,957		(2,557	)

Total held to maturity	$	677,913		(2,734	)		10,845		(186	)		688,758		(2,920	)

12

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

The following table similarly identifies temporarily impaired investment securities as of December 31, 2004.


	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	$	32,319		(320	)		15,321		(1,575	)		47,640		(1,895	)
Equity securities		409		(18	)		—		—			409		(18	)
Mortgage-backed securities		1,862,393		(18,886	)		—		—			1,862,393		(18,886	)

Total available for sale	$	1,895,121		(19,224	)		15,321		(1,575	)		1,910,442		(20,799	)

Held to maturity:
Municipal bonds and notes	$	39,279		(550	)		—		—			39,279		(550	)
Mortgage-backed securities		648,664		(2,124	)		—		—			648,664		(2,124	)

Total held to maturity	$	687,943		(2,674	)		—		—			687,943		(2,674	)

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. Seventy-two securities had an unrealized loss for twelve consecutive months or longer due to interest rates being higher at June 30, 2005 than at the time of purchase. Approximately 98 percent of the unrealized loss was concentrated in thirty-two mortgage-backed and four corporate securities. Mortgage-backed securities are rated AAA or carry an implied AAA credit rating. Three corporate securities are unrated but have undergone an internal credit review. One corporate security is A rated, and has never been downgraded. As a result of our credit review of the issuers, we have 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, we have the ability to hold these investments to maturity or full recovery of the unrealized loss.

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 $245.2 million and $147.2 million at June 30, 2005 and December 31, 2004, respectively. Included in the June 30, 2005 balance are approximately $3.9 million of commercial loans. The remainder of the loans held for sale at June 30, 2005 and all of the December 31, 2004 balance are residential mortgages.

At June 30, 2005 and December 31, 2004, residential mortgage origination commitments totaled $446.6 million and $284.4 million, respectively. Residential commitments outstanding at June 30, 2005 consisted of adjustable rate and fixed rate mortgages of $57.4 million and $389.2 million, respectively, at rates ranging from 1.0% to 10.75%. 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 June 30, 2005 and December 31, 2004, Webster also had outstanding commitments to sell residential mortgage loans of $445.6 million and $305.3 million, respectively.

At June 30, 2005 and December 31, 2004, Webster Bank serviced for others residential and commercial loans totaling $1.5 billion and $1.6 billion, respectively.

13

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 6: Loans

A summary of loans follows:


(In thousands)	June 30, 2005						December 31, 2004
	Amount			%			Amount			%

Residential mortgage loans	$	4,690,318			39.7	%	$	4,775,344			40.8	%
Commercial loans:
Commercial non-mortgage		1,481,998			12.6			1,409,155			12.0
Asset-based lending		612,489			5.2			547,898			4.7
Equipment financing		687,452			5.8			627,685			5.4

Total commercial loans		2,781,939			23.6			2,584,738			22.1
Commercial real estate		1,666,235			14.1			1,715,047			14.6
Consumer loans:
Home equity credit loans		2,639,297			22.3			2,606,161			22.2
Other consumer		31,899			0.3			31,485			0.3

Total consumer loans		2,671,196			22.6			2,637,646			22.5

Total loans		11,809,688			100.0	%		11,712,775			100.0	%
Less: allowance for loan losses		(154,822	)					(150,112	)

Loans	$	11,654,866					$	11,562,663

At June 30, 2005, loans included $19.4 million of net premiums and $34.6 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 $446.7 million and $523.3 million at June 30, 2005 and December 31, 2004, respectively.

At June 30, 2005 and December 31, 2004, unused portions of home equity credit lines extended were $1.3 billion and $1.2 billion, respectively. 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 $2.6 billion at June 30, 2005 and $2.9 billion at December 31, 2004. Consumer loan commitments totaled $45.4 million and $53.3 million at June 30, 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 June 30, 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

14

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

procedures in effect to monitor other credit and off-balance sheet products. At June 30, 2005, Webster’s standby letters of credit totaled $218.4 million and their fair value is not material to the unaudited interim financial statements.

NOTE 7: Allowance for Loan Losses

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


	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2005			2004			2005			2004

Balance at beginning of period	$	152,519			123,613		$	150,112			121,674
Provisions charged to operations		2,000			5,000			5,500			10,000
Allowance for purchased loans		—			20,081			—			20,081

Subtotal		154,519			148,694			155,612			151,755


Charge-offs		(1,811	)		(3,007	)		(4,275	)		(7,162	)
Recoveries		2,114			824			3,485			1,918

Net recoveries (charge-offs)		303			(2,183	)		(790	)		(5,244	)

Balance at end of period	$	154,822			146,511		$	154,822			146,511

Ratio of net recoveries (charge-offs) to average loans outstanding during the period (annualized)		0.01	%		(0.08	)%		(0.01	)%		(0.11	)%

Included in charge-offs are $775,000 of write-downs of loans transferred to held for sale during the first half of 2005.

15

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 8: Goodwill and Intangible Assets

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


	June 30,		December 31,
(In thousands)	2005		2004

Goodwill - not subject to amortization	$	642,732		623,298


Intangible assets:
Balances subject to amortization:
Core deposit intangibles	$	56,861		61,734
Other identified intangibles		6,950		7,289
Balances not subject to amortization:
Pension assets		1,844		1,844

Total intangible assets	$	65,655		70,867

Changes in the carrying amount of goodwill for the six months ended June 30, 2005 is as follows:


					Wealth and
	Retail		Commercial		Investment
(In thousands)	Banking		Banking		Advisors		Total

Balance at December 31, 2004	$	587,205		26,583		9,510		623,298
Purchase price adjustments		728		4,928		—		5,656
Purchase transactions		13,161		—		617		13,778

Balance at June 30, 2005	$	601,094		31,511		10,127		642,732

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 Eastern Wisconsin Bancshares purchase described in Note 3. Approximately $4.4 million of this amount relates to deposits held in the two retail branches that were divested on April 15, 2005, resulting in a net addition of $4.6 million with respect to this acquisition.

Amortization of intangible assets for the three and six months ended June 30, 2005, totaled $5.0 million and $9.9 million, respectively. 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)	$	19,913
2006		15,832
2007		7,777
2008		4,915
2009		4,742
Thereafter		20,543

16

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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 June 30, 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.


	June 30,			December 31,
(In thousands)	2005			2004

Deferred tax assets:
Allowance for loan losses	$	61,346			59,865
Net operating loss and tax credit carry forwards		11,210			13,800
Intangible assets		5,904			5,611
Net unrealized loss on securities available for sale		4,859			1,325
Compensation and employee benefit plans		4,594			10,005
Deductible acquisition costs		3,837			5,128
Purchase accounting and fair-value adjustments		—			991
Other		4,608			4,337

Total deferred tax assets		96,358			101,062
Less: valuation allowance		(14,954	)		(17,578	)

Deferred tax assets, net of valuation allowance		81,404			83,484


Deferred tax liabilities:
Equipment financing leases		5,285			3,386
Purchase accounting and fair-value adjustments		5,151			—
Mortgage servicing rights		3,246			3,619
Loan discounts		1,808			2,642
Other		2,298			2,849

Total deferred tax liabilities		17,788			12,496

Deferred tax asset	$	63,616			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.

17

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 10: Deposits

The following table summarizes the composition of deposits:


	June 30, 2005					December 31, 2004
			% of					% of
(In thousands)	Amount		total			Amount		total

Demand deposits	$	1,509,957		13.0	%	$	1,409,682		13.4	%
NOW accounts		1,640,692		14.2			1,368,213		12.9
Money market deposit accounts		1,892,664		16.4			1,996,918		18.9
Savings accounts		2,284,076		19.7			2,253,073		21.3
Certificates of deposit		4,251,845		36.7			3,543,402		33.5

Total	$	11,579,234		100.0	%	$	10,571,288		100.0	%

Interest expense on deposits is summarized as follows:


	Three months ended June 30,				Six months ended June 30,
(In thousands)	2005		2004		2005		2004

NOW accounts	$	2,060		990	$	3,287		1,618
Money market deposit accounts		9,305		6,873		16,911		12,065
Savings accounts		4,816		3,593		8,942		6,757
Certificates of deposit		27,918		17,716		50,827		34,562

Total	$	44,099		29,172	$	79,967		55,002

18

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 11: Federal Home Loan Bank Advances

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


	June 30, 2005				December 31, 2004
	Total				Total
(In thousands)	Outstanding		Callable		Outstanding		Callable

Fixed Rate:
1.86% to 6.96% due in 2005	$	952,868		45,000	$	1,607,368		45,000
2.18% to 6.31% due in 2006		366,114		—		368,695		—
4.09% to 7.45% due in 2007		343,535		—		244,648		—
3.93% to 5.93% due in 2008		175,349		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		35,341		35,000		35,370		35,000
3.99% to 6.60% due in 2011		41,530		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		420		—		430		—
2.51% to 3.75% due in 2023		387		—		391		—

		2,103,077		366,000		2,561,642		366,000

Unamortized premium		23,360				28,693

Total advances	$	2,126,437			$	2,590,335

Webster Bank had additional borrowing capacity of approximately $1.1 billion from the FHLB at June 30, 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 June 30, 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 June 30, 2005 and December 31, 2004 would have been increased by an additional $800.3 million and $913.6 million, respectively. At June 30, 2005 Webster Bank was in compliance with the FHLB collateral requirements.

19

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

The following table summarizes balances for other borrowings:


	June 30,		December 31,
(In thousands)	2005		2004

Securities sold under agreement to repurchase	$	927,889		1,117,040
Federal funds purchased		199,526		133,780
Treasury tax and loan		207,743		164,592
Other		92		1,286

		1,335,250		1,416,698
Unamortized premium		10,660		11,785

Total	$	1,345,910		1,428,483

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


	At or for the quarter ended
	June 30,			December 31,
(In thousands)	2005			2004

Repurchase agreements:
Quarter end balance	$	536,188			527,127
Quarter average balance		556,975			716,617
Highest month end balance during quarter		568,238			780,224
Weighted-average maturity (in months)		1.65			1.29
Weighted-average interest rate		2.33	%		1.86	%

20

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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 June 30, 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 June 30, 2005
Webster Financial Corporation
Total capital (to risk-weighted assets)	$	1,475,621		11.4	%	$	1,038,963		8.0	%	$	1,298,704		10.0	%
Tier 1 capital (to risk-weighted assets)		1,117,903		8.6			519,482		4.0			779,222		6.0
Tier 1 leverage capital ratio (to average assets)		1,117,903		6.7			666,072		4.0			832,591		5.0
Webster Bank, N.A.
Total capital (to risk-weighted assets)	$	1,538,726		12.0	%	$	1,023,136		8.0	%	$	1,278,920		10.0	%
Tier 1 capital (to risk-weighted assets)		1,183,904		9.3			511,568		4.0			767,352		6.0
Tier 1 leverage capital ratio (to average assets)		1,183,904		7.2			658,803		4.0			823,504		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.


	June 30,			December 31,
(In thousands)	2005			2004

Unrealized loss on available for sale securities (net of tax)	$	(9,024	)		(2,461	)
Unrealized loss upon transfer of available for sale securities to held to maturity (net of tax)		(2,963	)		(3,438	)
Deferred gain on hedge		1,274			1,358

Total	$	(10,713	)		(4,541	)

21

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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 Advisors. 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 second quarter and first six months of 2004 have been restated, to reflect changes in the methodologies adopted and reflected in the results for the second quarter and first six months of 2005. The following table presents the statement of income and total assets for Webster’s reportable segments.

Three months ended June 30, 2005


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Advisors			Corporate			Total

Net interest income	$	96,266		30,847		1,220			1,502			129,835
Provision for loan losses		3,226		5,162		81			(6,469	)		2,000

Net interest income after provision		93,040		25,685		1,139			7,971			127,835
Noninterest income		35,892		6,635		6,090			5,031			53,648
Noninterest expense		74,602		13,975		7,893			17,035			113,505

Income (loss) before income taxes		54,330		18,345		(664	)		(4,033	)		67,978
Income tax expense (benefit)		17,359		5,862		(212	)		(1,289	)		21,720

Net income (loss)	$	36,971		12,483		(452	)		(2,744	)		46,258


Total assets at period end	$	8,954,223		3,668,000		152,765			4,697,209			17,472,197

Three months ended June 30, 2004


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Advisors			Corporate			Total

Net interest income	$	83,982		27,504		1,151			830			113,467
Provision for loan losses		2,929		4,769		86			(2,784	)		5,000

Net interest income after provision		81,053		22,735		1,065			3,614			108,467
Noninterest income		35,909		6,204		5,982			8,983			57,078
Noninterest expense		66,787		13,050		7,328			10,014			97,179

Income (loss) before income taxes		50,175		15,889		(281	)		2,583			68,366
Income tax expense (benefit)		16,530		5,235		(93	)		851			22,523

Net income (loss)	$	33,645		10,654		(188	)		1,732			45,843


Total assets at period end	$	8,703,450		3,296,522		128,146			4,897,752			17,025,870

Six months ended June 30, 2005


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Advisors			Corporate			Total

Net interest income	$	192,142		60,255		2,289			3,381			258,067
Provision for loan losses		6,400		10,423		162			(11,485	)		5,500

Net interest income after provision		185,742		49,832		2,127			14,866			252,567
Noninterest income		70,463		13,290		11,639			11,284			106,676
Noninterest expense		144,703		27,008		15,218			34,350			221,279

Income (loss) before income taxes		111,502		36,114		(1,452	)		(8,200	)		137,964
Income tax expense (benefit)		35,731		11,573		(465	)		(2,628	)		44,211

Net income (loss)	$	75,771		24,541		(987	)		(5,572	)		93,753


Total assets at period end	$	8,954,223		3,668,000		152,765			4,697,209			17,472,197

22

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Six months ended June 30, 2004


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Advisors			Corporate			Total

Net interest income	$	160,433		53,691		2,230			2,919			219,273
Provision for loan losses		5,169		9,152		157			(4,478	)		10,000

Net interest income after provision		155,264		44,539		2,073			7,397			209,273
Noninterest income		66,659		16,303		11,164			17,675			111,801
Noninterest expense		123,258		31,487		13,623			20,952			189,320

Income (loss) before income taxes		98,665		29,355		(386	)		4,120			131,754
Income tax expense (benefit)		32,641		9,712		(128	)		1,363			43,588

Net income (loss)	$	66,024		19,643		(258	)		2,757			88,166


Total assets at period end	$	8,703,450		3,296,522		128,146			4,897,752			17,025,870

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. During 2004, the segment also included financial advisory services. The results for the first six months of 2005 reflect the growth in equipment financing, middle market and commercial real estate loans, which was a primary reason for the 12% increase in net interest income from the 2004 period. Noninterest income and expense declined due to the sale of Duff & Phelps in March 2004.

Wealth and Investment Advisors (“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.

23

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 15: Derivative Financial Instruments

At June 30, 2005, Webster had outstanding interest rate swaps with a notional amount of $703 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, $50 million of the interest rate swaps mature 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 generally 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 $219.4 million at June 30, 2005. The customer derivatives and the offsetting matching derivatives are marked to market and any changes in fair value are 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 (“rate locks”) 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 obligate the Company to deliver whole mortgage loans to various investors or issue MBSs, are established. At June 30, 2005, outstanding rate locks totaled approximately $299.2 million and the residential mortgage held for sale portfolio totaled $241.3 million. Forward sales, which include mandatory forward commitments of approximately $285.4 million and best efforts forward commitments of approximately $160.2 million at June 30, 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 rate locks 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.

24

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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 June 30,	2005			2004			2005		2004

Service cost	$	1,941			2,074			—		—
Interest cost		1,285			1,187			75		75
Expected return on plan assets		(1,741	)		(1,235	)		—		—
Transition obligation		(3	)		(2	)		—		—
Amortization of prior service cost		45			72			16		16
Amortization of the net loss		300			257			9		9

Net periodic benefit cost	$	1,827			2,353			100		100


	Pension Benefits						Other Benefits
Six months ended June 30,	2005			2004			2005		2004

Service cost	$	3,985			4,452			—		—
Interest cost		2,755			2,380			150		150
Expected return on plan assets		(3,190	)		(2,482	)		—		—
Transition obligation		(5	)		(5	)		—		—
Amortization of prior service cost		89			150			32		32
Amortization of the net loss		756			510			18		20

Net periodic benefit cost	$	4,390			5,005			200		202

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. In May 2005, a contribution of $10.0 million was made to the pension fund.

NOTE 17: 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 will not have an impact on its consolidated financial statements.

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, Accounting Changes and Error Corrections, which changes the requirements for accounting for and reporting a voluntary change in accounting principle. SFAS No. 154 requires retrospective application of such changes to prior periods’ financial statements unless it is impractical to do so. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

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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 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 (“SEC”). 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 June 30, 2005, had assets of $17.5 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 commercial banking, retail banking, health savings accounts (“HSA”), consumer financing, mortgage banking, trust and investment services through 154 banking offices, 291 ATMs and its Internet website (www.websteronline.com). For 2004, Webster’s voluntary turnover rate was 17%. 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 Management’s Discussion and Analysis included in the 2004 Annual Report on Form 10-K.

26

RESULTS OF OPERATIONS

Summary

Webster reported net income of $46.3 million in the second quarter of 2005, compared to $45.8 million in the year-ago period, an increase of 0.9%. Net income per diluted share was $0.85 in the second quarter compared to $0.91 in the year-ago period.

For the six months ended June 30, 2005, net income was $93.8 million compared to $88.2 million in the year-ago period, an increase of 6.3%. Net income per diluted share was $1.73 compared to $1.81 in the year-ago period.

The year over year comparison is impacted significantly by securities gains, the provision for loan losses and the effect of acquisitions. Net income per share included $1.5 million, or $0.02 per diluted share, from gains on sale of securities in the first six months of 2005 while the year ago period included $11.1 million, or $0.15, of gains. Diluted shares outstanding in the first half of 2005 included 6.7 million shares issued in the FIRSTFED acquisition. The provision for loan losses totaled $5.5 million for the first six months of 2005, a decline from $10.0 million the prior year period.

The increase in net income for the current year was driven by 10% 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 $38.8 million, or 18%, increase in net interest income. Total noninterest expenses for the current year reflects the impact of acquisitions, conversion and infrastructure costs and continued investments to support Webster’s strategic growth objectives.

Selected financial highlights are presented in the table below.


	At or for the					At or for the
	three months ended June 30,					six months ended June 30,
(In thousands, except per share data)	2005			2004		2005			2004

Earnings
Net interest income	$	129,835			113,467	$	258,067			219,273
Total noninterest income		53,648			57,078		106,676			111,801
Total noninterest expense		113,505			97,179		221,279			189,320
Net income		46,258			45,843		93,753			88,166

Net income per diluted common share	$	0.85			0.91	$	1.73			1.81
Dividends declared per common share		0.25			0.23		0.48			0.44
Book value per common share		29.94			27.37		29.94			27.37
Tangible book value per common share		17.18			15.02		17.18			15.02

Diluted shares (average)		54,278			50,475		54,244			48,767

Selected Ratios
Return on average assets		1.07	%		1.12		1.09	%		1.14
Return on average shareholders’ equity		11.57			13.86		11.85			14.06
Net interest margin		3.32			3.02		3.32			3.05
Efficiency ratio (a)		61.86			56.98		60.67			57.18
Tangible capital ratio		5.38			4.71		5.38			4.71


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

27

Net Interest Income

Net interest income was $129.8 million in the second quarter and $258.1 million for the first six months, compared to $113.5 million and $219.3 million for the same period a year ago and increase of $16.3 million, or 14.4%, for three months and $38.8 million, or 17.7%, for six months. The increases 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 June 30									Six months ended June 30,
	2005 v. 2004									2005 v. 2004
	Increase (decrease) due to									Increase (decrease) due to
(In thousands)	Rate			Volume			Total			Rate			Volume			Total

Interest on interest-earning assets:
Loans	$	20,932			16,952			37,884		$	30,116			47,964			78,080
Loans held for sale		(74	)		899			825			(39	)		2,526			2,487
Securities and short-term investments		5,570			(7,113	)		(1,543	)		(2,805	)		(1,134	)		(3,939	)

Total interest income		26,428			10,738			37,166			27,272			49,356			76,628

Interest on interest-bearing liabilities:
Deposits		9,001			5,926			14,927			11,656			13,309			24,965
Borrowings		12,157			(7,222	)		4,935			19,908			(9,288	)		10,620

Total interest expense		21,158			(1,296	)		19,862			31,564			4,021			35,585

Net change in fully taxable-equivalent net interest income	$	5,270			12,034			17,304		$	(4,292	)		45,335			41,043

Webster’s net interest margin for the quarter (annualized tax-equivalent net interest income as a percentage of average earning assets) improved 30 basis points to 3.32% from 3.02% 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 a larger increase in the yield on earning assets compared to the increase in the cost of rate bearing liabilities. 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 second quarter increased $37.2 million, or 20.9%, from the same period in the prior year and increased $76.6 million, or 22.4%, for the first six months of 2005 as compared to a year earlier. Higher volumes of earning assets for the six month period 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 for the second quarter were $11.7 billion at June 30, 2005, an increase of 12.3% over the $10.4 billion a year ago. The yield on earning assets for the second quarter increased by 72 basis points from the prior year’s second quarter primarily due to the higher interest rate environment than in the year ago second quarter. For the first six months, the yield on earning assets increased 58 basis points from the prior year six months period. The loan portfolio accounted for the majority of the increase, as its yield increased 57 basis points and its contribution to total earning assets increased to 74.3% from 68.4% a year earlier.

Interest Expense

Total interest expense for the second quarter of 2005 increased $19.9 million, or 31.6%, from the prior year. The higher interest rate environment caused the cost of interest bearing liabilities to increase 42 basis points compared to the year

28

ago period, and accounted for the entire increase in interest expense. Deposit growth in excess of loans and the deleveraging program reduced the reliance on higher cost borrowings. The six month period interest expense was $157.0 million, an increase of $35.6 million from the prior year period.

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 June 30,
	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	$	11,727,278		166,968			5.68	%	$	10,440,916			129,084			4.93	%
Securities		3,851,741		44,687			4.62	(b)		4,485,738	(a)		46,277			4.11	(b)
Loans held for sale		242,351		2,964			4.89			169,092			2,139			5.06
Short-term investments		13,260		131			3.91			29,891	(a)		84			1.11

Total interest-earning assets		15,834,630		214,750			5.40			15,125,637			177,584			4.68

Noninterest-earning assets		1,493,233								1,219,002

Total assets	$	17,327,863							$	16,344,639


Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand deposits	$	1,451,236		—			—	%	$	1,205,224			—			—	%
Savings, NOW & money market deposits		5,749,931		16,181			1.13			5,282,018			11,456			0.87
Time deposits		4,078,793		27,918			2.75			3,056,167			17,716			2.33

Total interest-bearing deposits		11,279,960		44,099			1.57			9,543,409			29,172			1.23


Federal Home Loan Bank advances		2,210,809		18,160			3.25			2,827,253			19,905			2.79
Fed funds and repurchase agreements		1,449,355		9,872			2.69			1,860,747			4,888			1.04
Other long-term debt		674,178		10,649			6.32			671,223			8,953			5.34

Total borrowings		4,334,342		38,681			3.54			5,359,223			33,746			2.50

Total interest-bearing liabilities		15,614,302		82,780			2.11			14,902,632			62,918			1.69


Noninterest-bearing liabilities		104,104								109,360

Total liabilities		15,718,406								15,011,992

Preferred stock of subsidiary corporation		9,577								9,577

Shareholders’ equity		1,599,880								1,323,070

Total liabilities and shareholders’ equity	$	17,327,863							$	16,344,639


Fully tax-equivalent net interest income				131,970									114,666
Less: tax equivalent adjustments				(2,135	)								(1,199	)


Net interest income				129,835									113,467


Interest-rate spread							3.29	%								2.99	%

Net interest margin							3.32	%								3.02	%


(a)		On a fully tax-equivalent basis.

(b)		For purposes of this computation, unrealized losses of $15.7 million and $21.1 million for 2005 and 2004, respectively, are excluded from the average balance for rate calculations.

29


	Six months ended June 30,
	2005								2004
						Fully Tax-								Fully Tax-
	Average					Equivalent			Average					Equivalent
(In thousands)	Balance		Interest (a)			Yield/Rate			Balance		Interest (a)			Yield

Assets
Interest-earning assets:
Loans	$	11,706,386		325,755			5.56	%	$	9,904,542		247,675			4.99	%
Securities		3,801,582		87,376			4.58	(b)		4,408,620		91,438			4.16	(b)
Loans held for sale		228,230		5,696			4.99			127,184		3,209			5.05
Short-term investments		20,020		273			2.71			32,825		150			0.90

Total interest-earning assets		15,756,218		419,100			5.31			14,473,171		342,472			4.73

Noninterest-earning assets		1,447,520								1,054,197

Total assets	$	17,203,738							$	15,527,368


Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand deposits	$	1,398,593		—			—	%	$	1,132,037		—			—	%
Savings, NOW & money market deposits		5,677,509		29,140			1.04			4,910,528		20,440			0.84
Time deposits		3,886,783		50,827			2.64			2,922,958		34,562			2.38

Total interest-bearing deposits		10,962,885		79,967			1.47			8,965,523		55,002			1.23


Federal Home Loan Bank advances		2,308,437		36,747			3.17			2,628,041		38,909			2.93
Fed funds and repurchase agreements		1,553,899		19,415			2.49			1,977,133		10,319			1.03
Other long-term debt		677,630		20,837			6.15			601,991		17,151			5.70

Total borrowings		4,539,966		76,999			3.38			5,207,165		66,379			2.53

Total interest-bearing liabilities		15,502,851		156,966			2.03			14,172,688		121,381			1.71

Noninterest-bearing liabilities		108,370								90,883

Total liabilities		15,611,221								14,263,571

Preferred stock of subsidiary corporation		9,577								9,577

Shareholders’ equity		1,582,940								1,254,220

Total liabilities and shareholders’ equity	$	17,203,738							$	15,527,368


Fully tax-equivalent net interest income				262,134								221,091
Less: tax equivalent adjustments				(4,067	)							(1,818	)


Net interest income				258,067								219,273


Interest-rate spread							3.28	%							3.02	%

Net interest margin							3.32	%							3.05	%


(a)		On a fully tax-equivalent basis.

(b)		For purposes of this computation, unrealized (losses) gains of $(15.7) million and $14.3 million for 2005 and 2004, respectively, are excluded from the average balance for rate calculations.

30

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 $2.0 million for the quarter and $5.5 million for the first six months, compared to $5.0 million and $10.0 million for the same periods 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 (recoveries) in the second quarter and first six months of 2005 were $(303,000), and $790,000 compared to $2.2 million and $5.2 million for the same periods a year earlier. The annualized net charge-off (recovery) ratio for the current quarter was (0.01)% of average total loans, down from 0.08% a year earlier, an indication of improved asset quality.

At June 30, 2005 and December 31, 2004, the allowance for loan losses totaled $154.8 million and $150.1 million, or 1.31% and 1.28% of total loans, and represented 369% 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 $53.6 million for the three months and $106.7 million for six months ended June 30, 2005 declined $3.4 million, or 6.0%, and $5.1 million, or 4.6%, from the same periods a year ago. This decline is the result of lower security gains, which were $0.7 million and $1.5 million for the 2005 periods compared with $5.6 million and $11.1 million for the same periods a year ago and the loss of Duff & Phelps revenue, which totaled $3.8 million for the first six months of 2004. Adjusted for these items, noninterest income increased $1.5 million, or 3.0%, for the quarter and $8.3 million, or 8.6%, for the first six months from the same periods a year ago.

Revenues from deposit service fees, loan and loan servicing and other fee income grew 17.5% for the quarter and 15.3% for the first six months compared to a year ago. Contributing to this increase was higher deposit service fees resulting primarily from the growth in the number of accounts and the acquisitions of FIRSTFED, First City and EWBI. Loan fees rose as a result of increased origination volumes and higher prepayment fees. Loan servicing income increased primarily as a result of increased volumes of mortgage loans serviced, acquired through the FIRSTFED acquisition.

Noninterest Expenses

Total noninterest expenses for the three and six months ended June 30, 2005 were $113.5 million, and $221.3 million compared with $97.2 million and $189.3 million recorded in the same periods a year ago, increases of $16.3 million for the quarter and $32.0 million for the first six months. The increases are the result of additional expenses relating to the acquisitions of FIRSTFED, First City and HSA of $9.2 million and $23.4 million for the quarter and first six months, respectively. Additional expense for the first six months included $1.7 million from additional investment in de novo branch expansion, $4.6 million of expenses related to the core systems conversion and the balance represents continued investment in personnel and technology to meet our strategic plan for growth.

Income Taxes

Income tax expense for the six months ended June 30, 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. For the second quarter of 2005, a lower level of earnings before taxes and a lower effective rate resulted in a lower income tax expense. The effective tax rates for the three and six months ended June 30, 2005 were approximately 32.0% and 32.1%, respectively, compared to 32.9% and 33.1% in the year ago periods. 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.

31

Financial Condition

Total assets were $17.5 billion at June 30, 2005 compared with $17.0 billion at December 31, 2004. Most of the increase occurred in loans, both held for sale and portfolio, and investment securities. Total deposits increased $1.0 billion, including approximately $187 million in health savings account deposits (“HSA”). The remaining growth in deposits was driven by continued growth from its de novo branches in Fairfield County, Connecticut and Westchester County, New York and a funding diversification strategy, which raised deposits through the issuance of institutional certificates of deposit and Eurodollar deposits.

Total equity was $1.6 billion at June 30, 2005, up $66.9 million from December 31, 2004. This net increase was primarily due to net income of $93.8 million that was partially offset by $25.8 million of dividend payments to common shareholders.

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 June 30, 2005 the investment portfolio totaled $3.8 billion, or 22.0% of total assets, compared with $3.7 billion, or 21.9%, at December 31, 2004 and $4.1 billion, or 24.3%, at June 30a year ago. The portfolio increase since December 31, 2004 is a result of purchases of $553.7 million during the year consisting mostly of available for sale securities, offset by sales and payments of $283.8 million and $8.8 million of unrealized losses on the available for sale portfolio. At both June 30, 2005 and December 31, 2004, the portfolio consisted primarily of mortgage-backed securities.

Loan Portfolio

At June 30, 2005, total loans were $11.8 billion, relatively unchanged from the total at December 31, 2004. Growth in commercial loans of $107.0 million during the quarter and $197.2 million for the first six months was partially offset by declines in the residential and commercial real estate portfolios.

Most of the commercial loan growth occurred in Middle Market where loans were up $84.9 million, asset-based loans grew by $64.6 million, equipment finance by $59.8 million and Business and Professional Banking by $17.2 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 during the first six months of 2005. Residential mortgages declined by 1.8% or $85.0 million as we allowed the portfolio to decline in this period of rising rates. Consumer loans totaled $2.7 billion, up $33.6 million from December 31, 2004.

Commercial loans (including commercial real estate) represented 37.7% of the loan portfolio, up from 36.7% at year end, while residential mortgage loans declined to 39.7% from 40.8%. The remaining portion of the loan portfolio consisted of home equity and other consumer loans.

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.

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Commercial Lending

Middle Market

At June 30, 2005, Middle Market loans, including commercial and owner-occupied commercial real estate, totaled $1.1 billion compared to $1.0 billion at December 31, 2004 and $978.7 million at June 30, 2004. Originations for the second quarter and six months of 2005 totaled $171.7 million and $273.0 million as compared to $68.5 million and $115.7 million for the same periods in 2004.

Asset-Based Lending

Webster Business Credit Corporation (“WBCC”) is Webster’s asset-based lending subsidiary. At June 30, 2005, asset-based loans totaled $612.5 million compared to $547.9 million at year end and $565.3 million at June 30, 2004. In its direct originations, WBCC generally establishes depository relationships with the borrower through cash management accounts. At June 30, 2005 and December 31, 2004, the total of these deposits was $23.8 million and $39.6 million, respectively. During the second quarter and first six months of 2005, WBCC funded loans of $31.3 million and $102.6 million, with new commitments of $69.9 million and $188.9 million, compared to funding of $34.6 million and $71.6 million, with new commitments of $105.4 million and $226.5 million, for the same periods in 2004.

Business and Professional Banking

The Business and Professional Banking Division administered a CT/NY portfolio of approximately $465.2 million at June 30, 2005, a 6.0% increase from $438.8 million at December 31, 2004. At June 30, 2005, the aggregate portfolio totaled $715.4 million, a 3.8% increase from $689.2 million at December 31, 2004. Included in the portfolio is $360.7 million of loans secured by commercial real estate. Originations for the second quarter and first six months of 2005 totaled $75.7 million and $150.4 million compared to $54.0 million and $108.2 million in the same periods 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 June 30, 2005, small business deposit balances totaled $1.3 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 $687.5 million at June 30, 2005, compared to $627.7 million at December 31, 2004 and $551.6 million at June 30, 2004. Center Capital originated $107.5 million and $185.8 million during the second quarter and first six months of 2005, respectively, compared to $79.8 million and $146.2 million during the same periods 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 $79.2 million at June 30, 2005 compared to $79.7 million at December 31, 2004, and $75.6 million a year ago. Loans originated in the second quarter and first six months of 2005 totaled $51.1 million and $102.1 million, respectively, compared to $52.8 million and $99.9 million for the same periods in 2004.

Commercial Real Estate Lending

At both June 30, 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 June 30, 2005 of $676.3 million, $581.7 million at December 31, 2004 and $598.7 million a year ago. During the second quarter and first six months of 2005, originations totaled $91.4 million and $116.3 million, representing decreases of $43.3 million and $108.8 million from the same periods a year earlier.

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Consumer Finance

Mortgage Banking and Residential Mortgage Loans

For the second quarter and six months ended June 30, 2005, originated residential mortgage loans totaled $665.1 million and $1.2 billion compared to $598.5 million and $1.0 billion for the same periods in 2004. During the second quarter of 2005, long-term interest rates fell and application activity increased, positively impacting the second quarter volume. A majority of this originated loan volume, including servicing, is sold in the secondary market. At June 30, 2005 and December 31, 2004, there were $245.2 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 June 30, 2005 and December 31, 2004, respectively. At June 30, 2005, approximately $1.1 billion, or 23.4%, of the total residential mortgage loan portfolio was adjustable rate loans. At June 30, 2005, approximately $3.6 billion, or 76.6% of the total residential mortgage loan portfolio, was fixed rate.

Consumer Loans

At June 30, 2005, consumer loans totaled $2.7 billion, an increase of $33.6 million, or 1.3%, compared to December 31, 2004. Originations during the second quarter and first six months of 2005 totaled $363.6 million and $547.5 million, compared to $301.7 million and $490.5 million for the same periods a year earlier.

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 June 30, 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 $44.2 million, or 0.25% of total assets, at June 30, 2005 from $39.2 million, or 0.23% of total assets, at December 31, 2004, but was down from $47.7 million, or 0.28% of total assets, at June 30, 2004.

The following table details nonperforming assets:


	June 30,		December 31,		June 30,
(In thousands)	2005		2004		2004

Loans accounted for on a nonaccrual basis:
Commercial:
Commercial banking	$	17,906		13,502		14,682
Equipment financing		3,466		3,383		5,021

Total commercial		21,372		16,885		19,703
Commercial real estate		11,654		8,431		13,757
Residential		6,690		7,796		8,599
Consumer		1,019		1,894		826

Total nonaccruing loans		40,735		35,006		42,885
Loans past due 90 days or more and accruing:
Commercial		1,167		1,122		1,213

Total nonperforming loans		41,902		36,128		44,098
Foreclosed properties		2,339		3,038		3,560

Total nonperforming assets	$	44,241		39,166		47,658

Total nonperforming loans decreased $3.7 million during the second quarter and increased $5.8 million during the first six months. The decrease is due to repayments and the increase is 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 June 30, 2005 was $154.8 million and represented 369% of nonperforming loans and 1.31% 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 $146.5 million, or 332% of nonperforming loans and 1.30% of total loans, at June 30, 2004. For additional information on the allowance, see Note 7 of Notes to Consolidated Interim Financial Statements elsewhere in this report.

Other Past Due Loans

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


	June 30, 2005					December 31, 2004					June 30, 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	$	10,288		0.09	%	$	11,296		0.10	%	$	13,405		0.12	%
Commercial		9,747		0.08			21,338		0.18			22,161		0.19
Commercial real estate		1,212		0.01			6,611		0.06			4,010		0.04
Consumer		5,479		0.05			3,777		0.03			3,004		0.03

Total	$	26,726		0.23	%	$	43,022		0.37	%	$	42,580		0.38	%

The overall decrease in loans past due 30-89 days of $16.3 million at June 30, 2005 from December 31, 2004 is primarily due to decreases of $11.6 million in commercial loans, $1.0 million in residential mortgage loans and $5.4 million in commercial real estate loans, partially offset by an increase of $1.7 million in consumer loans.

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Deposits

Total deposits increased $1.0 billion, or 9.5% to $11.6 billion at June 30, 2005 from December 31, 2004 and $1.2 billion, or 11.6%, from June 30, 2004. The increases occurred in most categories of deposits. The growth since year end was a result of the acquisition and growth in health savings accounts, 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 63.3% at June 30, 2005, from 66.5% at December 31, 2004 and 68.3% at June 30 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 $552.3 million, or 11.8%, to $4.1 billion at June 30, 2005 from December 31, 2004. The decrease is primarily a result of deposit growth in excess of loan 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.

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 June 30, 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

June 30, 2005		-7.1	%		-2.5	%		+0.5	%		0.0	%
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 at that time. 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. We are also farther away from assumed deposit rate floors as rates have risen. 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 June 30, 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
June 30, 2005
Assets	$	17,472,197		16,850,298			224,469			(305,029	)
Liabilities		15,861,241		15,193,373			272,166			(247,748	)
Off-balance sheet contracts				(2,745	)		29,561			(27,667	)

Decrease in net economic value							(18,136	)		(84,948	)
Net change as % of base net economic value							(1.1	)%		(5.1	)%

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 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 June 30, 2005 and December 31, 2004 because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $708.4 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. While short-term rates have risen about 100 basis points since year end, long-term rates have actually fallen by about 25 basis points. As noted in the table above, the estimated volatility in economic value of equity has increased modestly from year end for a 100 basis point fall in interest rates as the customers economic incentive to prepay mortgage assets increased slightly. The decrease in long-term rates had a slightly greater effect in the +100 basis point scenario due to the relatively greater slowdown in mortgage asset prepayments.

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 June 30, 2005 and December 31, 2004, FHLB advances outstanding totaled $2.1 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 $1.1 billion and $651.6 million at June 30, 2005 and December 31, 2004 respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $800.3 million at June 30, 2005 or used to collateralize other borrowings, such as repurchase agreements.

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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 June 30, 2005, $188.2 million of retained earnings were available for the payment of dividends to the holding company. Webster also maintains $75 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 June 30, 2005, Webster has repurchased 1,894,703 shares of its common stock under the buyback program, with 505,297 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.

Webster employees may vote their shares of Webster common stock held in the Company’s sponsored investment plans.

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 through 34 under the caption “Asset/Liability Management and Market Risk”.

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 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.

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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 Exchange Act of 1934, of shares of Webster common stock.


					Total Number of
					Shares Purchased as		Maximum Number of
					Part of Publicly		Shares that May Yet Be
	Total Number of		Average Price Paid		Announced Plans or		Purchased under the Plans or
Period	Shares Purchased		Per Share		Programs		Programs

April 1-30, 2005		38,116	$	44.10		22,900		2,805,297

May 1-31, 2005		—		—		—		2,805,297

June 1-30, 2005		—		—		—		2,805,297

Total		38,116	$	44.10		22,900		2,805,297

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

	(a)		The annual meeting of shareholders was held on April 21, 2005.

	(b)		The following individuals were re-elected as directors for a three-year term at the annual meeting: George T. Carpenter, John J. Crawford and C. Michael Jacobi. The other continuing directors are: Joel S. Becker, William T. Bromage, Robert A. Finkenzeller, Roger A. Gelfenbien, Laurence C. Morse, James C. Smith and Robert F. Stoico.

	(c)		The following matters were voted upon and approved by Webster’s shareholders at the 2005 Annual Meeting of Shareholders on April 21, 2005: (i) election of three directors to serve for three-year terms (Proposal 1), (ii) amendment to the Webster 1992 Stock Option Plan (Proposal 2), and (iii) ratification of the appointment of KPMG LLP as the independent auditors for Webster for the fiscal year ending December 31, 2005 (Proposal 3).

			The votes tabulated by an independent inspector of election, for the above-listed proposals were as follows:

			Proposal 1

			George T. Carpenter received 45,013,287 votes for election and 3,076,540 votes were withheld; John J. Crawford received 46,613,621 votes for election and 1,476,206 were withheld; and C. Michael Jacobi received 33,931,139 votes for election and 14,158,688 were withheld. There were no abstentions or broker non-votes for any of the nominees.

			Proposal 2

			Shareholders cast 45,335,215 votes for, 2,356,266 votes against and 400,256 abstentions.

			Proposal 3

			Shareholders cast 47,203,894 votes for, 787,929 votes against and 98,001 abstentions.

	(d)		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).

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: August 8, 2005	By:	/s/ William J. Healy

		William J. Healy Executive Vice President and Chief Financial Officer Principal Financial Officer

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