WEBSTER FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004.


[ ]		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) 578-2476

(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.

[X] Yes [ ] No

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

[X] Yes [ ] No

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock (par value $.01)		53,039,877

Class		Outstanding at July 31, 2004

Webster Financial Corporation and Subsidiaries

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)


	June 30,			December 31,
(In thousands, except share and per share data)	2004			2003
Assets:
Cash and due from depository institutions	$	252,818			209,234
Short-term investments		39,887			42,420
Securities (Note 4):
Trading, at fair value		1,944			555
Available for sale, at fair value		3,853,154			4,128,255
Held-to-maturity (fair value of $277,743 and $174,631)		284,392			173,371
Loans held for sale (Note 5)		153,396			89,830
Loans, net (Notes 6 and 7)		11,143,683			9,091,135
Accrued interest receivable		59,737			52,756
Goodwill (Note 9)		603,719			274,113
Cash surrender value of life insurance		224,082			180,556
Premises and equipment, net		132,842			95,631
Deferred tax asset, net (Note 8)		80,563			38,088
Intangible assets (Note 9)		77,533			56,816
Prepaid expenses and other assets		118,120			135,930

Total assets	$	17,025,870			14,568,690

Liabilities and Shareholders’ Equity:
Deposits (Note 10)	$	10,372,922			8,372,135
Federal Home Loan Bank advances (Note 11)		2,731,332			2,511,495
Federal funds purchased and securities sold under agreement to repurchase (Note 12)		1,670,594			1,892,138
Other long-term debt		695,417			532,760
Accrued expenses and other liabilities		95,112			97,690

Total liabilities		15,565,377			13,406,218

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, 2004 and December 31, 2003; Issued – 53,015,672 shares at June 30, 2004 and 49,512,045 at December 31, 2003		530			495
Paid-in capital		578,160			412,020
Retained earnings		901,598			833,357
Less: Treasury stock, at cost; no shares at June 30, 2004 and 3,235,826 shares at December 31, 2003		—			(112,713	)
Accumulated other comprehensive (loss) income		(29,372	)		19,736

Total shareholders’ equity		1,450,916			1,152,895

Total liabilities and shareholders’ equity	$	17,025,870			14,568,690

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three months ended June 30,				Six months ended June 30,
(In thousands, except per share data)	2004		2003		2004		2003
Interest Income:
Loans	$	129,084		114,734	$	247,675		227,944
Securities and short-term investments		45,162		45,772		89,770		8,723
Loans held for sale		2,139		4,231		3,209		97,517

Total interest income		176,385		164,737		340,654		334,184

Interest Expense:
Deposits (Note 10)		29,172		28,750		55,002		58,168
Federal Home Loan Bank advances and other borrowings		24,793		30,069		49,228		60,112
Other long-term debt		8,953		5,299		17,151		10,609

Total interest expense		62,918		64,118		121,381		128,889

Net interest income		113,467		100,619		219,273		205,295
Provision for loan losses (Note 7)		5,000		5,000		10,000		10,000

Net interest income after provision for loan losses		108,467		95,619		209,273		195,295

Noninterest Income:
Deposit service fees		19,250		17,529		36,435		34,419
Insurance revenue		10,596		9,980		22,234		20,944
Loan fees		7,305		4,723		13,954		10,628
Wealth and investment services		5,849		4,521		10,965		9,099
Gain on sale of securities, net		5,616		8,666		11,116		11,299
Gain on sale of loans and loan servicing, net		5,321		4,066		6,346		6,837
Increase in cash surrender value of life insurance		2,177		2,143		4,131		4,258
Financial advisory services		—		5,229		3,808		10,660
Other income		964		1,423		2,812		3,284

Total noninterest income		57,078		58,280		111,801		111,428

Noninterest Expenses:
Compensation and benefits		53,659		50,506		106,786		101,067
Occupancy		8,402		7,672		16,767		15,771
Furniture and equipment		8,993		7,575		16,634		15,096
Intangible amortization (Note 9)		4,582		3,968		8,674		7,930
Marketing		3,630		3,236		6,614		6,721
Professional services		2,938		2,994		5,837		5,472
Capital trust securities		—		2,743		—		5,665
Other expenses		14,975		14,505		28,008		28,283

Total noninterest expenses		97,179		93,199		189,320		186,005

Income before income taxes		68,366		60,700		131,754		120,718
Income taxes		22,523		20,090		43,588		40,171

Net Income	$	45,843		40,610	$	88,166		80,547

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three months ended June 30,
(In thousands)	2004			2003
Net Income	$	45,843			40,610
Other comprehensive loss, net of tax:
Unrealized net holding (loss) gain on securities available for sale arising during period (net of income tax effect of $(41,265) and $1,517, for 2004 and 2003, respectively)		(67,595	)		2,261
Reclassification adjustment for net gains included in net income (net of income tax benefit of $2,112 and $3,416 for 2004 and 2003, respectively)		(3,922	)		(5,150	)
Reclassification adjustment for cash flow hedge gain amortization included in net income		(42	)		(27	)
Reclassification adjustment for amortization of unrealized gain upon transfer of securities to held to maturity (net of income tax)		(73	)		—

Other comprehensive loss		(71,632	)		(2,916	)

Comprehensive (loss) income	$	(25,789	)		37,694


	Six months ended June 30,
(In thousands)	2004			2003
Net Income	$	88,166			80,547
Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities available for sale arising during year (net of income tax benefit of $(24,323) and $4,657, for 2004 and 2003, respectively)		(41,431	)		6,987
Reclassification adjustment for net gains included in net income (net of income tax effect of $4,016 and $4,456 for 2004 and 2003, respectively)		(7,457	)		(6,719	)
Deferred gain on cash flow hedge		—			1,690
Reclassification adjustment for cash flow hedge gain amortization included in net income		(84	)		(78	)
Reclassification adjustment for amortization of unrealized gain upon transfer of securities to held to maturity (net of income tax)		(136	)		—

Other comprehensive (loss) income		(49,108	)		1,880

Comprehensive income	$	39,058			82,427

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

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, 2003:
Balance, December 31, 2002	$	495			411,154			707,531			(134,318	)		50,596			1,035,458
Net income for the six months ended June 30, 2003		—			—			80,547			—			—			80,547
Dividends paid:
$.40 per common share		—			—			(18,251	)		—			—			(18,251	)
Exercise of stock options		—			(1,358	)		—			5,060			—			3,702
Common stock repurchased		—			—			—			(5,795	)		—			(5,795	)
Stock-based compensation		—			1,863			—			896			—			2,759
Net unrealized gain on securities available for sale, net of taxes		—			—			—			—			268			268
Repurchase of capital trust securities		—			(991	)		—			—			—			(991	)
Deferred gain from hedge, net of amortization		—			—			—			—			1,612			1,612

Balance, June 30, 2003	$	495			410,668			769,827			(134,157	)		52,476			1,099,309

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

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six months ended June 30,
(In thousands)	2004			2003
Operating Activities:
Net income	$	88,166			80,547
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses		10,000			10,000
Depreciation and amortization		15,454			18,217
Amortization of intangible assets		8,674			7,930
Stock-based compensation		2,904			2,759
Net gains on sale of foreclosed properties		(183	)		(67	)
Net gains on sale of securities		(11,473	)		(11,175	)
Net gains on sale of loans and servicing		(6,346	)		(6,837	)
Increase in cash surrender value of life insurance		(4,131	)		(4,258	)
Net loss (gain) on trading securities		357			(124	)
(Increase) decrease in trading securities		(1,746	)		1,983
Loans originated for sale		(664,076	)		(1,513,786	)
Proceeds from sale of loans originated for sale		686,251			1,604,725
(Increase) decrease in interest receivable		(6,981	)		567
Decrease in prepaid expenses and other assets		83,937			26,073
Decrease in accrued expenses and other liabilities		(42,120	)		(101,016	)

Net cash provided by operating activities		158,687			115,538

Investing Activities:
Purchases of available for sale securities		(1,011,873	)		(2,318,567	)
Purchases of held to maturity securities		(113,758	)		—
Proceeds from maturities and principal payments of available for sale securities		569,629			1,092,682
Proceeds from maturities of held to maturity securities		2,505			—
Proceeds from sales of available for sale securities		1,513,448			953,595
Net decrease (increase) in short-term investments		5,102			(5,075	)
Net increase in loans		(524,487	)		(772,448	)
Proceeds from sale of foreclosed properties		3,037			1,051
Net purchases of premises and equipment		(20,712	)		(7,618	)
Net cash from acquisition and sale transactions		(163,016	)		(27,447	)

Net cash provided (used) by investing activities		259,875			(1,083,827	)

Financing Activities:
Net increase in deposits		486,554			479,580
Proceeds from FHLB advances		35,525,157			20,261,731
Repayment of FHLB advances		(36,054,776	)		(20,238,930	)
Net (decrease) increase in federal funds purchased and securities sold under agreement to repurchase		(465,108	)		286,776
Other long-term debt issued		149,933			200,000
Redemption of capital trust securities		—			(12,342	)
Cash dividends to common shareholders		(19,926	)		(18,251	)
Exercise of stock options		5,626			3,702
Common stock repurchased		(2,438	)		(5,795	)

Net cash (used) provided by financing activities		(374,978	)		956,471

Increase (decrease) in cash and cash equivalents		43,584			(11,818	)
Cash and cash equivalents at beginning of period		209,234			266,463

Cash and cash equivalents at end of period	$	252,818			254,645

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 intercompany transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three and six months ended June 30, 2004 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 accounting principles generally accepted in the United States of America 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. The actual results of Webster could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for loan losses, the valuation allowance for the deferred tax asset and the determination of the obligation for pension and other post retirement benefits. 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, 2003.

NOTE 2: Stock-Based Compensation

At June 30, 2004 and 2003, Webster had a fixed stock-based compensation plan that covered employee and non-employee directors. During 2002, effective January 1, 2002, Webster adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, on a prospective basis, for all employee and non-employee stock options granted January 1, 2002 and thereafter. Prior to January 1, 2002, the provisions of APB No. 25 and related interpretations were applied for option grant accounting. Therefore, the cost related to this stock-based compensation included in the determination of net income for 2004 and 2003 is less than that which 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. Webster also grants restricted stock to senior management and directors.

Webster Financial Corporation and Subsidiaries

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 stock option awards in each of the periods presented.


	Three months ended June 30,						Six months ended June 30,
(In thousands, except per share data)	2004			2003			2004			2003
Net income, as reported	$	45,843			40,610		$	88,166			80,547
Add: Stock option compensation expense included in reported net income, net of related tax effects		909			537			1,399			1,006
Deduct: Total stock option compensation expense determined under fair value based method for all awards, net of related tax effects		(1,090	)		(1,051	)		(1,491	)		(2,034	)

Pro forma net income	$	45,662			40,096		$	88,074			79,519

Earnings per share:
Basic – as reported	$	0.92			0.89		$	1.84			1.77
– pro forma		0.92			0.88			1.84			1.75

Diluted – as reported	$	0.91			0.88		$	1.81			1.74
– pro forma		0.90			0.87			1.81			1.72

The fair value of each option is determined as of the grant date using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions used for grants issued during the second quarter and first six months of 2004, respectively, expected option term of 6.8 years, expected dividend yield of 2.00%, expected volatility of 30.59%, expected forfeiture rate of 5.00%, and weighted risk-free interest rate of 4.10% and 4.07%. For the second quarter and first six months of 2003, the following weighted-average assumptions were: expected option term of 8.6 and 8.7 years, expected dividend yield of 2.15%, expected volatility of 31.75%, expected forfeiture rate of 4.46% and weighted risk-free interest rate of 3.97%. The Black-Scholes model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, this model may not necessarily provide a reliable single measure of the fair value of employee stock options.

In addition, the cost of restricted stock granted is reflected in compensation and benefits expense and totaled $297,000 and $394,000, net of taxes, for the three months ended June 30, 2004 and 2003, and $583,000 and $789,000, net of taxes for the six month ended June 30, 2004 and 2003 respectively.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 3: Purchase and Sale Transactions

The following purchase and sale transactions have been completed during 2004. The results of operations of the acquired companies are included in the Consolidated Statements of Income subsequent to the date of acquisition.

Completed Transactions

Duff & Phelps, LLC

Webster sold its majority interest in Duff & Phelps, LLC, the Chicago-based financial advisory services and investment banking firm, to a private partnership group. Webster will maintain a strategic alliance with Duff & Phelps, with preferred customer status. The sale was completed on March 15, 2004.

Phoenix National Trust Company

On December 18, 2003, Webster Bank announced a definitive agreement to acquire Phoenix National Trust Company, (“Phoenix”), a wholly-owned subsidiary of the Phoenix Companies, Inc. The purchase was completed on March 31, 2004. Phoenix, which offered trust, custody and other financial services, was merged into Webster Trust Company, N.A., a subsidiary of Webster Bank.

New York Branch

On April 21, 2004, Webster Bank National Association (“Webster Bank”) completed the purchase of a banking branch with related deposits and loans from Hudson River Bank & Trust Company. The branch, located in Cohoes, New York, had deposit liabilities of approximately $11 million. This branch purchase was done as part of the overall charter change completed by Webster. The branch was closed and merged with Webster’s Scarsdale, New York branch.

FIRSTFED AMERICA BANCORP, INC.

As of the close of business on May 14, 2004, Webster completed its acquisition of FIRSTFED AMERICA BANCORP, INC. (“FIRSTFED”), headquartered in Swansea, Massachusetts, the holding company of First Federal Savings Bank of America (“First Federal”). The agreement was a combination cash and stock transaction valued at approximately $465 million, or $24.50 per common share of FIRSTFED stock, payable 60% in Webster common stock and 40% in cash. First Federal was a federally chartered thrift with $2.6 billion in assets as of December 31, 2003 and 26 branches; 19 in Massachusetts and 7 in Rhode Island.

FirstFed Trust Company

Webster sold its majority share in FirstFed Trust Company, N.A., to Coastline Trust Company, formerly MD Trust, LLC. The sale was completed on June 15, 2004.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 4: Securities

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


	June 30, 2004									December 31, 2003
	Amortized		Unrealized					Fair		Amortized		Unrealized					Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Trading:
Municipal bonds and notes								$	1,944								$	555

Available for Sale:
U.S. Treasury notes	$	201		—		(1	)		200		—		—		—			—
Municipal bonds and notes		1,096		1		(1	)		1,096		—		—		—			—
U.S. Government agency notes		—		—		—			—	$	73,821		96		(4,895	)		69,022
Corporate bonds and notes		155,456		5,228		(912	)		159,772		214,030		7,957		(2,124	)		219,863
Equity securities (a)		260,294		10,932		(1,250	)		269,976		163,783		17,202		(1,057	)		179,928
Mortgage-backed securities (b)		3,486,404		7,805		(72,099	)		3,422,110		3,649,955		29,033		(19,546	)		3,659,442

Total available for sale	$	3,903,451		23,966		(74,263	)		3,853,154	$	4,101,589		54,288		(27,622	)		4,128,255

Held to maturity:
Municipal bonds and notes	$	284,392		401		(7,050	)		277,743	$	173,371		1,348		(88	)		174,631

(a) As of June 30, 2004, the fair value of equity securities consisted of Federal Home Loan Bank (“FHLB”) stock of $227.5 million, and common stock of $42.5 million. The fair value of equity securities at December 31, 2003 consisted of FHLB stock of $134.0 million and common stock of $45.9 million.

(b) Includes mortgage-backed securities comprised of Fannie Mae, Freddie Mac, Government National Mortgage Association and non-agency issued mortgage-backed securities.

The following table depicts temporarily impaired investment securities:


	Less Than Twelve Months					Twelve Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(In thousands)	Value		Losses			Value		Losses			Value		Losses
Available for Sale:
U.S. Treasury notes	$	200		(1	)		—		—			200		(1	)
Municipal bonds and notes		150		(1	)		—		—			150		(1	)
Corporate bonds and notes		26,602		(912	)		—		—			26,602		(912	)
Equity securities		6,106		(480	)		3,673		(770	)		9,779		(1,250	)
Mortgage-backed securities		2,580,403		(52,277	)		534,929		(19,822	)		3,115,332		(72,099	)

Total available for sale	$	2,613,461		(53,671	)		538,602		(20,592	)		3,152,063		(74,263	)

Held to maturity:
Municipal bonds and notes	$	228,584		(7,050	)		—		—			228,584		(7,050	)

Available for sale mortgage-backed securities totaling $534.9 million as of June 30, 2004, had a $19.8 million unrealized loss for twelve consecutive months. These securities are rated AAA and continue to repay principal at par. Management believes that the market value decline of these securities is temporary resulting from the current interest rate environment and that full recovery of the original investment is likely.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 5: Loans Held for Sale

Loans held for sale totaled $153.4 million and $89.8 million at June 30, 2004 and December 31, 2003, respectively. These balances consisted of residential loans originated by Webster Bank and Peoples Mortgage Company (“PMC”). The activity for PMC is included for the period subsequent to the acquisition on May 14, 2004.

At June 30, 2004 and December 31, 2003, residential mortgage origination commitments totaled $319.2 million and $166.7 million, respectively. Residential commitments outstanding at June 30, 2004 consisted of adjustable rate and fixed rate mortgages of $82.4 million and $236.8 million, respectively, at rates ranging from 3.4% to 10.9%. Residential commitments outstanding at December 31, 2003 consisted of adjustable rate and fixed rate mortgages of $24.0 million and $142.7 million, respectively, at rates ranging from 3.9% to 7.8%. Commitments to originate loans generally expire within 60 days. At June 30, 2004 and December 31, 2003, Webster also had outstanding commitments to sell residential mortgage loans of $331.1 million and $149.6 million, respectively.

At June 30, 2004 and December 31, 2003, Webster Bank serviced for others residential and commercial loans totaling approximately $1.8 billion and $742.8 million, respectively. This increase is primarily due to the acquisition of FIRSTFED.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 6: Loans, Net

A summary of loans, net follows:


	June 30, 2004						December 31, 2003
(Dollars in thousands)	Amount			%			Amount			%
Residential mortgage loans	$	4,731,950			41.9	%	$	3,744,013			40.6	%
Commercial loans:
Commercial non-mortgage		1,338,552			11.9			1,007,696			10.9
Asset-based loans		565,320			5.0			526,933			5.8
Equipment financing		551,640			4.9			506,292			5.5

Total commercial loans		2,455,512			21.8			2,040,921			22.2
Commercial real estate		1,572,289			13.9			1,281,516			13.9
Consumer loans:
Home equity credit lines		1,586,290			14.1			1,467,251			15.9
Fixed home equity loans		912,100			8.1			649,971			7.1
Other consumer		32,053			0.2			29,137			0.3

Total consumer loans		2,530,443			22.4			2,146,359			23.3

Total loans		11,290,194			100.0	%		9,212,809			100.0	%
Less: allowance for loan losses		(146,511	)					(121,674	)

Loans, net	$	11,143,683					$	9,091,135

At June 30, 2004, loans, net included $19.8 million of net premiums and $31.1 million of net deferred costs, compared with $255,000 of net premiums and $29.0 million of net deferred costs at December 31, 2003. The unadvanced portions of residential and commercial construction loans totaled $334.2 million and $247.4 million at June 30, 2004 and December 31, 2003, respectively.

At June 30, 2004 and December 31, 2003, unused portions of home equity credit lines extended were $1.2 billion. Unused commercial and commercial real estate lines of credit, letters of credit, standby letters of credit, equipment financing commitments and outstanding commercial loan commitments totaled $2.4 billion at June 30, 2004 and $1.8 billion at December 31, 2003. Consumer loan commitments totaled $24.9 million and $14.2 million at June 30, 2004 and December 31, 2003, 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, 2004 and December 31, 2003. 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.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. At June 30, 2004, Webster’s standby letters of credit totaled $159.3 million. At June 30, 2004, the fair value of stand-by letters of credit is not material to the unaudited interim financial statements.

NOTE 7: Allowance for Loan Losses

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


	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2004			2003			2004			2003
Balance at beginning of period	$	123,613			118,596		$	121,674			116,804
Provisions charged to operations		5,000			5,000			10,000			10,000
Allowance for purchased loans		20,081			—			20,081			146

Subtotal		148,694			123,596			151,755			126,950

Charge-offs		(3,007	)		(4,872	)		(7,162	)		(8,746	)
Recoveries		824			515			1,918			1,035

Net charge-offs		(2,183	)		(4,357	)		(5,244	)		(7,711	)

Balance at end of period	$	146,511			119,239		$	146,511			119,239

Ratio of net charge-offs to average loans outstanding during the period (annualized)		0.08	%		0.20	%		0.11	%		0.18	%

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 8: Deferred Tax Asset, Net

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2004 and December 31, 2003 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)	2004			2003
Deferred tax assets:
Allowance for loan losses	$	57,747			48,286
Net unrealized loss on securities available for sale		17,619			—
Intangible assets, including goodwill impairment loss		5,358			8,658
Net operating loss and tax credit carryforwards		8,099			8,743
Compensation and employee benefit plans		8,230			3,286
Deductible acquisition costs		5,053			2,051
Other		3,460			6,148

Total deferred tax assets		105,566			77,172
Less: valuation allowance		(12,999	)		(10,267	)

Deferred tax assets, net of valuation allowance		92,567			66,905

Deferred tax liabilities:
Net unrealized gain on securities available for sale		—			10,712
Purchase accounting and fair value adjustments		190			10,123
Loan discounts		3,476			4,310
Equipment financing leases		2,833			1,773
Mortgage servicing rights		3,416			905
Other		2,089			994

Total deferred tax liabilities		12,004			28,817

Deferred tax asset, net	$	80,563			38,088

Management believes 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 Webster will generate any specific level of future income.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 9: 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)	2004		2003
Intangible assets:
Balances subject to amortization:
Core deposit intangibles	$	68,925		47,803
Other identified intangibles		7,694		8,099
Balances not subject to amortization:
Pension assets		914		914

Total intangible assets	$	77,533		56,816

Goodwill:
Balances not subject to amortization	$	603,719		274,113

During the first quarter of 2004, Webster’s interest in Duff & Phelps, LLC was sold. The sale resulted in the reduction of $7.1 million of associated goodwill. The acquisition of FIRSTFED resulted in goodwill of $334.7 million.

During the second quarter of 2004, core deposit intangibles of $29.4 million were added as a result of the FIRSTFED acquisition. This identified intangible asset is being amortized over a ten year period.

Changes in the carrying amount of goodwill for the six months ended June 30, 2004 is as follows:


						Wealth and
	Retail		Commercial			Investment
(In thousands)	Banking		Banking			Services			Total
Balance at December 31, 2003	$	239,841		24,939			9,333			274,113
Purchase price adjustments		104		2,544			—			2,648
Purchase transactions		327,174		6,681			1,006			334,861
Sale transaction		—		(7,074	)		(829	)		(7,903	)

Balance at June 30, 2004	$	567,119		27,090			9,510			603,719

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Amortization of intangible assets for the three and six months ended June 30, 2004, totaled $4.6 million and $8.7 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,
2004 (full year)	$	18,327
2005		19,179
2006		15,006
2007		6,950
2008		4,013
Thereafter		21,818

NOTE 10: Deposits

The following table summarizes the composition of deposits.


	June 30, 2004					December 31, 2003
			% of					% of
(In thousands)	Amount		total			Amount		total
Demand deposits	$	1,362,339		13.1	%	$	1,090,060		13.0	%
NOW accounts		1,423,822		13.7			1,052,690		12.6
Money market deposit accounts		2,013,894		19.4			1,581,276		18.9
Savings accounts		2,281,312		22.0			1,869,398		22.3
Time deposits		3,291,555		31.8			2,778,711		33.2

Total	$	10,372,922		100.0	%	$	8,372,135		100.0	%

Interest expense on deposits is summarized as follows:


	Three months ended June 30,				Six months ended June 30,
(In thousands)	2004		2003		2004		2003
NOW accounts	$	990		1,009	$	1,618		2,018
Money market deposit accounts		6,872		6,383		12,064		12,451
Savings accounts		3,593		3,957		6,757		8,084
Time deposits		17,717		17,401		34,563		35,615

Total	$	29,172		28,750	$	55,002		58,168

Webster Financial Corporation and Subsidiaries

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, 2004				December 31, 2003
	Total				Total
(In thousands)	Outstanding		Callable		Outstanding		Callable
Fixed Rate:
0.94% to 6.78% due in 2004	$	1,261,589		—	$	1,463,099		—
1.48% to 7.04% due in 2005		284,287		45,000		151,972		100,000
2.18% to 6.31% due in 2006		65,210		—		56,935		—
4.09% to 7.45% due in 2007		745,718		200,000		711,941		500,000
4.49% to 5.93% due in 2008		75,786		74,000		28,995		27,000
4.98% to 5.96% due in 2009		138,000		123,000		5,000		5,000
4.95% to 8.44% due in 2010		35,398		35,000		425		—
3.99% to 6.60% due in 2011		41,737		40,000		1,836		—
5.22% to 5.49% due in 2013		49,000		49,000		10,000		10,000
6.00% due in 2015		35		—		—		—
5.66% due in 2017		500		—		—		—
0.00% due in 2022		440		—		—		—
2.51% to 3.75% due in 2023		396		—		264		—

		2,698,096		566,000		2,430,467		642,000
Variable Rate:
5.76% due in 2004		—		—		80,000		—

		2,698,096		566,000		2,510,467		642,000
Unamortized premium on FHLB advances		33,236		—		1,028		—

Total advances, net	$	2,731,332		566,000	$	2,511,495		642,000

Webster Bank had additional borrowing capacity of approximately $744.4 million from the FHLB at June 30, 2004 and $140.6 million at December 31, 2003. Advances are secured by a blanket security agreement against certain qualifying assets, principally residential mortgage loans. At June 30, 2004 and December 31, 2003, 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, 2004 and December 31, 2003 would have been increased by an additional $1.2 billion and $1.8 billion, respectively. At June 30, 2004 Webster Bank was in compliance with the FHLB collateral requirements.

Total callable FHLB advances at June 30, 2004 were $566.0 million, a decline from $642.0 million at December 31, 2003. During the first quarter of 2004, Webster Bank purchased the call option from the FHLB on $400.0 million of advances, restructuring the callable advances into non-callable. As of June 30, 2004, $1.2 billion of fixed rate advances had been converted to floating rate through the use of interest rate swaps. See Note 15 of Notes to Consolidated Interim Financial Statements for further information.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 12: Federal Funds Purchased and Securities Sold Under Agreement to Repurchase

The following table summarizes balances for other borrowings:


	June 30,		December 31,
(In thousands)	2004		2003
Securities sold under agreement to repurchase	$	1,149,429		1,378,229
Federal funds purchased		184,575		400,000
Treasury tax and loan		326,044		105,129
Other		10,546		8,780

Total	$	1,670,594		1,892,138

The following table sets forth certain information concerning short-term borrowings.


	June 30,			December 31,
(Dollars in thousands)	2004			2003
Repurchase agreements:
Quarter end balance	$	517,307			842,491
Quarter average balance		683,147			949,531
Highest month end balance during quarter		722,455			982,368
Weighted-average maturity (in months)		2.3			3.5
Weighted-average interest rate		0.82	%		0.95

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 13: Shareholders’ Equity

At June 30, 2004, shareholder’s equity amounted to $1.5 billion, or 8.5% of total assets. At December 31, 2003, shareholder’s equity amounted to $1.2 billion or 7.9% of total assets.

Webster paid a cash dividend of $0.23 per share on common stock during the second quarter of 2004 compared to $0.21 per share in the second quarter of 2003.

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) respectively require Webster and its banking subsidiary to maintain certain ratios, set forth below. At June 30, 2004, 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
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
At June 30, 2004
Webster Financial Corporation
Total capital (to risk-weighted assets)	$	1,363,699		10.9	%	$	997,154		8.0	%	$	1,246,442		10.0	%
Tier 1 capital (to risk-weighted assets)		1,017,188		8.2			498,577		4.0			747,865		6.0
Tier 1 leverage capital ratio (to average assets)		1,017,188		6.5			627,067		4.0			783,833		5.0
Tangible capital (to average assets)		1,017,188		6.5			313,533		2.0			n/a
Webster Bank, N.A.
Total capital (to risk-weighted assets)	$	1,420,443		11.5	%	$	985,748		8.0	%	$	1,232,185		10.0	%
Tier 1 capital (to risk-weighted assets)		1,073,932		8.7			492,874		4.0			739,311		6.0
Tier 1 leverage capital ratio (to average assets)		1,073,932		6.9			624,779		4.0			780,974		5.0
Tangible capital (to average assets)		1,073,932		6.9			312,390		2.0			n/a
At December 31, 2003
Webster Financial Corporation
Total capital (to risk-weighted assets)	$	1,319,087		13.5	%	$	784,195		8.0	%	$	980,244		10.0	%
Tier 1 capital (to risk-weighted assets)		993,143		10.1			392,098		4.0			588,146		6.0
Tier 1 leverage capital ratio (to adjusted total assets)		993,143		6.9			571,713		4.0			714,641		5.0
Tangible capital (to adjusted total assets)		993,143		6.9			285,857		2.0			n/a
Webster Bank, N.A.
Total capital (to risk-weighted assets)	$	1,272,870		13.2	%	$	773,578		8.0	%	$	966,973		10.0	%
Tier 1 capital (to risk-weighted assets)		954,325		9.9			386,789		4.0			580,184		6.0
Tier 1 leverage capital ratio (to adjusted total assets)		954,325		6.7			566,351		4.0			772,053		5.0
Tangible capital (to adjusted total assets)		954,325		6.7			283,175		2.0			n/a

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 14: Business Segments

Webster has three segments for purposes of reporting business line results. These segments include Retail Banking, Commercial Banking and Wealth and Investment Services. The balance of the activity is reflected in Corporate. The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised. The second quarter and first six months results for 2003 have been restated, to reflect changes in the methodologies adopted and reflected in the results for the second quarter and first six months, 2004. The following table presents the statement of income and total assets for Webster’s reportable segments.

Three months ended June 30, 2004


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Services			Corporate			Total
Net interest income	$	77,956		24,317		845			10,349			113,467
Provision for loan losses		2,929		4,769		86			(2,784	)		5,000

Net interest income after provision		75,027		19,548		759			13,133			108,467
Noninterest income		35,977		6,720		5,982			8,399			57,078
Noninterest expense		58,714		9,730		7,026			21,709			97,179

Income (loss) before income taxes		52,290		16,538		(285	)		(177	)		68,366
Income tax expense (benefit)		17,224		5,447		(94	)		(54	)		22,523

Net income (loss)	$	35,066		11,091		(191	)		(123	)		45,843

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

Three months ended June 30, 2003


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Services			Corporate			Total
Net interest income	$	68,483		20,219		830			11,087			100,619
Provision for loan losses		1,907		4,339		40			(1,286	)		5,000

Net interest income after provision		66,576		15,880		790			12,373			95,619
Noninterest income		30,561		11,227		4,632			11,860			58,280
Noninterest expense		52,388		15,259		6,167			19,385			93,199

Income (loss) before income taxes		44,749		11,848		(745	)		4,848			60,700
Income tax expense (benefit)		14,812		3,922		(247	)		1,603			20,090

Net income (loss)	$	29,937		7,926		(498	)		3,245			40,610

Total assets at period end	$	6,683,067		2,770,242		65,655			4,933,608			14,452,572

Six months ended June 30, 2004


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Services			Corporate			Total
Net interest income	$	148,713		47,325		1,636			21,599			219,273
Provision for loan losses		5,169		9,152		157			(4,478	)		10,000

Net interest income after provision		143,544		38,173		1,479			26,077			209,273
Noninterest income		66,795		17,248		11,164			16,594			111,801
Noninterest expense		109,245		25,326		13,029			41,720			189,320

Income (loss) before income taxes		101,094		30,095		(386	)		951			131,754
Income tax expense (benefit)		33,442		9,955		(128	)		319			43,588

Net income (loss)	$	67,652		20,140		(258	)		632			88,166

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

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Six months ended June 30, 2003


					Wealth and
	Retail		Commercial		Investment						Consolidated
(In thousands)	Banking		Banking		Services			Corporate			Total
Net interest income	$	133,241		38,905		1,524			31,625			205,295
Provision for loan losses		3,876		8,417		77			(2,370	)		10,000

Net interest income after provision		129,365		30,488		1,447			33,995			195,295
Noninterest income		61,255		22,750		9,348			18,075			111,428
Noninterest expense		103,189		32,331		12,398			38,087			186,005

Income (loss) before income taxes		87,431		20,907		(1,603	)		13,983			120,718
Income tax expense (benefit)		29,097		6,958		(533	)		4,649			40,171

Net income (loss)	$	58,334		13,949		(1,070	)		9,334			80,547

Total assets at period end	$	6,683,067		2,770,242		65,655			4,933,608			14,452,572

The Retail Banking segment includes insurance services, business and professional banking, consumer lending and deposit generation 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 consumer loans and lower cost deposits. Increase in 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 have improved the level of noninterest income for 2004.

The Commercial Banking segment includes middle market, specialized, equipment financing, asset-based and commercial real estate lending, deposit and cash management activities and financial advisory services. The results for the first half of 2004 reflect the growth in equipment financing, middle market and commercial real estate loans, which was a primary reason for the 25% increase in net interest income from the 2003 period. Noninterest income declined chiefly due to the sale of Duff & Phelps in March 2004.

Wealth and Investment Services 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. Additional fee revenues and expense control improved the results in the 2004 period as compared to the 2003 period.

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. The decrease for the current year’s net income was primarily the result of a declining wholesale interest-rate spread. The yield on wholesale assets for the second quarter and first six months of 2004 declined 43 and 63 basis points from the same period a year earlier while wholesale borrowing costs declined only 38 and 36 basis points.

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.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 15: Derivative Financial Instruments

At June 30, 2004, Webster had outstanding interest rate swaps with a notional amount of $1.5 billion. 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, $350 million of the interest rate swaps mature in 2004, $100 million in 2005, $50 million in 2006 $500 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.

During the quarter, Webster Bank purchased two $100 million swaptions with the right, but not the obligation, to enter into two $100 million swaps paying 6.15% fixed and receiving one month LIBOR. The swaptions, together with $200 million of LIBOR swaps, establish a fair value hedge with certain callable fixed rate advances.

Webster Bank has outstanding interest swaps with a notional amount of $72.5 million against the cost of brokered deposits. The swaps transform the fixed rate deposits to floating rate and mature $31.5 million in 2006 and $41.0 million in 2008. A fair value hedging relationship has been established between the swaps and certain brokered deposits.

Webster Bank transacts certain derivative products with its customer base. These customer derivatives are offset with matching derivatives with other counterparties. Exposure with respect to these derivatives is largely limited to nonperformance by either of the parties in the transaction – the customer or the other counterparty. The notional amount of customer derivatives and the offsetting counterparty derivatives each totaled $140.2 million at June 30, 2004. The customer derivatives and the offsetting matching derivatives are marked to market and any difference is reflected in noninterest income.

Certain derivative instruments, primarily forward sales of mortgage-backed securities (“MBSs”), are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to the closing and funds disbursement on a single-family residential mortgage loan, an interest-rate locked commitment is generally extended to the borrower. During such time, the Bank is subject to risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, which agree to deliver whole mortgage loans to various investors or issue MBSs, are established. At June 30, 2004, outstanding rate locks totaled approximately $218.7 million and the residential mortgage held for sale portfolio totaled $153.4 million. Forward sales, which include mandatory forward commitments of approximately $143.0 million and best efforts forward commitments of approximately $188.1 million at June 30, 2004, 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 derivative activities associated with loans held for sale qualify as a fair value hedge under SFAS No. 133. A highly effective relationship has been established between loans held for sale and certain forward sales commitments.

The interest rate locked loan commitments are recorded at fair value, with changes in fair value recorded in current period earnings. The changes in the fair value of loans held for sale and forward sales commitments are also recorded to current period earnings. The value of the interest rate locked commitments, loans held for sale and forward sales commitments will be adjusted monthly based upon market interest rates and the level of locked loan commitments and unallocated forward sales commitments. Generally, the value of the locked loan commitment will increase in a falling rate environment and decrease in a rising interest rate environment. The opposite is true for the forward loan sale commitment. The goal is to offset the change in the market value of the locked loan commitments with the change in the market value of the forward loan sales commitments.

Webster Financial Corporation and Subsidiaries

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.


	Pension Benefits						Other Benefits
Three months ended June 30,	2004			2003			2004		2003
Service cost	$	2,074			1,696			—		—
Interest cost		1,187			946			75		74
Expected return on plan assets		(1,235	)		(857	)		—		—
Transition obligation		(2	)		(2	)		—		—
109 Amortization of prior service cost		72			17			16		16
Amortization of the net loss		257			293			9		—

Net periodic benefit cost	$	2,353			2,093			100		90


	Pension Benefits						Other Benefits
Six months ended June 30,	2004			2003			2004		2003
Service cost	$	4,452			3,389			—		—
Interest cost		2,380			1,892			150		191
Expected return on plan assets		(2,482	)		(1,714	)		—		—
Transition obligation		(5	)		(4	)		—		—
109 Amortization of prior service cost		150			33			32		31
Amortization of the net loss		510			697			20		—

Net periodic benefit cost	$	5,005			4,293			202		222

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 (estimated at $0 for 2004), 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 plans actuaries. For 2004, the preliminary estimated contribution ranges from $10.0 million to $15.0 million. As of June 30, 2004, no contribution has been made.

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

NOTE 17: Subsequent Events

On July 19, 2004, Webster announced a definitive agreement to acquire First City Bank in a combination cash and stock transaction. The transaction is valued at approximately $33 million, or $27 per common share of First City Bank stock, payable 60% in Webster stock and 40% in cash. First City Bank was founded in 1989 and has assets of approximately $185 million. It is headquartered in New Britain, Connecticut, with three additional branches in Berlin, Plainville and Newington. The transaction is subject to approval by the regulatory authorities and the First City Bank’s shareholders. The transaction is expected to close in the fourth quarter of 2004.

Webster Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 18: Recent Accounting Pronouncements

In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (“SAB 105”), which provides guidance about the measurement of loan commitments required to be accounted for as derivative instruments and recognized at fair value under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after June 30, 2004. Webster’s current policies are consistent with the guidance issued in SAB 105.

Webster Financial Corporation and Subsidiaries

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

Forward Looking Statements

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

Description of Business

Webster Financial Corporation (“Webster” or the “Company”), through its subsidiaries, Webster Bank, National Association (“Webster Bank”), Webster Insurance, Inc. (“Webster Insurance”) and Fleming, Perry & Cox (“Fleming”), delivers financial services to individuals, families and businesses primarily in Connecticut and equipment financing, asset-based lending and mortgage originations to public and private companies throughout the United States. Webster Bank provides business and consumer banking, mortgage origination and lending, trust and investment services through 147 banking and other offices, 268 ATM’s and its Internet website (www.websteronline.com). Founded in 1935 Webster Bank converted from a federal mutual to a federal stock institution in 1986. On April 21, 2004, Webster Bank completed its conversion from a federal savings bank to a national bank, regulated by the Office of the Comptroller of the Currency. At that time, Webster became a bank holding company, regulated by the Board of Governors of the Federal Reserve System. At June 30, 2004, Webster Bank as a national bank is subject to capital requirements similar to those applicable at March 31, 2004, when it operated under a federal savings bank charter. As a bank holding company, Webster is subject to capital requirements at June 30, 2004. Webster as of the close of business on May 14, 2004, acquired FIRSTFED America Bancorp, Inc., (“FIRSTFED”), the holding company of First Federal Savings Bank of America, (“First Federal”). 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.

RESULTS OF OPERATIONS

Summary

Webster reported net income of $45.8 million in the second quarter, compared to $40.6 million in the year-ago period, an increase of 13 percent. Net income per diluted share was $.91 in the second quarter, compared to $.88 in the year-ago period, an increase of 3 percent.

For the first six months of 2004, net income was $88.2 million compared to $80.5 million in the year-ago period, an increase of 9 percent. Net income per diluted share was $1.81 compared to $1.74 in the year-ago period, an increase of 4 percent.

Increased net income was partially driven by the second quarter acquisition of FIRSTFED. FIRSTFED had assets of $2.7 billion, including loans of $1.5 billion and deposits of $1.5 billion with 26 branches and 37 ATM’s. The second quarter results also reflect the sale and deleveraging of $750 million of FIRSTFED’s investment portfolio.

Webster Financial Corporation and Subsidiaries

The increase in net income for the current quarter and six months was driven by a growth in total revenues partially offset by higher operating expenses. Total revenue, consisting of net interest income and total noninterest income, rose approximately 7.3% in the quarter and 4.5% for the six months as compared to a year ago. Impacting these periods was the implementation on December 31, 2003 of Financial Accounting Standards Board Interpretation No. 46 (revised) (“FIN 46R”), which required the reclassification of capital trust securities expense for the second quarter and first six months of 2004 from noninterest expense to interest expense. Adjusting the prior periods for this effect, total revenues would have grown $14.4 million, or 9.2%, for the quarter and $20.0 million, or 6.4%, for the first six months. This growth was primarily the result of an increase in loans funded by a growth in retail deposits.

Selected financial highlights for the three and six months ended June 30, 2004 and 2003 are presented in the table below.


	Three months ended June 30,					Six months ended June 30,
(In thousands, except per share data)	2004			2003		2004			2003
Earnings
Net income	$	45,843			40,610	$	88,166			80,547
Net income per diluted common share		0.91			0.88		1.81			1.74
Dividends declared per common share		0.23			0.21		0.44			0.40
Book value per common share		27.37			24.09		27.37			24.09
Tangible book value per common share		15.02			17.59		15.02			17.59
Basic shares (average)		49,699			45,446		47,922			45,453
Diluted shares (average)		50,475			46,242		48,767			46,217

Selected Ratios
Return on average assets		1.12	%		1.15		1.14	%		1.16
Return on average shareholders’ equity		13.86			15.01		14.06			15.10
Net interest margin		3.02			3.10		3.05			3.20
Efficiency Ratio(a)		56.98			58.65		57.18			58.73

Footnote:

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

Webster Financial Corporation and Subsidiaries

A Comparison of the Three and Six Month Periods Ended June 30, 2004 and 2003.

Net income for the three and six months ended June 30, 2004, was $45.8 million, or $0.91 per diluted share and $88.2 million or $1.81 per diluted share respectively, compared to $40.6 million, or $.88 per diluted share and $80.5 million or $1.74 per diluted share for the same periods a year earlier.

Net Interest Income

Net interest income was $113.5 million in the second quarter and $219.3 million for the six months, compared to $100.6 million and $205.3 million for the same periods a year ago. Excluding the effect of FIN 46R, net interest income would have grown by $15.6 million or 15.9% for the quarter and $19.6 million or 9.8% from a year ago. These increases were primarily driven by the volume increase in loans, which was partially offset by the lower interest rate environment. Lower rates impacted the yields earned on earning assets as well as the rates paid on deposits and borrowings.

Webster anticipates that with the recent action by the Board of Governors of the Federal Reserve to increase interest rates the decline in net interest margin will begin to rise in the latter half of 2004. Cash flows from the securities portfolio continues to be redeployed into investments with shorter maturities, at significantly reduced yields, in anticipation of rising interest rates.

Interest Income

Total interest income on a fully tax-equivalent basis for the second quarter of 2004 increased $12.5 million, or 7.6%, and for the six months increased $7.6 million or 2.3% from the prior year. These increases are primarily due to an increase in the volume of earning assets, partially offset by a decrease in the yield on earning assets. Declines in yield occurred in both the loan and loans held for sale portfolios, where yields dropped compared to the year-ago period. The declines were a result of a lower interest rate environment during 2004 as compared to 2003, that caused an accelerated level of prepayments on fixed rate loans that were replaced with loans at significantly lower yields, such as residential mortgages and floating rate loans. Declines also occurred in the securities portfolio. The investment portfolio was also impacted by the low interest rate environment as mortgage related securities prepaid and premium amortization was accelerated as existing investment lives were shortened and proceeds were reinvested at significantly lower yields. The impact on interest income of lower yields on interest-earning assets was fully offset by an increase in the volume of average earnings assets of approximately $2.0 billion for the quarter and $1.5 billion for the first six months. Substantially all of this volume growth occurred in the loan portfolios.

Interest Expense

Total interest expense for the second quarter of 2004 decreased $1.2 million, or 1.9%, from the prior year and for the six month’s declined $7.5 million or 5.8%. These decreases were primarily due to a decline in the overall cost of interest-bearing liabilities. The cost of deposits and borrowings declined. The low interest rate environment was the primary factor for this decline as existing and new deposits were repriced at lower yields. Partially offsetting the favorable impact of lower interest rates was the increased expense resulting from growth in volume of deposits and borrowings. Also contributing to the increases was the FIN 46R reclassification of capital trust securities expense in the first quarter of 2004 to interest expense.

Webster Financial Corporation and Subsidiaries

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


	Three months ended June 30,
	2004								2003
						Fully Tax-								Fully Tax-
	Average					Equivalent			Average					Equivalent
(In thousands)	Balance		Interest (a)			Yield/Rate			Balance		Interest (a)			Yield
Assets
Interest-earning assets:
Loans	$	10,440,916		129,084			4.93	%	$	8,629,616		114,734			5.30	%
Securities		4,485,738		46,277			4.11	(b)		4,146,519		46,086			4.54	(b)
Loans held for sale		169,092		2,139			5.06			322,371		4,231			5.25
Short-term investments		29,891		84			1.11			23,724		56			0.93

Total interest-earning assets		15,125,637		177,584			4.68			13,122,230		165,107			5.06

Noninterest-earning assets		1,219,002								949,376

Total assets	$	16,344,639							$	14,071,606

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand deposits	$	1,205,224		—			—	%	$	989,619		—			—	%
Savings, Now & money market deposits		5,282,018		11,456			0.87			4,276,209		11,348			1.06
Time deposits		3,056,167		17,716			2.33			2,649,670		17,402			2.63

Total interest-bearing deposits		9,543,409		29,172			1.23			7,915,498		28,750			1.46

Federal Home Loan Bank advances		2,827,253		19,905			2.79			2,386,590		23,286			3.86
Fed funds and repurchase agreements		1,860,747		4,888			1.04			2,153,916		6,783			1.25
Other long-term debt		671,223		8,953			5.34			326,000		5,299			6.50

Total borrowings		5,359,223		33,746			2.50			4,866,506		35,368			2.88

Total interest-bearing liabilities		14,902,632		62,918			1.69			12,782,004		64,118			2.00

Noninterest-bearing liabilities		109,360								83,574

Total liabilities		15,011,992								12,865,578
Capital securities and preferred stock of subsidiary corporation		9,577								123,475
Shareholders’ equity		1,323,070								1,082,553

Total liabilities and shareholders’ equity	$	16,344,639							$	14,071,606

Fully tax-equivalent net interest income				114,666								100,989
Less: tax equivalent adjustments				(1,199	)							(370	)

Net interest income				113,467								100,619

Interest-rate spread							2.99	%							3.06	%

Net interest margin							3.02	%							3.10	%

(a) On a fully tax-equivalent basis.

(b) For purposes of this computation, unrealized (losses) gains of ($21.1) million and $90.0 million for 2004 and 2003, respectively, are excluded from the average balance for rate calculations.

Webster Financial Corporation and Subsidiaries


	Six months ended June 30,
	2004								2003
						Fully Tax-								Fully Tax-
	Average					Equivalent			Average					Equivalent
(In thousands)	Balance		Interest (a)			Yield/Rate			Balance		Interest (a)			Yield
Assets
Interest-earning assets:
Loans	$	9,904,542		247,675			4.99	%	$	8,428,441		227,944			5.41	%
Securities		4,408,620		91,438			4.16	(b)		4,177,334		98,113			4.80	(b)
Loans held for sale		127,184		3,209			5.05			324,980		8,723			5.37
Short-term investments		32,825		150			0.90			25,483		118			0.92

Total interest-earning assets		14,473,171		342,472			4.73			12,956,238		334,898			5.20

Noninterest-earning assets		1,054,197								942,439

Total assets	$	15,527,368							$	13,898,677

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Demand deposits	$	1,132,037		—			—	%	$	970,530		—			—	%
Savings, Now & money market deposits		4,910,528		20,440			0.84			4,130,329		22,552			1.10
Time deposits		2,922,958		34,562			2.38			2,656,542		35,616			2.70

Total interest-bearing deposits		8,965,523		55,002			1.23			7,757,401		58,168			1.51

Federal Home Loan Bank advances		2,628,041		38,909			2.93			2,483,365		47,077			3.77
Fed funds and repurchase agreements		1,977,133		10,319			1.03			2,077,451		13,035			1.25
Other long-term debt		601,991		17,151			5.70			311,635		10,609			6.81

Total borrowings		5,207,165		66,379			2.53			4,872,451		70,721			2.89

Total interest-bearing liabilities		14,172,688		121,381			1.71			12,629,852		128,889			2.04

Noninterest-bearing liabilities		90,883								75,137

Total liabilities		14,263,571								12,704,989
Capital securities and preferred stock of subsidiary corporation		9,577								127,133
Shareholders’ equity		1,254,220								1,066,555

Total liabilities and shareholders’ equity	$	15,527,368							$	13,898,677

Fully tax-equivalent net interest income				221,091								206,009
Less: tax equivalent adjustments				(1,818	)							(714	)

Net interest income				219,273								205,295

Interest-rate spread							3.02	%							3.16	%

Net interest margin							3.05	%							3.20	%

(a) On a fully tax-equivalent basis.

(b) For purposes of this computation, unrealized gains of $14.3 million and $88.3 million for 2004 and 2003, respectively, are excluded from the average balance for rate calculations.

Webster Financial Corporation and Subsidiaries

Net interest income can be understood in terms of the impact of changing rates and changing volumes. 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,
	2004 v. 2003									2004 v. 2003
	Increase (decrease) due to									Increase (decrease) due to
(In thousands)	Rate			Volume			Total			Rate			Volume			Total
Interest on interest-earning assets:
Loans	$	(8,399	)		22,749			14,350		$	(18,466	)		38,197			19,731
Loans held for sale		(148	)		(1,944	)		(2,092	)		(492	)		(5,022	)		(5,514	)
Securities and short-term investments		(4,056	)		4,275			219			(12,606	)		5,963			(6,643	)

Total interest income		(12,603	)		25,080			12,477			(31,564	)		39,138			7,574

Interest on interest-bearing liabilities:
Deposits		(4,971	)		5,393			422			(11,636	)		8,470			(3,166	)
Borrowings		(4,932	)		3,310			(1,622	)		(9,034	)		4,692			(4,342	)

Total interest expense		(9,903	)		8,703			(1,200	)		(20,670	)		13,162			(7,508	)

Net change in fully taxable-equivalent net interest income	$	(2,700	)		16,377			13,677		$	(10,894	)		25,976			15,082

Provision for Loan Losses

The provision for loan losses was $5.0 million for the quarter and $10.0 million for the first six months, the same amounts as provided in the three and six months a year ago. 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 in the loan portfolio, net charge-offs, the risk of loss on nonperforming and classified loans, and the level of economic activity. Net charge-offs in the second quarter and first six months of 2004 were $2.2 million and $5.2 million, compared to $4.4 million and $7.7 million for the same periods a year earlier. The annualized net charge-off ratio for the current quarter and six months was 0.08% and 0.11% of total average loans, down from 0.20% and 0.18% a year earlier. At June 30, 2004 and December 31, 2003, the allowance for loan losses totaled $146.5 million and $121.7 million, or 1.30% and 1.32% of total loans, and represented 332% and 323% of nonperforming loans, respectively. The offsetting effects of lower net charge-offs and higher loan volumes resulted in no change to the loan loss provision.

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 38 through 42 of this report.

Noninterest Income

Noninterest income for the three months ended June 30, 2004 decreased $1.2 million from the same period a year earlier. Strong growth in core fee categories of deposits, insurance, loans and wealth and investment services were offset by a $5.2 million decrease in financial advisory services due to the sale of Duff & Phelps during the first quarter. The acquisition of FIRSTFED during the second quarter contributed to fee income and overall noninterest income for the current period. Total noninterest income before gains on sale of securities increased $1.8 million or 3.7% from the same period a year earlier. Increased deposit fees were primarily due to a higher volume of deposits and increased levels of insufficient funds and ATM fees. Loan fees increased primarily due to lower mortgage servicing rights amortization, increased lease financing fee income and reduced deferred FAS91 fees due to a lower origination volume. There was a

Webster Financial Corporation and Subsidiaries

recovery of $201,000 in mortgage servicing rights in the three months ended June 30, 2004, compared to writedowns of $1.8 million for the same period a year earlier.

Noninterest income for the six months ended June 30, 2004 increased $373,000 from the same period a year earlier. Higher levels of fees from deposits, loans, insurance and wealth and investment services more than offset lower income from financial advisory services, loan sale gains and other income. The decrease in financial advisory services revenue of $6.9 million resulted from the sale of Duff & Phelps during the first quarter of 2004, as previously discussed. The acquisition of FIRSTFED during the second quarter contributed to fee income and overall noninterest income for the six month period. Increased deposit fees were primarily due to a higher volume of deposits, increased levels of insufficient funds charges and ATM fees that were partially offset by lower cash management and service fees on deposit accounts. Loan fees increased primarily due to lower mortgage servicing rights amortization, increased income from lease financing, prepayment penalties, line usage fee income and reduced deferred FAS91 fees due to a lower origination volume. Writedowns of mortgage servicing rights in the six months ended June 30, 2004 totaled $165,000 compared to $2.6 million for the same period a year earlier.

Noninterest Expenses

Total noninterest expenses for the three and six months ended June 30, 2004 were $97.2 million and $189.3 million, respectively, an increase from $93.2 million and $186.0 million recorded in the same periods a year ago. Adjusting for the effect of FIN 46R, expenses grew by $6.9 million, or 7.4%, for the second quarter and $9.0 million, or 5.0%, for the first six months. These increases reflect the investment in personnel, technology and infrastructure to meet our strategic plan for growth. The acquisition of FIRSTFED and the opening of de novo branches also added to the increase expense in the quarter. Webster’s voluntary turnover rate for 2003 was 12.8%.

Income Taxes

Income tax expenses for the three and six months ended June 30, 2004 are higher than the prior year periods primarily due to a higher level of income before taxes, partially offset by a lower effective tax rate. The effective tax rates for the three and six months ended June 30, 2004 and 2003 were approximately 32.9% and 33.1%, respectively, compared with 33.1% and 33.3%, respectively, in the prior year.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 of the 2003 Annual Report on Form 10-K. The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 intangible assets, deferred incentives and pension and post retirement benefits as our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most difficult, subjective or complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2003 Management’s Discussion and Analysis filed in the Annual Report on Form 10-K.

Financial Condition

Total assets increased by $2.5 billion, or 16.9%, during the first six months, reaching $17.0 billion as of June 30, 2004. The acquisition of FIRSTFED during the second quarter had a significant impact on the change in the balance sheet for the six month period. Total loans increased $2.1 billion with all loan categories showing significant growth over the prior year. The FIRSTFED acquisition contributed approximately $1.5 billion of loans. As part of the acquisition approximately $750 million of the FIRSTFED securities portfolio was sold with the proceeds used to reduce short-term borrowings.

Webster Financial Corporation and Subsidiaries

Total liabilities rose $2.2 billion, or 16.1%, over the year ago period. The increase is primarily due to deposit growth of $2.0 billion, or 23.9%, and a higher level of total borrowings of $161.0 million. The growth in total deposits is the result of increases in demand deposits of 25.0%, NOW accounts of 35.3%, savings accounts of 22.0%, money market deposit accounts of 27.4 % and certificates of deposit of 18.5%. The FIRSTFED acquisition contributed approximately $1.5 billion of total deposits. The increase in borrowings reflects a debt offering of $150.0 million of senior notes during the second quarter. The notes have an interest rate of 5.125% and mature on April 15, 2014. The proceeds of the note offering were partially used to fund the cash portion of the FIRSTFED acquisition purchase price.

The net increase in total equity of $298.0 million primarily reflects the value of Webster stock issued for the purchase of FIRSTFED that totaled $272.8 million and net income of $88.2 million. These were partially offset by an unfavorable change in net unrealized losses on available for sale securities of $48.9 million and $20.0 million in common stock dividend payments.

Loan Portfolio

Webster originates various types of commercial, commercial real estate, consumer and residential loans. At June 30, 2004 and December 31, 2003, total loans were $11.3 billion and $9.2 billion, respectively. Some of the loan products would include commercial and residential permanent and construction mortgage loans, commercial and industrial loans including asset-based loans, equipment financing loans and secured and unsecured loans to middle market and small business customers and consumer loans including home equity lines of credit and home equity loans. At June 30, 2004 and December 31, 2003, commercial loans (including commercial real estate) represented 36% and 37% of Webster’s loan portfolio and residential loans represented 42% and 41%, respectively. The remaining portion of the loan portfolios consisted of consumer loans. Refer to Webster’s 2003 Annual Report on Form 10-K, pages 4 through 10, for a more complete description of the Webster’s lending activities and credit administration policies and procedures. A majority of the increase in the loan portfolio is a result of the acquisition of FIRSTFED that had $1.5 billion of loans.

Commercial Lending

The following is a discussion of the activities by each of Webster’s commercial lending divisions.

Middle Market

The Middle Market Division provides a full array of financial services to a diversified group of companies, primarily privately held and located in Connecticut, with annual revenues greater than $10 million. At June 30, 2004 and December 31, 2003, Middle Market loans, including commercial and owner-occupied commercial real estate, totaled $978.7 million and $701.1 million, respectively, an increase of 40%. Originations for the second quarter and six months of 2004 totaled $68.5 million and $115.7 million as compared to $63.2 million and $128.3 million for the same periods in 2003. The FIRSTFED acquisition contributed approximately $188.0 million while the balance of the increase resulted from a combination of increased lending activity with existing customers and newly developed relationships.

Asset-Based Lending

Effective January 2004, Whitehall Business Credit Corporation, Webster Bank’s asset-based lending subsidiary, changed its name to Webster Business Credit Corporation (“WBCC”). Asset-based loans are generally secured by accounts receivable and inventory of the borrower and, in some cases, also include additional collateral such as property and equipment. At June 30, 2004, total asset-based loans were $565.3 million, an increase of 7.3% over the $526.9 million at December 31, 2003. WBCC directly originates loans for its portfolio and sells participations to other financial institutions. In addition, it participates in loans originated by other banks and financial institutions. In its direct originations, it generally establishes depository relationships with the borrower through cash management accounts. At June 30, 2004 and December 31, 2003, the total of these deposits was $24.4 million and $26.4 million, respectively. During the second quarter and first six months of 2004, WBCC funded $34.6 million and $71.6 million, respectively, with new commitments of $105.4 million and $226.5 million compared to funding of $92.9 million and $133.0 million with new commitments of $136.8 million and $228.2 million for the same periods in 2003.

Webster Financial Corporation and Subsidiaries

Specialized Lending

At June 30, 2004 and December 31, 2003, the Specialized Lending Division administered $168.3 million and $173.3 million of funded loans against commitments of $298.9 million and $323.9 million, respectively. Additionally, the portfolio contained $82.8 million and $84.6 million of funded Collateralized Loan Obligations against commitments of $91.7 million each at June 30, 2004 and December 31, 2003. All of these loans carry an investment grade rating by at least one of the independent rating agencies.

Business and Professional Banking

The Business and Professional Banking Division, previously Small Business Banking, provides a full array of commercial loan and deposit products to small businesses located throughout Connecticut, Southeastern Massachusetts Rhode Island and the Westchester County, New York marketplace. The target market reaches businesses with annual revenue of up to $10 million – providing commercial loan products with relationship credit exposures of generally up to $2 million, and the breadth of Webster’s business deposit products.

Through a dedicated group of business bankers as well as through the branch network, the Division provides a full range of financial products and services to its existing customer base as well as potential new customers. The Business and Professional Division also plays a major role in supporting the Community Reinvestment Act goals by providing credit facilities to a wide range of small businesses, including many local not-for-profit organizations. A Fair Isaac-based credit scoring model is utilized, in whole or in part, in loan approvals of up to $250,000, and offers a $100,000 same-day decisioned unsecured line of credit product. It also offers Small Business Administration (“SBA”) guaranteed loans under its Preferred Lender Program status in Connecticut. Application has been made to the SBA for Preferred Lender Program status in the states of Massachusetts and Rhode Island in support of the former FIRSTFED efforts in SBA lending. As of June 30, 2004 (the third quarter for the SBA), Webster Bank ranked third in Connecticut among SBA lenders with 63 loans totaling $9.9 million.

The Business and Professional Banking Division administered a portfolio of approximately $650.1 million at June 30, 2004, a 7.0% increase from $382.9 million at December 31, 2003. Included in the portfolio is $312.5 million of loans secured by commercial real estate. Originations totaled $54.0 million for the second quarter and $108.2 million for six months an 11.2% increase compared to the same periods in 2003. Webster Bank is a leader among Connecticut-based banks for providing loans of $1 million and under to small businesses in the state.

An objective of this Division’s strategic plan is to also focus on deposit growth as part of the overall customer relationship. The Bank has developed a variety of innovative small business deposit products and marketing programs that are designed to meet depositors’ needs and attract both short and long-term deposits. At June 30, 2004, small business deposit balances totaled $1.1 million, up from $901,000 the same period a year earlier, an increase of 18.8 %.

Equipment Financing

Center Capital Corporation (“Center Capital”), Webster Bank’s nationwide equipment financing subsidiary, transacts loan business with end-users of equipment, either by soliciting this business on a direct basis or through referrals from various manufacturers, dealers and distributors with whom they have business relationships. The portfolio totaled $551.6 million at June 30, 2004, compared with $506.3 million at December 31, 2003, an increase of 8.9%. Center Capital originated $79.8 million and $146.2 million in loans during the second quarter and first six months of 2004, compared to $68.8 million and $124.6 million during the same periods a year ago.

Webster Financial Corporation and Subsidiaries

Insurance Premium Financing

On January 24, 2003, Webster acquired Budget Installment Corp. (“BIC”), an insurance premium financing company based in Rockville Centre, New York, which finances commercial property and casualty premiums for businesses that pay their insurance premiums on an installment basis. The majority of its borrowers are located in the Long Island, New York City and Northern New Jersey areas. At June 30, 2004, total loans outstanding were $75.6 million compared to $61.4 million at December 31, 2003, an increase of 23%. Loans originated in the second quarter and first six months of 2004, totaled $52.8 million and $99.9 million compared to $35.7 million and $56.8 million for the same periods in 2003.

Commercial Real Estate Lending

Webster provides financing for the purpose of acquiring, developing, constructing, improving or refinancing commercial real estate where the property is the primary collateral securing the loan and the income which is produced from the property and its tenants is the primary repayment source. It also makes acquisition, development and construction loans to residential builders. At June 30, 2004 and December 31, 2003, commercial real estate loans totaled $1.6 billion and $1.3 billion, respectively. Included in these loans are owner-occupied loans originated by the Middle Market and Business and Professional Banking divisions of $598.7 million and $395.6 million at June 30, 2004 and December 31, 2003, respectively.

Cultivating relationships with high quality local, regional and national developers, both directly and through loan participations with selected banks outside its primary market, has been the unit’s goal as it seeks to maintain a core group of borrowers for repeat business, for cross selling opportunities, and to diversify its portfolio by geographic location. During the second quarter and first six months of 2004, it originated $134.7 million and $225.1 million of commercial real estate loans, an increase of $54.1 million, or 32%, from the six month period a year earlier.

Consumer Lending

At June 30, 2004 and December 31, 2003, consumer loans totaled $2.5 billion and $2.1 billion, respectively. Consumer loans outstanding increased significantly in 2003 and, at December 31, 2003 represented 23.6% of the total loan portfolio. This growth in balances continued during the first six months of 2004, as loans grew $384.1 million, or 18%, to $2.5 billion. The growth occurred in home equity loans and is attributable to the lower interest rate environment and the expansion of lending into states contiguous to Connecticut. Originations during the second quarter and six months of 2004 totaled $301.7 million and $490.5 million compared to $347.9 million and $676.8 million for the same periods a year earlier.

Residential Mortgage Loans and Mortgage Banking Activity

Webster is dedicated to providing a full complement of residential mortgage loan products that meet the financial needs of its customers. For the three and six months ending June 30, 2004 and 2003, originated residential mortgage loans totaled $598.5 million and $1.0 billion compared to $1.2 billion and $2.1 billion for the same period in 2003. As interest rates rose during the end of 2003, originations volume slowed. During the first quarter of 2004, interest rates fell and application activity increased from the previous quarter, which has positively impacted the second quarter volume. Webster’s channels for the origination of these loans include its network of branches, referrals, loan officers and call center, as well as its National Wholesale Lending Group through third party licensed mortgage brokers in targeted areas of the United States. A majority of this originated loan volume, including servicing, is sold in the secondary market. Webster sells these residential mortgage loans in a manner consistent with its asset/liability management objectives. At June 30, 2004 and December 31, 2003, there were $153.4 million and $89.8 million, respectively, of residential mortgage loans held for sale. 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 $3.7 billion at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, approximately $1.1 billion, or 25%, of the total residential mortgage loan portfolio were adjustable rate loans. Adjustable rate mortgage loans are offered at initial interest rates discounted from the fully-indexed rate. Adjustable rate loans originated during 2004 and 2003, when fully-indexed, will be 2.75% above the constant maturity one-year U.S. Treasury yield index. At June 30, 2004, approximately $3.6 billion, or 75% of the total residential mortgage loan portfolio, was fixed rate.

Webster Financial Corporation and Subsidiaries

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 aggressively managing nonperforming 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 Connecticut 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, 2004, 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 35 through 36 of Webster’s 2003 Annual Report on Form 10-K for additional information.

Nonperforming Assets

The amount of nonperforming assets increased to $47.7 million, or 0.28% of total assets, at June 30, 2004 from $42.9 million, or 0.29% of total assets, at December 31, 2003 and decreased from $57.0 million, or 0.39% of total assets, at June 30, 2003. During 2004, total nonperforming assets increased $4.8 million. Total nonperforming loans increased $7.6 million during the second quarter, primarily due to an increase of $8.2 million in commercial real estate loans and a decrease in commercial loans of $1.5 million. This increase is principally the result of the FIRSTFED acquisition. The decline in nonperforming assets at June 30, 2004 from a year earlier occurred primarily in the commercial lending area, partially offset by a higher level of commercial real estate loans.

Webster Financial Corporation and Subsidiaries

The following table details Webster’s nonperforming assets:


	June 30,		December 31,		June 30,
(In thousands)	2004		2003		2003
Loans accounted for on a nonaccrual basis:
Commercial:
Commercial banking	$	14,682		13,772		26,551
Specialized lending		—		6,427		3,399
Equipment financing		5,021		5,583		8,697

Total commercial		19,703		25,782		38,647
Commercial real estate		13,757		3,325		4,920
Residential		8,599		6,128		6,596
Consumer		826		959		767

Total nonaccruing loans		42,885		36,194		50,930

Loans past due 90 days or more and accruing:
Commercial		1,213		494		1,355
Commercial real estate		—		956		—

Total loans past due 90 days or more and accruing		1,213		1,450		1,355
Foreclosed Properties:
Residential and consumer		368		942		529
Commercial		3,192		4,296		4,224

Total foreclosed properties		3,560		5,238		4,753

Total nonperforming assets	$	47,658		42,882		57,038

The allowance for loan losses at June 30, 2004 was $146.5 million and represented 332% of nonperforming loans and 1.30% of total loans. This compares with an allowance of $121.7 million that represented 323% of nonperforming loans and 1.32% of total loans at December 31, 2003. The allowance was $119.2 million or 228% of nonperforming loans and 1.37% of total loans at June 30, 2003. For additional information on the allowance, see Note 7 of Notes to Consolidated Interim Financial Statements elsewhere in this report.

Webster Financial Corporation and Subsidiaries

Other Past Due Loans

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


	June 30, 2004					December 31, 2003					June 30, 2003
	Principal		Percent of loans			Principal		Percent of loans			Principal		Percent of loans
(Dollars in thousands)	Balances		outstanding			Balances		outstanding			Balances		outstanding
Past due 30–89 days:
Residential	$	13,405		0.12	%	$	9,443		0.10	%	$	12,409		0.14	%
Commercial		22,161		0.19			6,285		0.07			8,899		0.10
Commercial real estate		4,010		0.04			14,419		0.16			10,667		0.12
Consumer		3,004		0.03			2,403		0.02			4,080		0.05

Total	$	42,580		0.38	%	$	32,550		0.35	%	$	36,055		0.41	%

The overall increase in loans past due 30-89 days of $10.0 million at June 30, 2004 from December 31, 2003 is primarily due to increases of $4.0 million in residential and $15.9 million commercial loans, partially offset by reduced commercial real estate loans. The increase in commercial loans was the result of two loans totaling $12.5 million, which became past due during the quarter.

Troubled Debt Restructurings

At June 30, 2004 and December 31, 2003, total accruing troubled debt restructurings were $236,000 and $731,000, respectively. This compares to $590,000 at June 30, 2003. These loans are performing in accordance with terms of restructuring. A troubled debt restructuring occurs when, for economic or legal reasons related to debtor’s financial difficulties, a financial institution grants a concession to the debtor that it would not otherwise consider. Interest income recognized for total restructured loans for the three and six months ended June 30, 2004 under the restructured terms totaled $3,000 and $7,000 as compared to $4,000 and $8,000 that would have been booked under their original terms. At June 30, 2004, the $236,000 of debt restructurings were performing in accordance with their restructured terms and are not included in nonperforming loans.

Webster Financial Corporation and Subsidiaries

Classified Loans

Webster employs a dynamic risk rating system, designed to reflect the changes in the credit risk profile of each loan. The credit risk profile assesses the risks associated with both the borrower and the related loan facility. The rating system includes Classified rating categories which correspond directly to the regulatory definitions for Substandard, Doubtful, and Loss rated loans.

The following table summarizes classified loans, including nonperforming loans.


						Commercial
						Commercial
(In thousands)	Total			Residential		Banking*		Specialized		CRE**		Consumer
June 30, 2004
Substandard:
Accruing	$	90,421			514		87,349		568		1,990		—
Nonaccruing		39,600			8,578		25,294		—		5,007		721

Total substandard		130,021			9,092		112,643		568		6,997		721
Doubtful:
Nonaccruing		3,286			21		3,160		—		—		105
Loss		—			—		—		—		—		—

Total classified loans	$	133,307			9,113		115,803		568		6,997		826

Classified as a percent of loans		1.2	%		0.2		4.1		0.2		0.7		—

December 31, 2003
Substandard:
Accruing	$	72,638			999		63,408		8,231		—		—
Nonaccruing		29,403			6,097		17,413		5,067		—		826

Total substandard		102,041			7,096		80,821		13,298		—		826
Doubtful:
Nonaccruing		6,791			31		5,267		1,359		—		134
Loss		—			—		—		—		—		—

Total classified loans	$	108,832			7,127		86,088		14,657		—		960

Classified as a percent of loans		1.2	%		0.2		4.0		5.7		—		—

June 30, 2003
Substandard:
Accruing	$	62,064			1,085		39,148		21,746		—		85
Nonaccruing		44,313			6,573		37,117		—		—		623

Total substandard		106,377			7,658		76,265		21,746		—		708
Doubtful:
Nonaccruing		6,617			23		3,051		3,399		—		144
Loss		—			—		—		—		—		—

Total classified loans	$	112,994			7,681		79,316		25,145		—		852

Classified as a percent of loans		1.3	%		0.2		3.9		7.4		—		0.1

* Includes Middle Market, Small Business Banking, Asset-Based Lending and Equipment Financing.

** Does not include CRE loans administered by Middle Market and Small Business Banking, which are included in Commercial Banking.

Webster Financial Corporation and Subsidiaries

Webster believes that early identification and management of problem loans serves to minimize future losses, therefore it employs a rigorous portfolio review and management process, which identifies deteriorating credit risk and proactively manages problem loans. At June 30, 2004 and December 31, 2003, classified loans, including nonperforming loans, totaled $133.3 million and $108.8 million, respectively. Total classified loans as a percentage of total loans were the same for June 30, 2004 and December 31, 2003 at 1.2%. The increase in substandard accruing commercial classified loans for the current period is primarily due to three loans totaling approximately $10.1 million. Classified loans at June 30, 2004 increased from a year earlier by $20.3 million, due to an increase in commercial loans.

The total of nonperforming loans included in classified loans at June 30, 2004 was $42.9 million, up $6.7 million from year end and down $8.0 million from June 30, 2003. The remaining classified loans of $90.4 million at June 30, 2004, continued to perform in accordance with their contractual terms and accrue interest. Due to their classification as substandard, these currently performing loans are considered by management to be potential problem loans, and may in the future become nonperforming loans.

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, 2004 and the investment portfolio totaled $4.1 billion, or 24.3% of total assets, compared with $4.3 billion or 29.5% at December 31, 2003. During the quarter approximately $750 million of FIRSTFED’s securities were sold with the proceeds used to reduce short-term borrowed funds. At both June 30, 2004 and December 31, 2003, the portfolio consisted primarily of mortgage-backed securities. See Note 4 of Notes to Consolidated Interim Financial Statements for details on the components of the portfolio.

The portfolio is managed by the Treasury Group in accordance with regulatory guidelines and established corporate investment policies. These guidelines and policies include limitations on aspects such as investment grade and ratings, concentrations and investment type to help manage risk associated with investing in securities.

Deposits

Total deposits increased $2.0 billion, or 23.9%, to $10.4 billion at June 30, 2004 from December 31, 2003 and $2.3 billion, or 28.3%, from June 30, 2003. The increases primarily occurred in core deposits, which consist of interest-bearing and noninterest bearing demand deposits, savings accounts and money market deposit accounts. These changes reflect the success of Webster’s strategic plan, which calls for increasing core deposits as a percentage of total deposits. The percentage of core deposits increased to 68.3% at June 30, 2004, up from 66.8% at December 31, 2003 and from 67.6% at June 30 a year ago. The growth in the first six months of 2004 can be attributed to the acquisition of FIRSTFED in May which amounted to approximately $1.5 billion, with the balance due to the continued success of the High Performance Checking products (for Consumer and Business and Professional Practice customers) and de novo branch expansions. See Note 10 of Notes to Consolidated Interim Financial Statements for additional information.

Borrowing and Other Debt Obligations

Total borrowed funds, including other long-term debt, increased $161.0 million, or 3.3%, to $5.1 billion at June 30, 2004 from December 31, 2003. This increase is attributable to the $150 million of senior notes issued during the second quarter of 2004 to finance the cash portion of the FIRSTFED acquisition. The notes, which are not redeemable prior to their maturity on April 1, 2014, have an interest rate of 5.125%. Moody’s, Standard & Poor’s and Fitch have rated the notes as investment grade. See Notes 11 and 12 of Notes to Consolidated Interim Financial Statements for additional information.

Webster Financial Corporation and Subsidiaries

Asset/Liability Management and Market Risk

Interest rate risk is the sensitivity of the market value of interest-sensitive assets and liabilities and the sensitivity of earnings to changes in interest rates over short-term and long-term time horizons. The Asset/Liability Management Committee manages interest rate risk to maximize net income and net market 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 market 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 loans and deposit behaviors as compared with those simulated. These simulated estimates assume that management does not take any action to mitigate any negative effects from changing interest rates.

During 2004, the methodology for calculating earnings at risk was changed from instantaneous to gradual rate changes. The change was made to more closely reflect historical patterns of rate movements and to incorporate a larger degree of absolute rate change. The estimated impact on Webster’s net income as of June 30, 2004, for the subsequent twelve month period, if interest rates increase or decrease by 100 basis points gradually is a decrease of 0.8% and 0.3%, respectively. The estimated impact, as of December 31, 2003, for an instantaneous 100 basis point change were decreases of 1.5% and 0.1%, respectively. For comparative purposes, the average yield curve change in the +100 basis point scenario for December 31, 2003 is approximately equivalent to the +200 basis point scenario for June 30, 2004. Webster expanded its analysis to include gradual interest rate increases of 200 and 300 basis points. This analysis estimated that net income would decline 1.8% and 2.8%, respectively. Measuring earnings at risk using gradual rate changes instead of rate shocks is more realistic and, therefore, more useful in measuring and managing risk. The current interest rate scenario anticipates rates will rise gradually throughout 2004 and 2005.

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. Policy limits are also maintained for a –200 basis point scenario. This scenario has been suspended, however, until all points on the yield curve are once again greater than or equal to 2.00%.

Webster Financial Corporation and Subsidiaries

The following table summarizes the estimated economic value of assets, liabilities and hedges at June 30, 2004 and December 31, 2003 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points.


						Estimated Economic Value
	Book		Estimated Economic			Change
(In thousands)	Value		Value			-100 BP			+100 BP
June 30, 2004
Assets	$	17,025,870		16,375,893			350,958			(402,898	)
Liabilities		15,574,954		15,028,825			284,697			(257,059	)
Off-balance sheet contracts				(19,984	)		43,233			(40,896	)

(Decrease) increase in net economic value							109,494			(186,735	)
Net change as % of base net economic value							8.3	%		(14.1	)%
December 31, 2003
Assets	$	14,568,690		14,382,681			274,299			(347,843	)
Liabilities		13,415,795		13,415,770			294,220			(246,757	)
Off-balance sheet contracts				(6,083	)		32,839			(30,896	)

(Decrease) increase in net economic value							12,918			(131,982	)
Net change as % of Tier 1 Capital							1.4	%		(13.1	)%

The book value of assets exceeded the estimated economic value at June 30, 2004 and December 31, 2003 because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $681.3 million and $330.9 million, respectively.

As noted in the table above, the estimated volatility in economic value of equity has not changed significantly from year end for a 100 basis point rise in rates. Rates have risen with the yield curve increasing 25 to 100 basis points between December 31, 2003 and June 30, 2004. Risk to a rise in rates has not changed much due to minimal extension of asset durations. Economic value of equity does improve this quarter in the –100 basis point scenario, however, as pre-payable assets have less incentive to prepay at the now higher rate levels. In 2004, management began to compare changes in estimated economic value with base net economic value, instead of Tier 1 Capital, when calculating equity at risk. Changing this factor had no impact on the measured change in net economic value, but did modestly reduce the net change measurement as a percentage of the now larger denominator. The percentage measurement is now more consistent with industry practice.

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, 2004 and December 31, 2003, FHLB advances outstanding totaled $2.7 billion and $2.5 billion. Webster Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $744.4 million at June 30, 2004. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $1.2 billion or used to collateralize other borrowings, such as repurchase agreements.

Webster Financial Corporation and Subsidiaries

The main sources of liquidity at the holding company level 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 Webster. At June 30, 2004, $110.7 million of retained earnings were available for dividend to the holding company. Webster also maintains $75.0 million in available revolving lines of credit with correspondent banks.

On July 23, 2002, Webster announced an additional 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, 2004, Webster has repurchased 1,862,541 shares of its common stock under the buyback program, with 537,459 remaining shares to be repurchased. On July 22, 2003, a stock buyback program was announced consisting of 2.3 million shares. During the second quarter of 2004, no shares were repurchased.

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 43 through 44 under the caption “Asset/Liability Management and Market Risk”.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company’s Exchange Act filings.

There were no changes made in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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.

Webster Financial Corporation and Subsidiaries

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

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


					Total Number of		Maximum Number of
					Shares Purchased as		Shares that May Yet
					Part of Publicly		Be Purchased under
	Total Number of		Average Price Paid		Announced Plans or		the Plans or
Period	Shares Purchased		Per Share		Programs		Programs
April 1-30, 2004		—		—		—		2,837,459
May 1-31, 2004		—		—		—		2,837,459
June 1-30, 2004		—		—		—		2,837,459

Total		—		—		—		2,837,459

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS UPDATE FOR ANNUAL MEETING

(a) The annual meeting of shareholders was held on April 22, 2004.

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

(c) The following matters were voted upon and approved by the Registrant’s shareholders at the 2004 Annual Meeting of Shareholders on April 22, 2004: (i) election of three directors to serve for three-year terms (Proposal 1) and (ii) the ratification of the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2004 (Proposal 2).

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

Proposal 1

Joel S. Becker received 40,231,738 votes for election and 1,171,277 votes were withheld; William T. Bromage received 40,215,508 votes for election and 1,187,508 were withheld; and James C. Smith received 40,257,113 votes for election and 1,145,903 votes were withheld. There were no abstentions or broker non-votes for any of the nominees.

Proposal 2

Shareholders cast 40,631,223 votes for, 641,636 votes against and 130,152 abstentions.

(d) Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

2.1 Agreement and Plan of Merger by and between Webster Financial Corporation and FIRSTFED AMERICA BANCORP, INC., dated as of October 6, 2003 (filed as Exhibit 99.1 to the Corporation’s Current Report on Form 8-K filed with the SEC on November 4, 2003 and incorporated herein by reference).

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).

Webster Financial Corporation and Subsidiaries

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 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 Company’s Chief Financial Officer.

(b) Reports on Form 8-K

Current report on Form 8-K filed with the Securities and Exchange Commission on May 26, 2004.

Current report on Form 8-K filed with the Securities and Exchange Commission on April 15, 2004.

Current report on Form 8-K filed with the Securities and Exchange Commission on April 12, 2004.

Current report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2004.


	Page No.
PART I – FINANCIAL INFORMATION
Item 1. Interim Financial Statements (unaudited)
Consolidated Statements of Condition at June 30, 2004 and December 31, 2003		3
Consolidated Statements of Income for the three and six months ended June 30, 2004 and 2003		4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2004 and 2003		6
Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2004 and 2003		7
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		8
Notes to Consolidated Interim Financial Statements		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		28
Item 3. Quantitative and Qualitative Disclosures about Market Risk		45
Item 4. Controls and Procedures		45
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		45
Item 2. Changes in Securities, Use of Proceeds and Issuer of Purchases of Equity Securities		46
Item 3. Defaults upon Senior Securities		46
Item 4. Submission of Matters to a Vote of Security Holders		47
Item 5. Other Information		47
Item 6. Exhibits and Reports on Form 8-K		47
SIGNATURE		49
EXHIBITS		50
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION


	Six months ended June 30,
(In thousands)	2004		2003
Supplemental Disclosures:
Income taxes paid	$	35,393		38,748
Interest paid		115,607		124,142
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed properties		1,114		2,588
Purchase Transactions:
Fair value of noncash assets acquired in purchase transaction	$	2,639,554		43,058
Fair value of liabilities assumed in purchase acquisition		2,568,359		42,514
Fair value of common stock issued		272,797		—
Sale Transactions:
Fair value of noncash assets sold in sale transaction		4,562		—
Fair value of liabilities sold in sale transaction		983		—


		WEBSTER FINANCIAL CORPORATION
		Registrant

Date: August 9, 2004	By:	/s/ William J. Healy

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

(a)		As of June 30, 2004, the fair value of equity securities consisted of Federal Home Loan Bank (“FHLB”) stock of $227.5 million, and common stock of $42.5 million. The fair value of equity securities at December 31, 2003 consisted of FHLB stock of $134.0 million and common stock of $45.9 million.

(b)		Includes mortgage-backed securities comprised of Fannie Mae, Freddie Mac, Government National Mortgage Association and non-agency issued mortgage-backed securities.

(a)		On a fully tax-equivalent basis.

(b)		For purposes of this computation, unrealized (losses) gains of ($21.1) million and $90.0 million for 2004 and 2003, respectively, are excluded from the average balance for rate calculations.

(a)		The annual meeting of shareholders was held on April 22, 2004.

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

(c)		The following matters were voted upon and approved by the Registrant’s shareholders at the 2004 Annual Meeting of Shareholders on April 22, 2004: (i) election of three directors to serve for three-year terms (Proposal 1) and (ii) the ratification of the appointment of KPMG LLP as independent auditors for the Company for the fiscal year ending December 31, 2004 (Proposal 2).

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

		Proposal 1 Joel S. Becker received 40,231,738 votes for election and 1,171,277 votes were withheld; William T. Bromage received 40,215,508 votes for election and 1,187,508 were withheld; and James C. Smith received 40,257,113 votes for election and 1,145,903 votes were withheld. There were no abstentions or broker non-votes for any of the nominees.

		Proposal 2 Shareholders cast 40,631,223 votes for, 641,636 votes against and 130,152 abstentions.

(d)		Not applicable.

2.1		Agreement and Plan of Merger by and between Webster Financial Corporation and FIRSTFED AMERICA BANCORP, INC., dated as of October 6, 2003 (filed as Exhibit 99.1 to the Corporation’s Current Report on Form 8-K filed with the SEC on November 4, 2003 and incorporated herein by reference).

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 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 Company’s Chief Financial Officer.

		Current report on Form 8-K filed with the Securities and Exchange Commission on May 26, 2004.

		Current report on Form 8-K filed with the Securities and Exchange Commission on April 15, 2004.

		Current report on Form 8-K filed with the Securities and Exchange Commission on April 12, 2004.

		Current report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2004.