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 March 31, 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)		46,305,262

Class		Outstanding at April 30, 2004

Webster Financial Corporation and Subsidiaries

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)


	March 31,			December 31,
(In thousands, except share and per share data)	2004			2003
Assets:
Cash and due from depository institutions	$	230,137			209,234
Short-term investments		22,130			42,420
Securities:
Trading, at fair value		2,845			555
Available for sale, at fair value (Note 4)		4,231,102			4,128,255
Held-to-maturity (fair value of $202,344 and $174,631)		200,531			173,371
Loans held for sale (Note 5)		135,771			89,830
Loans, net (Notes 6 and 7)		9,407,225			9,091,135
Accrued interest receivable		51,297			52,756
Goodwill (Note 9)		269,760			274,113
Cash surrender value of life insurance		182,511			180,556
Premises and equipment, net		99,866			95,631
Intangible assets (Note 9)		52,723			56,816
Deferred tax asset, net (Note 8)		19,517			38,088
Prepaid expenses and other assets		184,855			135,930

Total assets	$	15,090,270			14,568,690

Liabilities and Shareholders’ Equity:
Deposits (Note 10)	$	8,638,082			8,372,135
Federal funds purchased and securities sold under agreement to repurchase (Note 12)		2,150,719			1,892,138
Federal Home Loan Bank advances (Note 11)		2,437,014			2,511,495
Other long-term debt		532,760			532,760
Accrued expenses and other liabilities		110,156			97,690

Total liabilities		13,868,731			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 March 31, 2004 and December 31, 2003;
Issued – 49,404,788 shares at March 31, 2004 and 49,512,045 at December 31, 2003		494			495
Paid-in capital		411,594			412,020
Retained earnings		866,404			833,357
Less: Treasury stock, at cost, 3,105,725 shares at March 31, 2004 and 3,235,826 shares at December 31, 2003		(108,790	)		(112,713	)
Accumulated other comprehensive income		42,260			19,736

Total shareholders’ equity		1,211,962			1,152,895

Total liabilities and shareholders’ equity	$	15,090,270			14,568,690

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three months ended March 31,
(In thousands, except per share data)	2004		2003
Interest Income:
Loans	$	118,591		113,221
Loans held for sale		1,070		4,481
Securities and short-term investments		44,608		51,745

Total interest income		164,269		169,447

Interest Expense:
Deposits (Note 10)		25,830		29,418
FHLB advances and other borrowings		24,435		30,043
Other long-term debt		8,198		5,310

Total interest expense		58,463		64,771

Net interest income		105,806		104,676
Provision for loan losses (Note 7)		5,000		5,000

Net interest income after provision for loan losses		100,806		99,676

Noninterest Income:
Deposit service fees		17,185		16,890
Insurance revenue		11,638		10,964
Loan fees		6,649		5,905
Gain on sale of securities, net		5,500		2,633
Wealth and investment services		5,116		4,578
Financial advisory services		3,808		5,431
Increase in cash surrender value of life insurance		1,954		2,115
Gain on sale of loans and loan servicing, net		1,025		2,771
Other income		1,848		1,861

Total noninterest income		54,723		53,148

Noninterest Expenses:
Compensation and benefits		53,127		50,561
Occupancy		8,365		8,099
Furniture and equipment		7,641		7,521
Intangible amortization (Note 9)		4,092		3,962
Marketing		2,984		3,485
Professional services		2,899		2,478
Capital trust securities		—		2,922
Other expenses		13,033		13,778

Total noninterest expenses		92,141		92,806

Income before income taxes		63,388		60,018
Income taxes		21,065		20,081

Net Income	$	42,323		39,937

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued


	Three months ended March 31,
(In thousands, except per share data)	2004		2003
Net income	$	42,323		39,937

Basic earnings per share	$	0.92		0.88
Diluted earnings per share		0.90		0.86
Dividends paid per common share		0.21		0.19
Average shares outstanding:
Basic		46,146		45,461
Diluted		47,059		46,192

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


	Three months ended March 31,
(In thousands)	2004			2003
Net Income	$	42,323			39,937
Other comprehensive income, net of tax:
Unrealized net holding gain on securities available for sale arising during year (net of income tax effect of $17,657 and $2,917, for 2004 and 2003, respectively)		25,900			4,725
Reclassification adjustment for net gains included in net income (net of income tax effect of $2,169 and $1,039 for 2004 and 2003, respectively)		(3,271	)		(1,569	)
Deferred gain on cash flow hedge		—			1,690
Reclassification adjustment for cash flow hedge gain amortization included in net income		(43	)		(36	)
Reclassification adjustment for amortization of unrealized gain upon transfer of securities to held to maturity (net of income tax)		(62	)		—

Other comprehensive income		22,524			4,810

Comprehensive income	$	64,847			44,747

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)


													Accumulated
													Other
													Compre-
	Common			Paid-in			Retained			Treasury			hensive
(In thousands, except per share data)	Stock			Capital			Earnings			Stock			Income			Total
Three months ended March 31, 2003
Balance, December 31, 2002	$	495			411,154			707,531			(134,318	)		50,596			1,035,458
Net income for the three months ended March 31, 2003		—			—			39,937			—			—			39,937
Dividends paid:
$.19 per common share		—			—			(8,661	)		—			—			(8,661	)
Exercise of stock options		—			(1,082	)		—			3,437			—			2,355
Common stock repurchased		—			—			—			(4,781	)		—			(4,781	)
Stock-based compensation		—			413			—			915			—			1,328
Net unrealized gain on securities available for sale, net of taxes		—			—			—			—			3,156			3,156
Deferred gain from hedge, net of amortization		—			—			—			—			1,654			1,654

Balance, March 31, 2003	$	495			410,485			738,807			(134,747	)		55,406			1,070,446

Three months ended March 31, 2004
Balance, December 31, 2003	$	495			412,020			833,357			(112,713	)		19,736			1,152,895
Net income for the three months ended March 31, 2004		—			—			42,323			—			—			42,323
Dividends paid:
$.21 per common share		—			—			(9,276	)		—			—			(9,276	)
Exercise of stock options		—			(1,503	)		—			6,311			—			4,808
Common stock repurchased		—			—			—			(2,438	)		—			(2,438	)
Common stock retired		(1	)		1			—			—			—			—
Stock-based compensation		—			1,076			—			50			—			1,126
Net unrealized gain on securities available for sale, net of taxes		—			—			—			—			22,629			22,629
Amortization of deferred hedging gain		—			—			—			—			(43	)		(43	)
Amortization of unrealized gain on securities transferred to held to maturities, net of taxes		—			—			—			—			(62	)		(62	)

Balance, March 31, 2004	$	494			411,594			866,404			(108,790	)		42,260			1,211,962

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Three months ended March 31,
(In thousands)	2004			2003
Operating Activities:
Net income	$	42,323			39,937
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses		5,000			5,000
Depreciation and amortization		6,525			7,673
Amortization of intangible assets		4,092			3,962
Stock-based compensation		1,126			1,328
Net gains on sale of foreclosed properties		(141	)		(34	)
Net gains on sale of securities		(5,440	)		(2,608	)
Net gains on sale of loans and servicing		(1,025	)		(2,771	)
Increase in cash surrender value of life insurance		(1,954	)		(2,115	)
Net gains on trading securities		(60	)		(25	)
Increase in trading securities		(2,230	)		(5,147	)
Loans originated for sale		(295,151	)		(678,062	)
Proceeds from sale of loans originated for sale		250,235			761,582
Decrease (increase) in interest receivable		1,459			(3,536	)
Increase (decrease) in prepaid expenses and other assets		(48,773	)		7,768
Increase (decrease) in accrued expenses and other liabilities		14,062			(125,965	)

Net cash (used) provided by operating activities		(29,952	)		6,987

Investing Activities:
Purchases of available for sale securities		(698,647	)		(1,064,466	)
Purchases of held to maturity securities		(27,828	)		—
Proceeds from maturities and principal payments of available for sale securities		199,713			535,645
Proceeds from maturities of held to maturity securities		552			—
Proceeds from sales of available for sale securities		441,365			155,174
Net decrease in short-term investments		20,263			1,900
Net increase in loans		(315,723	)		(562,284	)
Proceeds from sale of foreclosed properties		1,563			2,085
Net purchases of premises and equipment		(9,029	)		(1,019	)
Net cash paid for acquisitions and sales		(8,109	)		(27,447	)

Net cash used by investing activities		(395,880	)		(960,412	)

Financing Activities:
Net increase in deposits		265,947			177,687
Proceeds from FHLB advances		14,706,340			16,698,246
Repayment of FHLB advances		(14,780,735	)		(15,976,177	)
Net increase (decrease) in federal funds purchased and securities sold under agreement to repurchase		262,089			(163,337	)
Other long-term debt issued		—			200,000
Cash dividends to common shareholders		(9,276	)		(8,661	)
Exercise of stock options		4,808			2,355
Common stock repurchased		(2,438	)		(4,781	)

Net cash provided by financing activities		446,735			925,332

Increase (decrease) in cash and cash equivalents		20,903			(28,093	)
Cash and cash equivalents at beginning of period		209,234			266,463

Cash and cash equivalents at end of period	$	230,137			238,370

See accompanying Notes to Consolidated Interim Financial Statements.

Webster Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued


	Three months ended March 31,
(In thousands)	2004		2003
Supplemental Disclosures:
Income taxes paid	$	5,872		383
Interest paid		59,917		61,698
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed properties		905		1,739

Assets acquired and liabilities assumed were as follows:


	Three months ended March 31,
(In thousands)	2004		2003
Fair value of noncash assets acquired in purchase acquisition	$	5,034		43,058
Fair value of liabilities assumed in purchase acquisition		188		42,514

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 months ended March 31, 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 March 31, 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 March 31,
(In thousands, except per share data)	2004			2003
Net income, as reported	$	42,323			39,937
Add: Stock option compensation expense included in reported net income, net of related tax effects		490			469
Deduct: Total stock option compensation expense determined under fair value based method for all awards, net of related tax effects		(449	)		(982	)

Pro forma net income	$	42,364			39,424

Earnings per share:
Basic – as reported	$	0.92			0.88
– pro forma		0.92			0.87

Diluted – as reported	$	0.90			0.86
– pro forma		0.90			0.85

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 first quarter of 2004: 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 3.26%. For the first quarter of 2003, the following weighted-average assumptions were: expected option term of 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 $286,000 and $395,000, net of taxes, for the three months ended March 31, 2004 and 2003.

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 or are pending 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

Phoenix National Trust Company

On December 18, 2003, Webster 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 was merged into Webster Trust Company, N.A., a subsidiary of Webster Bank. Phoenix offers trust, custody and other financial services.

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.

Pending Transactions

FIRSTFED AMERICA BANCORP, INC.

On October 7, 2003, a definitive agreement to acquire FIRSTFED AMERICA BANCORP, INC. (“FIRSTFED”), headquartered in Swansea, Massachusetts, the holding company of First Federal Savings Bank of America, was announced. The agreement is a combination of 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. FIRSTFED is 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. The merger is subject to customary closing conditions, including approval by regulatory authorities and is expected to close in the second quarter of 2004. Both the Office of the Comptroller of the Currency and the Federal Reserve Bank of Boston approved the transaction effective April 21, 2004. FIRSTFED shareholders approved the transaction on April 22, 2004. The remaining regulatory approval is that of the Massachusetts Board of Bank Incorporation.

On April 21, 2004, Webster 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. The branch will be closed and merged with Webster’s Scarsdale, New York branch.


	Page No.
PART I – FINANCIAL INFORMATION
Item 1. Interim Financial Statements (unaudited)
Consolidated Statements of Condition at March 31, 2004 and December 31, 2003		3
Consolidated Statements of Income for the three months ended March 31, 2004 and 2003		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2004 and 2003		5
Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2004 and 2003		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003		7
Notes to Consolidated Interim Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3. Quantitative and Qualitative Disclosures about Market Risk		41
Item 4. Controls and Procedures		42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		42
Item 2. Changes in Securities, Use of Proceeds and Issuer of Purchases of Equity Securities		42
Item 3. Defaults upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		43
Item 5. Other Information		43
Item 6. Exhibits and Reports on Form 8-K		43
SIGNATURE		45
EXHIBITS
BYLAWS, AS AMENDED
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

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