WEBSTER FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2005.

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

For the transition period from to .

Commission File Number: 001-31486

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		06-1187536

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Webster Plaza, Waterbury, Connecticut		06702

(Address of principal executive offices)		(Zip Code)

(203) 465-4329

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

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

þ Yes o No

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

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)



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

Assets:
Cash and due from depository institutions	$	266,088			248,825
Short-term investments		79,676			17,629
Securities (Note 4):
Trading, at fair value		1,038			—
Available for sale, at fair value		2,591,270			2,494,406
Held-to-maturity (fair value of $1,201,210 and $1,234,629)		1,212,934			1,229,613
Loans held for sale (Note 5)		352,233			147,211
Loans, net (Notes 6 and 7)		11,544,555			11,562,663
Accrued interest receivable		67,953			63,406
Goodwill (Note 8)		639,512			623,298
Cash surrender value of life insurance		230,823			228,120
Premises and equipment		161,635			149,069
Other intangible assets (Note 8)		74,978			70,867
Deferred tax asset (Note 9)		73,981			70,988
Prepaid expenses and other assets		116,152			114,502

Total assets	$	17,412,828			17,020,597


Liabilities and Shareholders’ Equity:
Deposits (Note 10)	$	11,031,835			10,571,288
Federal Home Loan Bank advances (Note 11)		2,319,722			2,590,335
Securities sold under agreement to repurchase and other short-term debt (Note 12)		1,670,950			1,428,483
Other long-term debt		674,240			680,015
Accrued expenses and other liabilities		142,910			196,925

Total liabilities		15,839,657			15,467,046


Preferred stock of subsidiary corporation		9,577			9,577

Commitments and contingencies (Notes 5 and 6)

Shareholders’ equity (Note 13):
Common stock, $.01 par value;
Authorized – 200,000,000 shares at March 31, 2005 and December 31, 2004
Issued – 53,833,274 shares at March 31, 2005 and 53,639,467 shares at December 31, 2004		538			536
Paid-in capital		610,556			605,696
Retained earnings		977,963			942,830
Less: Treasury stock, at cost; 46,520 shares at March 31, 2005 and 11,000 shares at December 31, 2004		(2,314	)		(547	)
Accumulated other comprehensive loss		(23,149	)		(4,541	)

Total shareholders’ equity		1,563,594			1,543,974

Total liabilities and shareholders’ equity	$	17,412,828			17,020,597

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)



	Three months ended March 31,
(In thousands, except per share data)	2005		2004

Interest Income:
Loans	$	158,787		118,591
Securities and short-term investments		40,899		44,608
Loans held for sale		2,732		1,070

Total interest income		202,418		164,269

Interest Expense:
Deposits (Note 10)		35,868		25,830
Federal Home Loan Bank advances and other borrowings		28,130		24,435
Other long-term debt		10,188		8,198

Total interest expense		74,186		58,463

Net interest income		128,232		105,806
Provision for loan losses (Note 7)		3,500		5,000

Net interest income after provision for loan losses		124,732		100,806

Noninterest Income:
Deposit service fees		19,129		17,185
Insurance revenue		11,802		11,638
Loan fees		8,929		6,649
Wealth and investment services		5,395		5,116
Gain on sale of loans and loan servicing, net		2,536		1,025
Increase in cash surrender value of life insurance		2,238		1,954
Gain on sale of securities, net		756		5,500
Financial advisory services		—		3,808
Other income		2,243		1,848

Total noninterest income		53,028		54,723

Noninterest Expenses:
Compensation and benefits		57,902		53,127
Occupancy		10,859		8,365
Furniture and equipment		10,798		7,641
Intangible assets amortization (Note 8)		4,902		4,092
Marketing		3,283		2,984
Professional services		3,770		2,899
Conversion and infrastructure costs		1,134		—
Other expenses		15,126		13,033

Total noninterest expenses		107,774		92,141

Income before income taxes		69,986		63,388
Income taxes		22,491		21,065

Net Income	$	47,495		42,323

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued



	Three months ended March 31,
(In thousands, except per share data)	2005		2004

Net income	$	47,495		42,323

Basic earnings per share	$	0.89		0.92
Diluted earnings per share		0.88		0.90
Dividends paid per common share		0.23		0.21

Average shares outstanding:
Basic		53,571		46,146
Diluted		54,217		47,059

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



	Three months ended March 31,
(In thousands)	2005			2004

Net Income	$	47,495			42,323

Other comprehensive (loss) income, net of tax:
Unrealized net holding (loss) gain on securities available for sale arising during period (net of income tax (benefit) expense of $(9,849), and $17,657 for 2005 and 2004, respectively)		(18,292	)		25,900
Reclassification adjustment for net security gains included in net income (net of income tax expense of $255 and $2,169 for 2005 and 2004, respectively)		(473	)		(3,271	)
Reclassification adjustment for cash flow hedge gain amortization included in net income		(42	)		(43	)
Reclassification adjustment for amortization of unrealized loss (gain) upon transfer of securities to held to maturity (net of income tax)		199			(62	)

Other comprehensive (loss) income		(18,608	)		22,524

Comprehensive income	$	28,887			64,847

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)


													Accumulated
													Other
	Common			Paid-in			Retained			Treasury			Comprehensive
(In thousands, except per share data)	Stock			Capital			Earnings			Stock			Income (loss)			Total


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

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


Three months ended March 31, 2005:
Balance, December 31, 2004	$	536			605,696			942,830			(547	)		(4,541	)		1,543,974
Net income for the three months ended March 31, 2005		—			—			47,495			—			—			47,495
Dividends paid:
$.23 per common share		—			—			(12,362	)		—			—			(12,362	)
Exercise of stock options		2			3,529			—			—			—			3,531
Common stock repurchased		—			—			—			(3,023	)		—			(3,023	)
Stock-based compensation		—			1,331			—			1,256			—			2,587
Net unrealized loss on securities available for sale, net of taxes		—			—			—			—			(18,765	)		(18,765	)
Amortization of deferred hedging gain		—			—			—			—			(42	)		(42	)
Amortization of unrealized loss on securities transferred to held to maturity, net of taxes		—			—			—			—			199			199

Balance, March 31, 2005	$	538			610,556			977,963			(2,314	)		(23,149	)		1,563,594

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



	Three months ended March 31,
(In thousands)	2005			2004

Operating Activities:
Net income	$	47,495			42,323
Adjustments to reconcile net income to net cash used by operating activities:
Provision for loan losses		3,500			5,000
Depreciation and amortization		5,725			6,525
Amortization of intangible assets		4,902			4,092
Stock-based compensation		2,587			1,126
Net gain on sale of foreclosed properties		(8	)		(141	)
Net gain on sale of securities		(728	)		(5,440	)
Net gain on sale of loans and loan servicing		(2,536	)		(1,025	)
Increase in cash surrender value of life insurance		(2,238	)		(1,954	)
Net gain on trading securities		(28	)		(60	)
Increase in trading securities		(1,010	)		(2,230	)
Loans originated for sale		(503,269	)		(295,151	)
Proceeds from sale of loans originated for sale		300,783			250,235
(Increase) decrease in interest receivable		(3,610	)		1,459
Decrease (increase) in prepaid expenses and other assets		4,996			(48,773	)
(Decrease) increase in accrued expenses and other liabilities		(59,719	)		14,062
Proceeds from surrender of life insurance contracts		793			—

Net cash used by operating activities		(202,365	)		(29,952	)

Investing Activities:
Purchases of available for sale securities		(229,236	)		(698,647	)
Purchases of held to maturity securities		(18,702	)		(27,828	)
Proceeds from maturities and principal payments of available for sale securities		89,380			199,713
Proceeds from maturities and principal payments of held to maturity securities		35,277			552
Proceeds from sales of available for sale securities		15,316			441,365
Net decrease in short-term investments		46,429			20,263
Net decrease (increase) in loans		111,097			(315,723	)
Proceeds from sale of foreclosed properties		689			1,563
Net purchases of premises and equipment		(14,197	)		(9,029	)
Net cash paid for acquisitions		(28,998	)		(8,109	)

Net cash provided (used) by investing activities		7,055			(395,880	)

Financing Activities:
Net increase in deposits		263,306			265,947
Proceeds from FHLB advances		9,350,500			14,706,340
Repayment of FHLB advances		(9,618,980	)		(14,780,735	)
Net increase in federal funds purchased and securities sold under agreement to repurchase		239,601			262,089
Repayment of other long term debt		(10,000	)		—
Cash dividends to common shareholders		(12,362	)		(9,276	)
Exercise of stock options		3,531			4,808
Common stock repurchased		(3,023	)		(2,438	)

Net cash provided by financing activities		212,573			446,735

Increase in cash and cash equivalents		17,263			20,903
Cash and cash equivalents at beginning of period		248,825			209,234

Cash and cash equivalents at end of period	$	266,088			230,137

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued



	Three months ended March 31,
(In thousands)	2005		2004

Supplemental Disclosures:
Income taxes paid	$	8,344		5,872
Interest paid		77,605		59,917

Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed properties	$	647		905

Purchase Transactions:
Fair value of noncash assets acquired	$	235,033		5,027
Fair value of liabilities assumed		210,686		188

Sale Transaction:
Fair value of noncash assets sold	$	—		11,743
Fair value of liabilities sold		—		5,292

See accompanying Notes to Consolidated Interim Financial Statements.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1: Basis of Presentation and Principles of Consolidation

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

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

NOTE 2: Stock-Based Compensation

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

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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


	Three months ended March 31,
(In thousands, except per share data)	2005			2004

Net income, as reported	$	47,495			42,323
Add: Stock option compensation expense included in reported net income, net of related tax effects		1,069			490
Deduct: Total stock option compensation expense determined under fair value based method for all awards, net of related tax effects		(1,069	)		(449	)

Pro forma net income	$	47,495			42,364


Earnings per share:
Basic – as reported	$	0.89			0.92
– pro forma		0.89			0.92

Diluted – as reported	$	0.88			0.90
– pro forma		0.88			0.90

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

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

NOTE 3: Purchase and Sale Transactions

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

Eastern Wisconsin Bancshares, Inc.

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

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

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 4: Securities

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


	March 31, 2005									December 31, 2004
	Amortized		Unrealized					Estimated		Amortized		Unrealized				Estimated
(In thousands)	Cost		Gains		Losses			Fair Value		Cost		Gains		Losses		Fair Value

Trading:
Municipal bonds and notes								$	1,038							$	—

Available for Sale:
Municipal bonds and notes	$	30		—		—			30	$	390		—		—		390
Corporate bonds and notes		189,187		5,417		(1,982	)		192,622		192,076


	Page No.
	Pending
PART I – FINANCIAL INFORMATION

Item 1. Interim Financial Statements (unaudited)

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

Consolidated Statements of Income for the three months ended March 31, 2005 and 2004		4

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004		5

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2005 and 2004		6

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004		7

Notes to Consolidated Interim Financial Statements		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures about Market Risk		35

Item 4. Controls and Procedures		35

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36

Item 3. Defaults upon Senior Securities		36

Item 4. Submission of Matters to a Vote of Security Holders		36

Item 5. Other Information		36

Item 6. Exhibits		37

SIGNATURE		38

EXHIBITS		39
EX-31.1 CERTIFICATION
EX-31.2 CERTIFICATION
EX-32.1 CERTIFICATION
EX-32.2 CERTIFICATION

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