The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial Corporation and the Notes thereto included elsewhere in this report (collectively, the "Financial Statements").

Critical Accounting Policies and Estimates

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Credit Losses

Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. The allowance for credit losses, which comprises the allowance for loan losses and the reserve for unfunded credit commitments, provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio and in unfunded credit commitments. To assess the adequacy of the allowance, management considers historical information as well as the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for credit losses and by recoveries of loans previously charged-off, and reduced by loans charged-off. For a full discussion of the methodology of assessing the adequacy of the allowance for credit losses, see the "Asset Quality" section elsewhere within Management's Discussion and Analysis of Financial Condition and Results of Operations.

Valuation of Investment Securities

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

Valuation of Goodwill/Other Intangible Assets

Webster, in part, has increased its market share through acquisitions accounted for under the purchase method, which requires that assets acquired and liabilities assumed be recorded at their fair values estimated by means of internal or other valuation techniques. These valuation estimates affect the measurement of goodwill and other intangible assets recorded in the acquisition. Goodwill is subject to ongoing periodic impairment tests and is evaluated using various fair value techniques including multiples of revenue, discounted cash flows, price/equity and price/earnings ratios.

Income Taxes

Certain aspects of income tax accounting require significant management judgment, including determining the expected realization of deferred tax assets and evaluating uncertain tax positions. Such judgments are subjective

and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of the net deferred tax assets could differ materially from the amounts recorded in the financial statements.

Deferred tax assets generally represent items that can be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years' taxable income to which "carry back" refund claims could be made. Valuation allowances are established against those deferred tax assets determined not likely to be realized.

Deferred tax liabilities generally represent items that will require a future tax payment, for which tax expense has been recognized in the Company's financial statements and a payment has been deferred, or a deduction taken on the Company's tax return but not yet recognized as an expense in the financial statements. Deferred tax liabilities are also recognized for certain "non-cash" items such as certain acquired intangible assets subject to amortization which results in future financial statement expenses that are not deductible for tax purposes.

For more information about income taxes, see Note 9 of Notes to Consolidated Financial Statements included elsewhere within this report.

Pension and Other Postretirement Benefits

The determination of the obligation and expense for pension and other postretirement benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other postretirement obligations and expense. See Note 20 of Notes to Consolidated Financial Statements for further information.

Results of Operations

Summary

Webster's net loss for the year ended December 31, 2008 was $321.8 million or $6.42 per diluted common share, compared to net income of $96.8 million or $1.76 per diluted common share for the year ended December 31, 2007. Loss from continuing operations was $318.8 million or $6.36 per diluted common share for the year ended December 31, 2008, compared to income from continuing operations of $110.7 million or $2.01 per diluted common share in 2007, a decrease of 388.0%.

The year over year decrease in results from continuing operations for 2008 as compared to 2007 is primarily attributable to the increase in the loss on write-down of investments to fair value of $215.7 million, the $198.4 million impairment of goodwill, a $118.6 million increase in the provision for credit losses and a $10.0 million increase in net losses on sales of investment securities offset by a $113.9 million reduction in the income tax expense. Excluding the net impact of these items, pre-tax income from continuing operations would have been $158.0 million and pre-tax income from continuing operations per common share would have been $3.04.

The year over year decrease in results from continuing operations for 2007 as compared to 2006 include an increase in provision for credit losses of $56.8 million, severance and other charges of $15.6 million, a net charge of $6.8 million related to the redemption of debt and a $3.6 million loss on the write-down of investments to fair value. Excluding the net impact of these items, pre-tax income from continuing operations would have been $158.9 million and pre-tax income from continuing operations per common share would have been $2.89.

Net interest income of $505.8 million for the year ended December 31, 2008 decreased 0.47% when compared to 2007 due to a decrease in the net interest margin of 12 basis points when compared to the prior year. The decline year over year was primarily due to reductions in the Federal Reserve rates as well as an increase in non-performing assets and lower yields on assets tied to prime and LIBOR. Average interest bearing liabilities increased $0.5 billion, or 3.23%, with increases in average borrowings of $0.9 billion partially offset by decreases in average deposits of $0.4 billion. Average earning assets increased $0.5 billion, or 3.23% when compared to 2007, which includes the December 2008 receipt and subsequent investment of $400 million pursuant to the Capital Purchase Program under TARP.

Non-interest income of $(28.1) million decreased by $230.4 million, or 113.9%, in 2008 compared to 2007. The decrease in non-interest income was primarily due to the $215.7 million increase in loss on write-down of investments to fair value, the $10.0 million increase in net losses on sales of investment securities and the $8.1 million decrease in income from mortgage banking activities due to the decision to exit the National Wholesale origination channel, partially offset by a $5.5 million increase in deposit service fees. The decrease in non-interest income was also impacted by a $2.8 million decline in loan fees and income from wealth and investment services in 2008 when compared to the results for 2007.

Non-interest expenses of $676.0 million increased $192.1 million, or 39.7%, in 2008 compared to 2007. The decrease is primarily due to the $198.4 million goodwill impairment charge, partially offset by $4.9 million lower compensation expense.

Selected financial highlights are presented in the following table.

                                                         At or for the years ended December 31,
(In thousands, except per share data)                   2008                  2007             2006
Earnings
Net interest income                                $      505,791         $    508,192       $ 508,550
Provision for credit losses                               186,300               67,750          11,000
Non-interest income                                       197,319              202,026         179,195
Loss on write-down of securities available for
sale to fair value                                       (219,277 )             (3,565 )       (48,879 )
(Loss) gain on sale of securities, net                     (6,094 )              3,851           1,289
Non-interest expenses                                     477,657              483,970         436,335
Goodwill impairment                                       198,379                   -               -
(Loss) income from continuing operations, net
of tax                                                   (318,757 )            110,696         133,680
(Loss) income from discontinued operations,
net of tax                                                 (3,073 )            (13,923 )           110
Net (loss) income                                        (321,830 )             96,773         133,790

Common Share Data
Net (loss) income per common share from
continuing operations-diluted (c)                  $        (6.36 )       $       2.01       $    2.47
Net (loss) income per common share-diluted (c)              (6.42 )               1.76            2.47

Dividends declared per common share                          1.20                 1.17            1.06
Book value per common share                                 23.78                33.09           33.24
Tangible book value per common share                        13.35                18.73           19.76

Diluted shares (average)                                   52,020               54,996          54,065
Dividends declared per Series A preferred
share                                                       48.86                   -               -

Selected Ratios
Return on average assets (a)                                (1.84 )%              0.66 %          0.75 %
Return on average shareholders' equity (a)                 (17.43 )               5.97            7.78
Net interest margin                                          3.28                 3.40            3.16
Efficiency ratio (b)                                        62.51                61.98           60.30
Tangible capital ratio                                       7.70                 5.89            6.72
Tangible common equity ratio                                 4.08                 5.89            6.72

(a) Calculated based on income from continuing operations for all years presented.

(b) Calculated using SNL's methodology-non-interest expense (excluding foreclosed property expenses, intangible amortization, goodwill impairments and other charges) as a percentage of net interest income (FTE basis) plus non-interest income (excluding gain/loss on securities and other charges).

(c) For the year ended December 31, 2008 the effect of stock options and preferred stock on the computation of diluted earnings per share was anti-dilutive, therefore, the effect of these types of potential common stock were not included in the determination of diluted shares (average).

Table 1: Three-year average balance sheet and net interest margin. Average balances are daily averages and yields are calculated on a fully tax equivalent basis.

                                                                                          Year ended December 31,
                                                      2008                                         2007                                          2006
                                       Average                      Average        Average                        Average        Average                        Average
(Dollars in thousands)                 Balance       Interest       Yields         Balance        Interest        Yields         Balance        Interest        Yields
Loans (a)                            $ 12,700,933    $ 710,621         5.60 %    $ 12,390,955    $   837,711         6.76 %    $ 12,800,864    $   843,398         6.59 %
Investment securities (b)               3,023,039      171,813         5.51         2,470,400        144,352         5.79         3,224,776        162,504         4.93
Loans held for sale                        27,366        1,597         5.83           344,663         21,560         6.26           288,892         17,213         5.96
Short-term investments                      6,422          146         2.27            59,345          3,045         5.13            25,514          1,079         4.23

Total interest-earning
assets (b)                             15,757,760      884,177         5.58        15,265,363      1,006,668         6.60        16,340,046      1,024,194         6.25
Other assets                            1,546,699                                   1,590,282                                     1,531,421

Total assets                         $ 17,304,459                                $ 16,855,645                                  $ 17,871,467

Demand deposits                      $  1,487,661    $      -            -       $  1,506,696    $        -            -       $  1,470,861    $        -            -
Savings, NOW, money market
deposit accounts                        5,776,660       80,994         1.40 %       5,749,378        125,590         2.18 %       5,427,812        100,165         1.85 %
Certificates of deposits                4,764,386      169,188         3.55         5,218,449        235,717         4.52         5,193,608        210,034         4.04

Total deposits                         12,028,707      250,182         2.08        12,474,523        361,307         2.90        12,092,281        310,199         2.57

Fed funds and repurchase
agreements                              1,359,318       34,643         2.55           996,341         44,769         4.49         1,243,269         52,301         4.21
FHLB advances                           1,269,098       39,236         3.09           757,367         35,302         4.66         2,035,786         94,322         4.63
Other long-term-debt                      660,146       39,421         5.97           609,371         46,025         7.55           633,667         49,366         7.79

Total borrowings                        3,288,562      113,300         3.45         2,363,079        126,096         5.34         3,912,722        195,989         5.01

Total interest-bearing
liabilities                            15,317,269      363,482         2.37        14,837,602        487,403         3.28        16,005,003        506,188         3.16
Other liabilities                         149,236                                     156,083                                       139,057

Total liabilities                      15,466,505                                  14,993,685                                    16,144,060

Preferred stock of subsidiary
corporation                                 9,577                                       9,577                                         9,577
Shareholders' equity                    1,828,377                                   1,852,383                                     1,717,830

Total liabilities and
shareholders' equity                 $ 17,304,459    $ 520,695                   $ 16,855,645    $   519,265                   $ 17,871,467    $   518,006

Less fully taxable-equivalent
adjustment                                             (14,904 )                                     (11,073 )                                      (9,456 )

Net interest income                                  $ 505,791                                   $   508,192                                   $   508,550

Interest rate spread (b)                                               3.21 %                                        3.32 %                                        3.09 %
Net interest margin (b)                                                3.28 %                                        3.40 %                                        3.16 %

Average Prime Rate                                                     5.09 %                                        8.05 %                                        7.96 %
Average Federal Funds Rate                                             1.92 %                                        5.02 %                                        4.97 %

(a) Includes amortization of net deferred loan costs (net of fees) and premiums (net of discounts) of: $14.8 million, $24.7 million and $19.5 million in 2008, 2007 and 2006, respectively.

(b) Unrealized gains (losses) on available-for-sale securities are excluded from the average yield calculations. Unrealized net (losses) gains averaged ($94.0) million, $2.4 million and $(36.0) million for 2008, 2007 and 2006, respectively.

Net Interest Income

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. The table below is based upon reported net interest income.

Table 2: Net interest income - rate/volume analysis (not presented on a tax-equivalent basis).

                                       Years ended December 31,                   Years ended December 31,
                                             2008 vs. 2007                              2007 vs. 2006
                                      Increase (decrease) due to                 Increase (decrease) due to
(In thousands)                     Rate         Volume         Total          Rate         Volume         Total
Interest on interest-earning
assets:
Loans                           $ (147,589 )   $  20,499     $ (127,090 )   $  21,709     $ (27,396 )   $  (5,687 )
Loans held for sale                 (1,373 )     (18,590 )      (19,963 )         892         3,455         4,347
Investments                         (7,328 )      28,059         20,731        19,043       (36,846 )     (17,803 )

Total interest income             (156,290 )      29,968       (126,322 )      41,644       (60,787 )     (19,143 )

Interest on interest-bearing
liabilities:
Deposits                           (98,657 )     (12,468 )     (111,125 )      41,012        10,096        51,108
Borrowings                         (52,994 )      40,198        (12,796 )      12,051       (81,944 )     (69,893 )

Total interest expense            (151,651 )      27,730       (123,921 )      53,063       (71,848 )     (18,785 )

Net change in net interest
income                          $   (4,639 )   $   2,238     $   (2,401 )   $ (11,419 )   $  11,061     $    (358 )

Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on deposits and borrowings, totaled $505.8 million for the year ended December 31, 2008, compared to $508.2 million for the year ended December 31, 2007, a decrease of $2.4 million. Average interest-earning assets grew by 3.23% to $15.8 billion at December 31, 2008 from $15.3 billion at December 31, 2007 while average interest-bearing liabilities also grew 3.23% to $15.3 billion at December 31, 2008 from $14.8 billion at December 31, 2007. Despite the offsetting growth in interest-earning assets to interest-bearing liabilities, the net interest margin declined by 12 basis points to 3.28% for the year ended December 31, 2008 from 3.40% for the year ended December 31, 2007. The yield on interest-earning assets declined by 102 basis points for the year ended December 31, 2008 while the cost of interest-bearing liabilities declined 91 basis points for the year ended December 31, 2008.

The decline in yields in certain asset classes within the loan portfolio reflects the effects that the 400 basis point reductions made by the Federal Reserve during 2008 have had on the floating rate home equity lines, commercial real estate ("CRE") and commercial and industrial ("C&I") interest bearing assets. At December 31, 2008 approximately 70.0% of Webster's CRE portfolio and 64.4% of its C&I portfolio are floating rate assets, while 97.4% of the equipment finance portfolio is fixed rate. The decline in yields is also impacted by the increase in non-accruing loans. Webster's total non-performing assets increased to $263.2 million at December 31, 2008 in comparison with $121.1 million at December 31, 2007, with C&I, residential development, 1-4 family residential and residential construction representing $100.0 million of the $142.1 million increase. The majority of the increase is a result of residential development loans along with 1-4 family residential and construction loans that reflect the continuing challenge of the residential housing market as well as the deterioration of economic conditions of the market in general.

Since net interest income is affected by changes in interest rates, by loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies. See "Asset/Liability Management and Market Risk" for further discussion of Webster's interest rate risk position.

Interest Income

Interest income decreased $126.3 million, or 12.7%, to $869.3 million for the year ended December 31, 2008 as compared to 2007. The decrease in the average yield of 102 basis points was partially offset by an increase in average interest earning assets of $492.4 million. The average loan portfolio, excluding loans held for sale,

increased by $310.0 million for the year ended December 31, 2008, or 2.5%, compared to 2007. Average investment securities increased by $552.6 million for the year ended December 31, 2008, or 22.4%, compared to 2007. In addition, higher yielding commercial and consumer loans partially replaced reductions in residential loans.

The 102 basis point decrease in the average yield earned on interest-earning assets for the year ended December 31, 2008 to 5.58% compared to 6.60% for 2007 is a direct result of actions taken by the federal government to reduce the fed fund rates by 400 basis points during the year ended December 31, 2008. The loan portfolio yield decreased 116 basis points to 5.60% for the year ended December 31, 2008 and comprised 80.6% of average interest-earning assets at December 31, 2008 compared to the loan portfolio yield of 6.76% and 81.2% of average interest-earning assets for the year ended December 31, 2007. Additionally, the yield on investment securities was 5.51%, a 28 basis point decrease over 2007.

Interest Expense

Interest expense for the year ended December 31, 2008 decreased $123.9 million, or 25.4%, compared to 2007. The decrease was primarily due to competitive deposit pricing, a decline in average deposits of $445.8 million for the year ended December 31, 2008 and the 400 basis points in rate reductions made by the Federal Reserve, offset by a $925.5 million increase in average total borrowings when compared to 2007.

The cost of interest-bearing liabilities was 2.37% for the year ended December 31, 2008, a decrease of 91 basis points compared to 3.28% for 2007. Deposit costs for the year ended December 31, 2008 decreased to 2.08% from 2.90% in 2007, a decrease of 82 basis points. Total borrowing costs for the year ended December 31, 2008 decreased 189 basis points to 3.45% from 5.34% for 2007.

Provision for Credit Losses

The provision for credit losses was $186.3 million for the year ended December 31, 2008, an increase of $118.5 million compared to $67.8 million for the year ended December 31, 2007. The increase in the provision is primarily due to increased charge-offs and increased reserve coverage levels given the increase in nonperforming loans as well as the general deteriorating economic conditions affecting all of the Company's loan portfolios. For the year ended December 31, 2008, total net charge-offs were $138.1 million compared to $25.2 million in 2007. See Tables 18 through 24 for information on the allowance for credit losses, net charge-offs and nonperforming assets.

Management performs a quarterly review of the loan portfolio and unfunded commitments to determine the adequacy of the allowance for credit losses. Several factors influence the amount of the provision, primarily loan growth and portfolio mix, performance, net charge-offs and the general economic environment. At December 31, 2008, the allowance for credit losses totaled $245.8 million or 2.02% of total loans compared to $197.6 million or 1.58% at December 31, 2007. See the "Allowance for Credit Losses Methodology" section later in Management's Discussion and Analysis for further details.

Non-interest Income

Table 3: Non-interest income comparison of 2008 to 2007.




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