Summary of WEBSTER FINANCIAL CORP

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 "Consolidated Financial Statements").
Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements can be identified by words such as "believes", "anticipates", "expects", "intends", "targeted", "continue", "remain", "will", "should", "may", "plans", "estimates" and similar references to future periods, however such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to:
(i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors;
(iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on Webster's current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Webster's actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
(1) local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;
(2) volatility and disruption in national and international financial markets;
(3) government intervention in the U.S. financial system; (4) changes in the level of non-performing assets and charge-offs; (5) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (6) adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio; (7) inflation, interest rate, securities market and monetary fluctuations; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by customers; (9) changes in consumer spending, borrowings and savings habits;
(10) technological changes and cyber-security matters; (11) the ability to increase market share and control expenses; (12) changes in the competitive environment among banks, financial holding companies and other financial service providers; (13) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords; (14) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (15) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and (16) our success at managing the risks involved in the foregoing items. Any forward-looking statement made by the Company in this Annual Report on Form 10-K speaks only as of the date on which it is made. Factors or events that could cause the Company's actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Financial Performance
In 2012 the Company achieved several goals which were part of its overall strategy to operate more efficiently and effectively in a changing regulatory environment. During 2012 net income per common share increased, credit quality steadily improved, capital ratios remained strong, low cost deposits were at record highs, total loans grew, and return on average assets and average shareholders' equity showed continued improvement. In addition, the Company launched an all-encompassing review of operating expenses with a goal to operate at a 60% efficiency ratio, which was achieved during the fourth quarter of 2012. These efforts, coupled with our focus on meeting the changing preferences of our customers, resulted in a significant improvement in earnings during 2012. Webster's net income available to common shareholders for the year ended December 31, 2012 was $171.2 million compared to $148.1 million for the year ended December 31, 2011. Net income available to common shareholders per diluted share was $1.86 for the year ended December 31, 2012 compared to $1.61 for the year ended December 31, 2011. The primary factors which led to the increase in net income available to common shareholders in 2012 as compared to 2011 are outlined below.
The factors positively impacting net income available to common shareholders include:
• interest expense decreased $21.4 million;

• income from mortgage banking activities increased $18.1 million; and

• non-interest expense (excluding litigation) decreased $18.7 million.

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The factors negatively impacting net income available to common shareholders include:
• interest income decreased $6.2 million;

• deposit service fees decreased $6.2 million; and

• the absence in 2012 of the $9.5 million non-recurring litigation benefit that occurred in 2011.

The impact of the items outlined above, after the effect from income taxes, resulted in income from continuing operations of $173.7 million for the year ended December 31, 2012 as compared to $149.4 million for the year ended December 31, 2011.
Credit quality improved as evidenced by improvement in asset quality ratios. Net charge offs to average loans and leases decreased from 1.00% at December 31, 2011 to 0.68% at December 31, 2012 and non-performing loans to total loans, leases and Other Real Estate Owned ("OREO") decreased from 1.72% at December 31, 2011 to 1.65% at December 31, 2012. The continued improvement in credit quality in 2012 resulted in a $1.0 million and $92.5 million decrease in the provision for loan and lease losses compared to 2011 and 2010, respectively. The Company's capital remained strong at December 31, 2012 and well above the requirements to be considered "well capitalized" according to current and proposed regulatory standards. Due to the impact of loan growth on total risk weighted assets, the Tier 1 common equity to risk weighted assets ratio declined to 10.78% at December 31, 2012 from 11.12% at December 31, 2011. The tangible common equity ratio increased to 7.17% at December 31, 2012 from 7.03% at December 31, 2011.
On December 4, 2012, the Company closed the public offering of 5,060,000 depositary shares pursuant to an Underwriting Agreement, dated November 27, 2012, between the Company and Deutsche Bank Securities Inc., as representative for the underwriters listed therein. Each depositary share represents a 1/1000th interest in a share of its Series E Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share). Dividends accrue and are payable on the liquidation amount of $25,000 per share of Series E Preferred Stock in arrears at 6.40% per annum only when, as, and if declared by the Board of Directors of Webster and to the extent Webster has legally available funds to pay dividends.
During 2012, the Company completed several initiatives to improve shareholder return. On January 23, 2012, Webster's Board of Directors declared a quarterly dividend of $0.05 per share and on April 23, 2012, the Company increased its quarterly cash dividend to common shareholders to $0.10 per common share from $0.05 per common share.
In addition, on December 6, 2012, Webster announced that its Board of Directors has authorized a $100 million common stock repurchase program under which shares may be repurchased from time to time in open market or privately negotiated transactions, subject to market conditions and other factors. On December 7, 2012, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P., collectively the selling stockholders, and Barclays Capital Inc. entered into an underwriting agreement pursuant to which the Warburg enitities agreed to sell 10,000,000 shares of Webster's common stock, $0.01 par value per share, to the underwriter. The transaction closed on December 12, 2012. In connection with the common stock repurchase program, Webster purchased 2,518,891 shares of its common stock in the offering at a price per share equal to $19.85, the price per share paid by the underwriter to the selling stockholders pursuant to the underwriting agreement

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Selected financial highlights are presented in the following table:

                                                       At or for the year ended December 31,
(In thousands, except per share and ratio data)          2012             2011           2010
Earnings:
Net interest income                                $     578,908    $     563,768    $  537,271
Provision for loan and lease losses                       21,500           22,500       115,000
Total non-interest income                                192,758          177,042       201,225
Total non-interest expense                               501,804          510,976       538,974
Income from continuing operations                        173,697          149,383        72,164
Income from discontinued operations, net of tax                -            1,995            94
Net (loss) income attributable to noncontrolling
interests                                                      -               (1 )           3
Net income attributable to Webster Financial
Corporation                                              173,697          151,379        72,255
Net income available to common shareholders              171,237          148,093        47,339
Per Share Data:
Weighted-average common shares - diluted                  91,649           91,688        82,172
Net income from continuing operations per common
share - diluted (a)                                $        1.86    $        1.59    $     0.57
Net income available to common shareholders per
common share - diluted (a)                                  1.86             1.61          0.57
Dividends declared per common share                         0.35             0.16          0.04
Dividends declared per Series A preferred share            85.00            85.00         85.00
Dividends declared per Series B preferred share                -                -         49.86
Dividends declared per subsidiary preferred share              -             0.83          0.86
Book value per common share                                22.75            20.74         19.97
Tangible book value per common share                       16.47            14.58         13.64
Selected Ratios:
Return on average assets (b)                                0.90 %           0.84 %        0.40 %
Return on average shareholders' equity (b)                  8.92             8.24          3.86
Return on average tangible common shareholders'
equity                                                     12.36            11.86          6.08
Net interest margin                                         3.32             3.47          3.36
Efficiency ratio                                           62.78            65.13         66.73
Tangible common equity ratio                                7.17             7.03          6.80
Tier 1 common equity to risk weighted assets               10.78            11.12          9.88

(a) For the years ended December 31, 2012, 2011 and 2010 the effect of preferred stock on the computation of diluted earnings per share was anti-dilutive; therefore, the effect of this security was not included in the determination of diluted average shares.

(b) Based on net income before preferred dividend.

The Company evaluates its business based on certain ratios that utilize tangible equity, a non-GAAP financial measure.
The efficiency ratio, which measures the costs expended to generate a dollar of revenue, is calculated excluding foreclosed property expense, amortization of intangibles, gain or loss on securities and other non-recurring items. Accordingly, this is also a non-GAAP financial measure. The Company believes the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Company. Other companies may define or calculate supplemental financial data differently.
See the following tables for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP at or for the year ended December 31, 2012, 2011 and 2010.

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(Dollars in thousands)
                                                       At or for the year ended December 31,
Return on average tangible common shareholders'
equity (non-GAAP):                                      2012            2011           2010
Net income attributable to Webster Financial
Corporation                                        $     173,697   $    151,379   $     72,255
Shareholders' equity (GAAP)                        $   2,093,530   $  1,845,774   $  1,778,879
Less: Preferred stock (GAAP)                             151,649         28,939         28,939
    Non controlling interests (GAAP)                           -              -          9,644
    Goodwill and other intangible assets (GAAP)          540,157        545,577        551,164
Add back: DTL related to other intangible assets
(GAAP)                                                     3,678          5,619              -
Tangible common equity (non-GAAP)                  $   1,405,402   $  1,276,877   $  1,189,132
Return on average tangible common shareholders'
equity (non-GAAP)                                          12.36 %        11.86 %         6.08 %

                                                          For the year ended December 31,
Efficiency ratio (non-GAAP)                             2012            2011           2010
Non-interest expense (GAAP)                        $     501,804   $    510,976   $    538,974
Less: Foreclosed property (income) expense                (1,098 )        2,744         10,773
Intangible assets amortization                             5,420          5,588          5,588
Severance                                                  1,505          5,100          1,832
Debt prepayment penalties                                  4,040          5,203              -
Write-down for expedited asset disposition                     -          6,260              -
Preferred stock redemption costs                               -            423              -
Stock registration costs                                     175              -              -
Warrant registration                                           -            350              -
Loan repurchase and unfunded commitment reserve
benefit, net                                                   -         (1,436 )            -
Branch and facility optimization                             168          5,004          4,307
Fraud loss                                                     -              -          5,861
Litigation                                                     -         (9,523 )       22,476
Non-interest expense (non-GAAP)                    $     491,594   $    491,263   $    488,137
Net interest income (before provision) (GAAP)      $     578,908   $    563,768   $    537,271
Add back: FTE adjustment                                  14,751         15,497         14,857
Non-interest income (GAAP)                               192,758        177,042        201,225
Less: Net gain on securities                               3,347          2,024         21,793
Income (non-GAAP)                                  $     783,070   $    754,283   $    731,560
Efficiency ratio (non-GAAP)                                62.78 %        65.13 %        66.73 %

                                                       At or for the year ended December 31,
Tangible common equity ratio (non-GAAP):                2012            2011           2010
Equity (GAAP)                                      $   2,093,530   $  1,845,774   $  1,778,879
Less: Preferred stock (GAAP)                             151,649         28,939         28,939
     Non controlling interests (GAAP)                          -              -          9,644
     Goodwill and other intangible assets (GAAP)         540,157        545,577        551,164
Add back: DTL related to other intangible assets
(GAAP)                                                     3,678          5,619              -
Tangible common equity (non-GAAP)                  $   1,405,402   $  1,276,877   $  1,189,132
Total Assets                                       $  20,146,765   $ 18,714,340   $ 18,033,881
Less: Goodwill and other intangible assets (GAAP)        540,157        545,577        551,164
Add back: DTL related to other intangible assets
(GAAP)                                                     3,678          5,619              -
Tangible assets (non-GAAP)                         $  19,610,286   $ 18,174,382   $ 17,482,717
Tangible equity ratio (non-GAAP)                            7.17 %         7.03 %         6.80 %

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(Dollars and shares in thousands, except per
share data)
                                                               At December 31,
Tangible book value per common share (non-GAAP):      2012           2011           2010
Equity (GAAP)                                    $  2,093,530   $  1,845,774   $  1,778,879
Less: Preferred equity (GAAP)                         151,649         28,939         28,939
     Non controlling interests (GAAP)                       -              -          9,644
     Goodwill and other intangible assets (GAAP)      540,157        545,577        551,164
Add back: DTL related to other intangibles
(GAAP)                                                  3,678          5,619              -
Tangible common equity (non-GAAP)                $  1,405,402   $  1,276,877   $  1,189,132
Common shares outstanding                              85,341         87,600         87,160
Tangible book value per common share (non-GAAP)  $      16.47   $      14.58   $      13.64

                                                               At December 31,
Tier 1 common equity/ risk weighted assets
(non-GAAP):                                           2012           2011           2010
Equity (GAAP)                                    $  2,093,530   $  1,845,774   $  1,778,879
Less: Preferred equity (GAAP)                         151,649         28,939         28,939
     Non controlling interests (GAAP)                       -              -          9,644
     Goodwill and other intangible assets (GAAP)      540,157        545,577        551,164
Add back: Accumulated other comprehensive loss
(GAAP)                                                 32,266         60,204         13,709
DTL (DTA) related to goodwill and other
intangibles (regulatory)                               11,380         12,795        (36,956 )
Tier 1 common equity (regulatory)                $  1,445,370   $  1,344,257   $  1,165,885
Risk-weighted assets (regulatory)                $ 13,409,363   $ 12,087,718   $ 11,805,871
Tier 1 common equity/ risk weighted assets
(non-GAAP)                                              10.78 %        11.12 %         9.88 %

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The following table summarize the Company's average balances (average balances are daily averages), interest and yields on major categories of Webster's interest-earning assets and interest-bearing liabilities on a fully tax equivalent basis.

Table 1: Three-year average balance sheet and net interest margin.

                                                                         Years ended December 31,
                                           2012                                    2011                                    2010
                            Average                      Average     Average                     Average     Average                     Average
(Dollars in thousands)      Balance      Interest (a)    Yields      Balance      Interest (a)    Yields     Balance      Interest (a)    Yields
Assets
Interest-earning assets:
Loans                    $ 11,525,233   $     485,666      4.21 % $ 11,054,100   $     486,883     4.40 % $ 10,904,698   $     493,244     4.52 %
Securities (b)              6,100,219         216,513      3.58      5,407,867         223,568     4.16      5,254,314         225,918     4.32
Federal Home Loan and
Federal Reserve Bank
stock                         143,074           3,508      2.45        143,874           3,318     2.31        142,896           2,983     2.09
Interest-bearing
deposits                       77,265             141      0.18        112,232             216     0.19        151,756             389     0.26
Loans held for sale            73,156           2,425      3.31         28,144           1,235     4.39         21,758             970     4.46
Total interest-earning
assets                     17,918,947         708,253      3.96 %   16,746,217         715,220     4.28 %   16,475,422         723,504     4.40 %
Noninterest-earning
assets                      1,427,824                                1,335,374                               1,378,242
Total assets             $ 19,346,771                             $ 18,081,591                            $ 17,853,664
Liabilities and equity
Interest-bearing
liabilities:
Demand deposits          $  2,638,025                             $  2,278,419                            $  1,789,161
Savings, checking &
money market deposits       8,824,581   $      21,061      0.24 %    8,534,333   $      33,747     0.40 %    8,458,169          49,251     0.58 %
Time deposits               2,703,414          38,525      1.43      3,031,835          47,061     1.55      3,490,017          63,378     1.82
Total deposits             14,166,020          59,586      0.42     13,844,587          80,808     0.58     13,737,347         112,629     0.82
Securities sold under
agreements to repurchase
and other short-term
borrowings                  1,207,623          21,034      1.74      1,053,323          16,173     1.54        899,203          15,900     1.77
Federal Home Loan Bank
advances                    1,389,999          16,943      1.22        569,987          14,352     2.52        567,711          17,628     3.11
Long-term debt                418,896          17,031      4.07        565,331          24,622     4.36        586,546          25,219     4.30
Total borrowings            3,016,518          55,008      1.82      2,188,641          55,147     2.52      2,053,460          58,747     2.86
Total interest-bearing
liabilities                17,182,538         114,594      0.67 %   16,033,228         135,955     0.85 %   15,790,807         171,376     1.09 %
Noninterest-bearing
liabilities                   217,653                                  202,205                                 184,264
Total liabilities          17,400,191                               16,235,433                              15,975,071
Noncontrolling interests            -                                    9,119                                   9,643
Preferred Stock                38,335                                   28,942                                 317,659
Common shareholders'
equity                      1,908,245                                1,808,097                               1,551,291
Webster Financial Corp.
shareholders' equity        1,946,580                                1,837,039                               1,868,950
Total liabilities and
equity                   $ 19,346,771                             $ 18,081,591                            $ 17,853,664
Tax-equivalent net
interest income                               593,659                                  579,265                                 552,128
Less: tax equivalent
adjustments                                   (14,751 )                                (15,497 )                               (14,857 )
Net interest income                     $     578,908                            $     563,768                           $     537,271
Net interest margin                                        3.32 %                                  3.47 %                                  3.36 %

(a) On a fully tax-equivalent basis.

(b) Average balances and yields of securities available for sale are based upon the historical amortized cost.

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Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 75.0% of total revenue for the year ended December 31, 2012. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin.
Since net interest income is affected by changes in interest rates, 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 ("ALCO")and through related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size, duration and credit risk of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position and other factors. See the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate risk position. 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 . . .