UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2004.

OR

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________.

WEBSTER FINANCIAL CORPORATION

Registrant’s telephone number, including area code: (203) 578-2476

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act — Not Applicable

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Act). Yes þ No o

     The aggregate market value of voting and non-voting common equity held by non-affiliates of Webster Financial Corporation as of June 30, 2004 was $2,399,410,287.

     The number of shares of common stock outstanding, as of February 28, 2005: 53,768,574.

DOCUMENTS INCORPORATED BY REFERENCE

WEBSTER FINANCIAL CORPORATION AND SUBSIDARIES

WEBSTER FINANCIAL CORPORATION
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

2

Forward Looking Statements

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

PART I

ITEM 1. Business

General

Webster Financial Corporation (“Webster” or the “Company”), a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Delaware in 1986. Webster, on a consolidated basis, at December 31, 2004 had assets of $17.0 billion and shareholders’ equity of $1.5 billion. Webster’s principal assets are all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”), and Webster Insurance, Inc. (“Webster Insurance”). Webster, through its various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and eastern New York State, and equipment financing, asset-based lending, mortgage origination and insurance premium financing throughout the United States. Webster Bank provides business banking, retail banking, consumer financing, mortgage banking, call center, trust and investment services through 150 banking offices, 276 ATM’s and its Internet website (www.websteronline.com). Founded in 1935 it converted from a federal mutual to a federal stock institution in 1986. In 2004, Webster Bank converted from a federal savings bank to national bank charter, regulated by the Office of the Comptroller of the Currency. Webster’s common stock is traded on the New York Stock Exchange under the symbol of “WBS”.

Webster’s mission statement is the foundation of our operating principles. Stated simply as — “We Find A Way” to help individuals, families and businesses achieve their financial goals. The Company operates with a local market orientation and a vision to be the leading regional financial services provider in the markets we serve. Its operating objectives include developing customer relationships through cross-sale opportunities to fuel internal growth, increasing the products and services currently offered and expanding geographically in contiguous markets.

Retail Banking

Retail Banking is the oldest and largest part of our business. Our geographic reach stretches from Westchester County, New York and Fairfield County, Connecticut — one of the most affluent regions in the U.S. — through Connecticut. In 2004 we extended our franchise across Southern New England, by entering Rhode Island and southeastern Massachusetts, through the acquisition of FIRSTFED AMERICA BANCORP, INC. adding 26 branches to our network and approximately $1.5 billion in loans and deposits.

Our strong position within our service region is widely recognized. In terms of deposit share, Webster Bank ranks either first or second in our primary markets. These rankings are starting points for continued organic growth in the years ahead. Webster’s Retail Banking segment is intently focused on growing core deposits that fuel Webster’s profitability by attracting a growing number of customers and offering products and services that deepen our customer relationships.

New branches, high performance checking (HPC) and deeper relationships with our existing customers all depend upon gaining confidence and trust through skilled professionals in the field for their success. We select, develop and reward talented individuals in our retail banking system.

We are continually working to expand the franchise through de novo branches. In 2004 we opened four branches in Westchester County, New York, and one in Fairfield County, Connecticut which expanded and strengthened our contiguous market reach.

We also secured a position in the fast-moving health savings account market with our acquisition of HSA Bank. The largest bank provider of HSA accounts in the country.

3

Business and Professional Banking
Business and Professional Banking (“BP”) provides a full array of loan and deposit products to small businesses located in Webster’s markets. The BP market consists of businesses with annual revenue of up to $10 million, with relationship exposures up to $2 million and an array of business deposit products. This market segment represents a significant percentage of commercial businesses located within the boundaries of our marketplace. It originates loans and deposit relationships through a dedicated group of business bankers as well as through the branch network. It also plays a major role in supporting the Community Reinvestment Act goals by providing credit facilities to a wide range of small businesses, including many local not-for-profit organizations. A primary objective of BP’s strategy is to focus on deposit growth as part of the overall customer relationship and develop a variety of innovative small business deposit products that are designed to meet depositors’ needs and attract both short-term and long-term deposits.

Commercial Banking

Webster’s Commercial Banking group takes a direct relationship approach to providing lending, deposit and cash management services to middle market companies in our four-state franchise territory and commercial real estate loans principally in the Northeast. Asset-based lending and equipment financing is provided to customers across the United States. This well diversified portfolio totaled $4.3 billion at December 31, 2004 and is maintained and monitored under a strategy designed to mitigate credit risk.

Middle Market Lending
The Middle Market Division provides a full array of financial services to a diversified group of companies with revenues greater than $10 million, primarily privately held and located within Southern New England. Typical loan facilities include lines of credit for working capital, term loans to finance purchases of equipment and commercial real estate loans for owner-occupied buildings. Unit and relationship managers within the Middle Market Division average over 20 years of experience in the Connecticut market.

Commercial Real Estate Lending
The Commercial Real Estate Division provides primarily in and around Webster’s market variable rate and fixed rate financing alternatives for the purpose of acquiring, developing, constructing, improving or refinancing commercial real estate where the property is the primary collateral securing the loan and the income generated from the property is the primary repayment source. Typically it lends on investment quality real estate, including apartments, anchored retail, industrial and office properties. Loan types include construction, construction mini-perm and permanent loans, in amounts that range from $2 million to $15 million and are diversified by property type and geographic location. The lending group consists of a team of professionals with a high level of expertise and experience. The majority of the lenders have more than 15 years of national lending experience in both construction and permanent lending with major banks and insurance companies.

Asset-Based Lending
Webster Business Credit Corporation (“WBCC”) is Webster Bank’s asset-based lending subsidiary with offices in New York, New York; South Easton, Massachusetts; Chicago, Illinois and Atlanta, Georgia. WBCC was previously named Whitehall Business Credit Corporation and changed its name effective January 5, 2004. Asset-based loans are generally secured by accounts receivable and inventories of the borrower and, in some cases, also include additional collateral such as property and equipment.

WBCC originates as agent, loans for its portfolio and sells participations to other financial institutions. In addition, it purchases participations from other banks and financial entities. In its capacity as agent, it generally establishes depository relationships with the borrower in the form of cash management accounts.

Equipment Financing
Center Capital Corporation (“Center Capital”), an equipment financing subsidiary of Webster Bank, transacts business with end-users of equipment, either by soliciting this business on a direct basis or through referrals from various equipment manufacturers, dealers and distributors with whom it has relationships.

Center Capital markets its products nationally through a direct sales force of equipment financing professionals who are grouped by customer type or collateral-specific business. During 2004, financing initiatives encompassed four distinct industry/equipment niches, each operating as a division; Construction and Transportation Equipment Financing, Environmental Equipment Financing, Machine Tool Equipment Financing and Aviation Equipment Financing.

Within each division, Center Capital seeks to finance equipment that retains good value throughout the term of the underlying transaction. Little, if any, residual value risk is taken and, in many instances, financing terms cover only half of the financed equipment’s useful life. As such, and in the exceptional instances where it is forced to repossess its collateral, that equipment may have value equal to or in excess of the defaulted contract’s remaining balance. All credit underwriting, contract preparation and closing, as well as servicing (including collections) are performed centrally at Center Capital’s headquarters in Farmington, Connecticut.

4

Insurance Premium Financing
Budget Installment Corporation (“BIC”) is an insurance premium financing subsidiary of Webster Bank based in Rockville Centre, New York. BIC finances commercial property and casualty premiums for businesses throughout the United States that pay their insurance premiums on an installment basis.

Consumer Finance

Webster’s Consumer Finance division provides a convenient and competitive selection of residential first mortgages and home equity loans, through Webster Bank and People’s Mortgage Company (“PMC”), a wholly-owned subsidiary of Webster Bank. Webster Bank’s loan distribution channels consist of the branch network, loan officers, call center, as well as third party licensed mortgage brokers. Additionally, loan products may be offered periodically through direct mail programs. It also provides the convenience of the Internet for equity loan applications that are available in most states. PMC engages in mortgage banking activities throughout New England and the mid-Atlantic region.

Consumer loan products are underwritten in accordance with accepted industry guidelines including, but not limited to, the evaluation of the credit worthiness of the borrower(s) and collateral. Independent credit reporting agencies and the Fair Isaac scoring model and the analysis of personal financial information are utilized to determine the credit worthiness of potential borrowers. Also, it obtains and evaluates an independent appraisal of collateral value to determine the adequacy of the collateral.

Residential Mortgage and Mortgage Banking
Consumer Finance is dedicated to providing a full compliment of residential mortgage loan products that are available to meet the financial needs of Webster’s customers. While our primary lending markets are Connecticut, Southern New England and the mid-Atlantic region, we also lend nationally through our National Wholesale Lending Group. We offer customers products including conventional conforming and jumbo fixed rate loans, conforming and jumbo adjustable rate loans, Federal Housing Authority (“FHA”), Veterans Administration (“VA”) and state agency mortgage loans through Connecticut Housing Finance Authority (“CHFA”). Various programs are offered to support the Community Reinvestment Act goals at the state level. Types of properties consist of one-to-four family residences, owner and non-owner occupied, second homes, construction, permanent and improved single family building lots. Customer loans are normally retained in the residential mortgage portfolio with servicing retained. Non-customer loans are sold in the secondary market on a service-released basis.

The National Wholesale Lending production is originated by approved licensed mortgage brokers located throughout the United States and is underwritten, closed and funded by Webster Bank. The majority of this production is sold into the secondary market as mortgage-backed securities. The National Wholesale channel is headquartered in Cheshire, Connecticut and has three other regional offices located in Chicago, Illinois; Phoenix, Arizona; and Seattle, Washington.

PMC loan production is also originated by licensed professionals working in its regional locations. Loans are sold in the secondary market on a servicing-released basis.

Total residential mortgage originations for the group were $2.6 billion in 2004.

Consumer Loans
Webster Bank provides an array of consumer loan products to its customers. It concentrates on offering a range of products including home equity loans and lines of credit, as well as second mortgages and direct installment lending programs. There are no credit card loans in the consumer loan portfolio.

Credit Risk Management
Webster Bank manages and controls risk in the loan portfolio through adherence to consistent standards. Written credit policies establish underwriting standards, place limits on exposure and set other limits or standards as deemed necessary and prudent. Exceptions to the underwriting policies arise periodically and to insure proper identification and disclosure, additional approval requirements and a tracking requirement for all qualified exceptions have been established. In addition, regular reports are made to senior management and the Board of Directors regarding the credit quality of the loan portfolio.

Risk Management, which is independent of the loan production areas, oversees the loan approval process, ensures adherence to credit policies and monitors efforts to reduce classified and nonperforming assets.

The Loan Review Department, which is independent of the loan production areas and loan approval, performs ongoing independent reviews of the risk management process, adequacy of loan documentation and assigned loan risk ratings. The results of its reviews are reported directly to the Audit Committee of the Board of Directors.

5

Insurance

Webster Insurance offers a full range of insurance products to both businesses and individuals. A regional insurance agency, Webster Insurance provides insurance products and services that include: commercial and personal property and casualty insurance; life, health, disability and long-term care insurance for individuals and businesses; annuities and investment products and risk management services. It is the largest insurance agency based in Connecticut and is headquartered in Wallingford with offices in several other Connecticut communities, including Westport, Waterford, Vernon, East Haven as well as an office in Harrison, New York. In 2004, as part of the FIRSTFED acquisition, Webster acquired FIRSTFED Insurance Agency, LLC, which provides insurance products in the Massachusetts and Rhode Island markets.

Wealth and Investment Services

This business line serves high net worth clients, not-for-profit organizations and business clients with investment management, trust, credit and deposit products and financial planning services through Webster Financial Advisors (“WFA”). WFA is comprised of three units, Trust, financial planning, as well as a lending and deposit product function that complements the private banking suite of products. WFA provides several different levels of financial plans. In addition, brokerage and investment products are offered through Webster Investment Services, Inc. (“WIS”).

WFA provides investment management and a comprehensive range of trust, custody, estate and administrative services to high net worth individuals, small to medium size companies and not-for-profit organizations (endowments and foundations). At December 31, 2004 and 2003, there were approximately $1.9 billion and $1.3 billion of trust assets under administration, of which $1.1 billion and $908.0 million were under management, respectively. These assets are not included in the Consolidated Financial Statements.

WIS offers securities services, including brokerage and investment advice, and is a registered investment advisor with over 100 registered representatives offering customers an expansive array of investment products including stocks and bonds, mutual funds, managed accounts and annuities. Brokerage and online investing services are available for customers who prefer to access and manage their own investments.

Information Technology Investment

Webster announced it will begin to use Fidelity Information Services, Inc., (“FIS”) under a ten-year agreement to provide information technology, application processing and item processing services. Webster plans to use new software for core data processing services, enhancing both capacity and speed for customer benefit in consumer, commercial, mortgage and small business accounts in Fidelity’s application service provider (“ASP”) environment. The migration to the new technology platform will be completed in the third quarter of 2005. Webster anticipates one-time implementation costs of approximately $5.7 million in 2005.

The new system will enhance sale and service delivery capabilities across its lines of business. Additionally, leveraging the processing capacity of Fidelity’s data centers will provide Webster with ability to continue to grow and expand its markets.

Business Segments

For segment reporting information, see Note 20 to the Financial Statements in Item 8 hereof.

Acquisitions

The Company’s growth and increase in market share have been achieved through both internal growth and acquisitions of financial institutions. We continually evaluate acquisition opportunities that complement our mission statement. Acquisitions typically involve the payment of a premium over book and market values. Acquisitions commonly result in one-time charges against earnings for costs to close the transaction, although cost-savings, especially incident to in-market acquisitions, are achieved.

The following acquisitions and sales transactions were completed during 2004 and their results of operations are included in the Consolidated Financial Statements for periods subsequent to the date of acquisition.

Duff & Phelps, LLC
Webster sold on March 15, 2004 its majority interest in Duff & Phelps, LLC, the Chicago-based financial advisory services and investment banking firm, to a private partnership group.

6

Phoenix National Trust Company
On March 31, 2004, Phoenix National Trust Company, (“Phoenix”), a wholly-owned subsidiary of the Phoenix Companies, Inc. was acquired by Webster Bank. Phoenix, which offered trust, custody and other financial services, was merged into Webster Trust Company, N.A., then a subsidiary of Webster Bank. Webster Trust has subsequently been merged into Webster Bank.

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

FIRSTFED AMERICA BANCORP, INC.
As of the close of business on May 14, 2004, the acquisition of FIRSTFED AMERICA BANCORP, INC. (“FIRSTFED”), headquartered in Swansea, Massachusetts, the holding company of First Federal Savings Bank of America (“First Federal”) was completed. The agreement was a combination cash and stock transaction valued at approximately $460 million, or $24.50 per common share of FIRSTFED stock, payable 60% in Webster common stock and 40% in cash. First Federal was a federally chartered thrift with $2.7 billion in assets as of March 31, 2004 and 26 branches; 19 in Massachusetts and 7 in Rhode Island.

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

First City Bank
On December 3, 2004, the acquisition of First City Bank, in a combination cash and stock transaction valued at approximately $33 million, or $27 per common share of First City Bank stock, payable 60% in Webster stock and 40% in cash, was completed. First City Bank was founded in 1989 and had $185.2 million in assets. It was headquartered in New Britain, Connecticut, with additional branches in Berlin, Plainville and Newington, all of which were relocated to existing Webster branches.

The following transaction announced during 2004 was closed on February 28, 2005:

Eastern Wisconsin Bancshares, Inc.
On September 7, 2004, Webster announced its entry into the health savings account market through a definitive agreement to acquire Eastern Wisconsin Bancshares, Inc., the holding company for State Bank of Howards Grove, headquartered in Howards Grove, Wisconsin. The acquisition will make Webster one of the largest custodians and administrators of health savings accounts in the United States. The purchase price is approximately $26 million in cash. The State Bank of Howards Grove has $163 million in assets and $144 million in deposits, including $100 million in health savings account deposits. This transaction closed on February 28, 2005.

A definitive agreement was announced on February 8, 2005 whereby Webster will divest The State Bank of Howards Grove’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. The branch sale is expected to close during the second quarter 2005.

Subsidiaries

Webster’s direct subsidiaries include Webster Bank and Webster Insurance. Webster also owns all of the outstanding common stock in the following unconsolidated financial vehicles: Webster Trust I and II, Webster Statutory Trust I and People’s Bancshares Capital Trust I. See Notes 14 and 21 of the Notes to Consolidated Financial Statements for additional information.

Below is a brief description of Webster’s principal direct and indirect subsidiaries.

Commercial Lending
Webster provides various commercial lending products through subsidiaries of Webster Bank to clients throughout the United States. Webster Business Credit Corporation provides asset-based lending services, Budget Installment Corporation finances insurance premiums for commercial entities and Center Capital provides equipment financing. Webster Growth Capital provides mezzanine financing for small to middle-market companies.

Retail Banking
Webster Bank is the primary source of retail activity within the consolidated group. Webster Bank provides banking services through 150 branches, 276 ATMs and the Internet. Insurance activities are conducted through Webster Insurance. Residential mortgage origination activity is conducted through both Webster Bank and People’s Mortgage Corporation.

7

Investment Planning and Securities Brokerage Activities
Brokerage and investment products are offered by Webster Investment Services, which is also a registered investment advisor. Fleming, Perry & Cox, Inc. provides financial planning services for high net worth individuals.

Other subsidiaries
Webster Mortgage Investment Corporation is a passive investment subsidiary whose primary function is to provide servicing on passive investments, such as residential and commercial mortgage loans purchased from Webster Bank.

Webster Preferred Capital Corporation is real estate investment trust, which acquires, holds and manages mortgage assets, principally residential mortgage loans acquired from Webster Bank.

Webster has various other subsidiaries that are not significant to the consolidated entity.

Employees

At December 31, 2004, Webster had 3,059 full-time equivalent employees consisting of 2,865 full-time and 378 part-time and other employees. None of the employees were represented by a collective bargaining group. Webster maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, a pension plan and an employee 401(k) investment plan. Management considers relations with its employees to be good. See Note 18 of Notes to Consolidated Financial Statements contained elsewhere within this report for additional information on certain benefit programs.

Competition

We are subject to strong competition from banks and other financial institutions, including savings and loan associations, finance companies, credit unions, consumer finance companies and insurance companies. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than Webster. Competition from both bank and non-bank organizations is expected to continue.

The banking industry is also experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to increase competition by enabling more companies to provide cost effective products and services.

Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services and office hours. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, mutual funds and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized service. Competition for origination of first mortgage loans comes primarily from other savings institutions, mortgage banking firms, mortgage brokers, commercial banks and insurance companies.

Supervision and Regulation

Webster is a bank holding company and is registered with the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act (“BHCA”). As such, the Federal Reserve is Webster’s primary federal regulator, and Webster is subject to extensive regulation, supervision, and examination by the Federal Reserve. Webster is subject to the capital adequacy guidelines of the Federal Reserve, which are applied on a consolidated basis. These guidelines require bank holding companies having the highest regulatory ratings for safety and soundness to maintain a minimum ratio of Tier 1 capital to total average assets (or “leverage ratio”) of 3%. All other bank holding companies are required to maintain an additional capital cushion of 100 to 200 basis points. The Federal Reserve capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. At December 31, 2004, Webster was well capitalized under the capital adequacy guidelines. The Federal Reserve also may set higher minimum capital requirements for a bank holding company whose circumstances warrant it, such as a bank holding company anticipating significant growth. The Federal Reserve has not advised Webster that it is subject to any special capital requirement.

Any bank holding company that failed to meet the minimum capital adequacy guidelines applicable to it would be considered to be undercapitalized and would be required to submit an acceptable plan to the Federal Reserve to achieve capital adequacy. The Federal Reserve considers a bank holding company’s capital ratios and other indicators of capital strength when evaluating proposals to expand banking or nonbanking activities, and it may restrict the ability of an undercapitalized bank holding company to pay dividends to its shareholders.

8

Webster also has made a declaration to the Federal Reserve of its status as a financial holding company under the Gramm-Leach-Bliley Act (“GLBA”). As a financial holding company, Webster is authorized to engage in certain financial activities that a bank holding company may not engage in. Currently, Webster engages in certain insurance agency activities pursuant to this authority. If a financial holding company fails to remain well capitalized and well managed, the company and its affiliates may not commence any new activity that is authorized particularly for financial holding companies. If a financial holding company remains out of compliance for 180 days or such longer period as the Federal Reserve permits, the Federal Reserve may require the financial holding company to divest either its insured depository institutions or all its nonbanking subsidiaries engaged in activities not permissible for a bank holding company. If a financial holding company fails to maintain a “satisfactory” or better record of performance under the Community Reinvestment Act, it may not commence any new activity authorized particularly for financial holding companies, but may continue to make merchant banking and insurance company investment in the ordinary course of business.

Webster Bank is a national association chartered by the Office of the Comptroller of the Currency (“OCC”). The OCC is its primary federal regulator, and it is subject to extensive regulation, supervision, and examination by the OCC. In addition, as to certain matters, Webster Bank is subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Federal Reserve. Webster Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the OCC that are similar to those applicable to Webster. At December 31, 2004, Webster Bank was in compliance with all minimum capital requirements. There also are substantial regulatory restrictions on Webster Bank’s ability to pay dividends to Webster. Under OCC regulations, Webster Bank may pay dividends to Webster without prior regulatory approval so long as it meets its applicable regulatory capital requirements before and after payment of the dividends and its total dividends do not exceed its net income to date over the calendar year plus retained net income over the preceding two years. At December 31, 2004, Webster Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends to Webster of $123.7 million without the prior approval of the OCC. Its deposits are insured up to regulatory limits by the FDIC and are subject to corresponding deposit insurance assessments to maintain the FDIC insurance funds.

Any bank that is less than well-capitalized is subject the certain mandatory prompt corrective actions by its primary federal regulatory agency, as well as other discretionary actions, to resolve its capital deficiencies. The severity of the actions required to be taken increases as the bank’s capital position deteriorates. A bank holding company must guarantee that a subsidiary bank will meet its capital restoration plan, up to an amount equal to 5% of the subsidiary bank’s assets or the amount required to meet regulatory capital requirements, whichever is less. In addition, under Federal Reserve policy, a bank holding company is expected to serve as a source of financial strength for, and to commit financial resources to support its subsidiary banks. Any capital loans made by a bank holding company to a subsidiary bank are subordinated to the claims of depositors in the bank and to certain other indebtedness of the subsidiary bank. In the event of the bankruptcy of a bank holding company, any commitment by the bank holding company to a federal banking regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and would be entitled to priority of payment.

Webster Bank is authorized by the OCC to engage in trust activities and is subject to its regulation, supervision, and examination. Webster Bank provides trust and related fiduciary services to its customers. Webster Investment Services, Inc. (“WIS”) is registered as a broker-dealer and investment advisor and is subject to extensive regulation, supervision, and examination by the Securities and Exchange Commission (“SEC”). Fleming, Perry and Cox (“Fleming”) is registered as an investment advisor and is subject to extensive regulation, supervision and examination by the SEC. WIS and Fleming also are members of the National Association of Securities Dealers, Inc. (“NASD”) and are subject to its regulation. WIS is authorized to engage as a broker-dealer and Webster Bank is authorized to engage as an underwriter of municipal securities, and as such they are subject to regulation by the Municipal Securities Rulemaking Board. Webster Insurance is a licensed insurance agency with offices in the state of Connecticut and New York and is subject to registration and supervision by the State of Connecticut Department of Insurance.

Transactions between Webster Bank and its affiliates, including Webster, are governed by sections 23A and 23B of the Federal Reserve Act. Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices. Sections 23A and 23B and Regulation W of the Federal Reserve also regulate transactions by a bank with its financial subsidiaries that it may operate as a result of the expanded authority granted under GLBA.

Under GLBA, all financial institutions, including Webster, Webster Bank, and several of their affiliates and subsidiaries, are required to establish policies and procedures to restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request and to protect customer data from unauthorized access. In addition, the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”) includes many provisions concerning national credit reporting standards, and permits consumers, including customers of Webster, to opt out of information sharing among affiliated companies for marketing purposes. The FACT Act also requires banks and other financial institutions to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The Federal Reserve and the Federal Trade Commission are granted extensive rulemaking authority under the FACT Act, and Webster Bank and its affiliates are subject to these provisions.

9

Webster has developed policies and procedures for itself and its subsidiaries, including Webster Bank, and believes it is in compliance with all privacy, information sharing, and notification provisions of GLBA and the FACT Act.

Under Title III of the USA PATRIOT Act, all financial institutions, including Webster, Webster Bank, and several of their affiliates and subsidiaries, are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution, such as Webster or Webster Bank, in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act and the BHCA. Webster and Webster Bank have in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and they engage in very few transactions of any kind with foreign financial institutions or foreign persons.

The Sarbanes-Oxley Act (“SOA”) was adopted for the stated purpose to increase corporate responsibility, enhance penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. SOA is the most far-reaching U.S. securities legislation enacted in several years. It applies generally to all companies that file or are required to file periodic reports with the SEC under the Securities Exchange Act of 1934 (“Exchange Act”), including Webster. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC and the Comptroller General. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. In addition, the federal banking regulators have adopted generally similar requirements concerning the certification of financial statements by bank officials.

Available Information
Webster makes available free of charge on its website (www.wbst.com or www.websteronline.com) its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after it electronically files such material with, or furnishes it to the Securities and Exchange Commission. Information on Webster’s website is not incorporated by reference into this report.

Statistical Disclosure
The information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below.

10

ITEM 2. Properties

At December 31, 2004, Webster Bank had 150 branch offices, which includes: 35 banking offices, including its main office, in New Haven County; 47 banking offices in Hartford County; 20 banking offices in Fairfield County; 9 banking offices in Litchfield County; 5 banking offices in Middlesex County; 2 banking offices in Tolland County and 1 banking office in New London County. It also maintains 5 banking offices in New York State, 19 in Massachusetts and 7 in Rhode Island. Of these, 75 offices are owned and 75 offices are leased. Lease expiration dates range from 1 to 83 years with renewal options of 3 to 35 years. Webster Financial Advisors has offices in Hartford, New Haven, Waterbury and is headquartered in Stamford, Connecticut. The National Wholesale Lending Group is headquartered in Cheshire, Connecticut and maintains offices in Chicago, Illinois; Phoenix, Arizona and Seattle, Washington.

Subsidiaries maintain the following offices: Webster Insurance has offices in Harrison, New York and East Haven, Vernon, Wallingford, Waterford and Westport, Connecticut. Webster Investment Services, Inc. is headquartered in Kensington, Connecticut with sales offices located throughout Webster’s branch network. Center Capital has offices in Blue Bell, Pennsylvania; Schaumburg, Illinois; Brookfield, Connecticut and is headquartered in Farmington, Connecticut. WBCC is headquartered in New York, New York with offices in Atlanta, Georgia; South Easton, Massachusetts; Chicago, Illinois and Hartford, Connecticut. BIC is headquartered in Rockville Centre, New York. Peoples Mortgage Corporation has offices in South Easton, Andover and Wellesley, Massachusetts; Hamden, Connecticut; Severna Park, Rockville and Towson, Maryland.

The total net book value of properties and furniture and fixtures owned at December 31, 2004 was $149.1 million. See Note 8 of Notes to Consolidated Financial Statements elsewhere in this report for additional information.

ITEM 3. Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incident to the registrant’s business, to which Webster is a party or of which any of its property is subject.

ITEM 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of 2004, no matters were submitted to a vote of our security holders.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
The common shares of Webster trade on the New York Stock Exchange under the symbol “WBS”.

The following table sets forth the quarterly high, low and dividends declared per share of common stock for the years ended December 31, 2004 and 2003. On February 28, 2005, the closing market price of Webster common stock was $43.80. Webster increased its quarterly dividend to $0.23 per share in the second quarter of 2004.

11

Holders
Webster had approximately 12,000 shareholders of common stock at February 14, 2005. The number of shareholders of record was determined by American Stock Transfer and Trust Company.

Dividends
Payment of dividends is subject to various restrictions, none of which is expected to limit any dividend policy that the Board of Directors may in the future decide to adopt. The payment of dividends from Webster Bank to Webster is subject to certain regulatory and other restrictions. Under OCC regulations, Webster Bank may pay dividends to Webster without prior regulatory approval so long as it meets its applicable regulatory capital requirements before and after payment of the dividends and its total dividends do not exceed its net income to date over the calendar year plus retained net income over the preceding two years. At December 31, 2004, Webster Bank was in compliance with all applicable minimum capital requirements and had the ability to pay dividends of $123.7 million to Webster without the prior approval of the OCC. Its deposits are insured up to regulatory limits by the FDIC and are subject to corresponding deposit insurance assessments to maintain the FDIC insurance funds. If the capital of Webster is diminished by depreciation in the value of its property or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See “Supervision and Regulation” section contained elsewhere within this report for additional information on dividends.

Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2004).

  * This table does not include 106,145 options assumed in mergers and acquisitions transactions on an aggregated basis.

Recent sale of unregistered securities; use of proceeds from registered securities
No unregistered securities were sold by Webster within the last three years. Registered securities were exchanged either as part of an employee and director stock compensation plan or as consideration for acquired entities.

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

Other Events
The annual meeting of shareholders will be held on Thursday, April 21, 2005 at the Courtyard by Marriott, 63 Grand Street, Waterbury, Connecticut 06702.

12

ITEM 6. Selected Financial Data

(a) Webster adopted FIN 46R on December 31, 2003, and in accordance with its provisions, deconsolidated the capital trusts and reported the associated liabilities as other long-term debt. Commencing in 2004, the costs have been reclassified from noninterest expenses to interest expense.

13

Selected Quarterly Consolidated Financial Information

Selected quarterly data for 2004 and 2003 follows:

The fourth quarter of 2004 was impacted by the $750 million balance sheet de-leveraging transaction. Loss on sale of securities includes $4.0 million of losses related to the de-leveraging and non-interest expenses include $45.8 million of debt prepayment expenses. As a result, net income was reduced by $32.4 million, or $0.63 per diluted common share, after taxes.

14

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 considered elsewhere in this report (collectively, the “Financial Statements”).

Critical Accounting Policies

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 our most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. To assess the adequacy of the allowance, management uses 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 loan 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 loan losses, see the “Asset Quality” section elsewhere within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Valuation of Goodwill/Intangible Assets and Analysis for Impairment
Webster, in part, has increased its market share through acquisitions, as well as from the purchase of other financial institution’s branches and selected assets (not entire institution). These acquisitions have been accounted for under the purchase method which requires that assets acquired and liabilities assumed be recorded at their fair value which is an estimate determined by the use of internal or other valuation techniques. These valuation estimates may result in goodwill and other intangible assets. Goodwill is subject to ongoing periodic impairment tests and is evaluated using various fair value techniques including multiples of revenue, price/equity and price/earnings ratios. For a discussion of impairment testing methodology, see Note 7 of Notes to Consolidated Financial Statements included elsewhere within this report.

Income Taxes
Certain aspects of income tax accounting require management judgment, including determining the expected realization of deferred tax assets and liabilities, for inclusion in its Consolidated Statements of Condition. 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 or liabilities could differ materially from that 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 statements 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 (a full valuation allowance has been established for the Connecticut, Massachusetts and Rhode Island portion of the net deferred tax assets).

Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in our financial statements for which payment has been deferred, or an expense taken on our tax return but not yet recognized in our financial statements. It also includes certain “non-cash” items such as purchase accounting adjustments, which represent a future financial statement expense not deductible for tax purposes.

For more information about income taxes see Note 9 of the Notes to Consolidated Financial Statements include 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 18 of Notes to Consolidated Financial Statements for further information.

15

Results of Operations

Summary
Net income was $153.8 million or $3.00 per diluted shares in 2004, compared with $163.2 million or $3.52 the prior year. The decline is attributable to a balance sheet de-leveraging charge taken in the fourth quarter amounting to $32.4 million after-tax, or $0.63 per share. The de-leveraging contributed to significant improvement in the net interest margin, strengthened Webster’s capital position and improved the ability to respond to rising interest rates.

Our results for 2004 also reflect the interest rate environment during the year as short-term interest rates remained at or near historically low levels during much of the first half of 2004 and began to rise over the remainder of the year. As a result, our net interest margin declined slightly in 2004 to 3.11% compared to 3.14% a year ago. The decline in the net interest margin was more than offset by an increase of 13% in net interest income for the year driven primarily by growth of $2.0 billion in average earning assets. The margin improved in the second half of 2004, averaging 3.25% in the fourth quarter, as a result of the de-leveraging and the rise in interest rates.

Noninterest income declined by $12.8 million, or 5%, in 2004 due entirely to $19 million less revenue from Duff & Phelps, which was sold during the first quarter of 2004. Offsetting this was growth in the core fee categories of deposit services, insurance, loan and loan servicing and wealth and investment services which increased $17 million, or 11% compared to 2003. Gains on sale of loans and servicing declined $6.2 million during the year as a result of lower origination volume.

Noninterest expenses increased by $69 million and included $46 million of debt prepayment expenses related to the de-leveraging program. It also reflects continuing investment in personnel, technology and de novo branch openings under our strategic plan for growth. Partially offsetting this were declines resulting from the Duff & Phelps sale and the adoption of FIN 46R, which required the costs of the capital trusts to be classified as interest expense in 2004 instead of noninterest expenses as required in 2003.

(a)	Total noninterest expense as a percentage of net interest income plus total noninterest income.

16

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

(a)	Interest on nonaccrual loans has been included only to the extent reflected in the Consolidated Statements of Income. Nonaccrual loans are included in the average balance outstanding.

(b)	Includes amortization of net deferred loan costs (net of fees) and premiums (net of discounts) of: $14.2 million, $3.4 million and $3.7 million in 2004, 2003 and 2002, respectively.

(c)	Unrealized gains (losses) on available-for-sale securities are excluded from the average yield calculations. Unrealized net gains averaged $152,000, $46.4 million and $68.5 million for 2004, 2003 and 2002, respectively.

17

Net Interest Income
Net interest income also can be understood in terms of the impact of changing rates and changing volumes. The table below 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 (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume) and (iii) the 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.

Table 2: Net interest income — rate/volume analysis

Net interest income totaled $468.2 million for the year ended December 31, 2004, an increase of $54.6 million, or 13.2%, over the prior year and resulted from the growth in average earning assets of $2.0 billion during the year partially offset by a decline in the rate on earning assets. On a fully taxable-equivalent basis the net interest margin declined to 3.11% in 2004 from 3.14%. See the Table 2 above for further information.

The low interest rate environment during much of 2003 and the first half of 2004 contributed to the decline in margin. During this period mortgage related assets (loans and investments) and other fixed rate loans prepaid with the proceeds reinvested at lower yields. As can be seen from the rate/volume table above, the increase in net interest income in 2004 is entirely due to the volume growth in earning assets, which increased $2.0 billion or 14.8% with most of the growth occurring in the loan portfolio. Interest-bearing liabilities grew $2.1 billion, with deposits and borrowed funds increasing $1.7 billion and $324 million, respectively. Partially offsetting the volume increase was the decline in rate due to lower interest rate environment that existed in much of 2004 as compared to 2003. As a result, of the lower rates, asset yields dropped faster than liability costs. See “Asset/Liability Management and Market Risk” section within Management’s Discussion and Analysis for additional information.

The net interest margin improved throughout the second half of 2004. The fourth quarter de-leveraging transaction was the principal cause of the quarter’s net interest margin increasing to 3.25% from 3.06% in the third quarter. This increase in margin is expected to be maintained in 2005 and was one of the principal reasons for the de-leveraging transaction.

18

Interest Income
Total interest income increased $73.4 million, or 11.1%, to $732.1 million for the year 2004 as compared to $658.7 million the previous year. The increase in the volume of earning assets, with most of that growth occurring in the loan portfolio, was the primary cause of increased interest income. The increase in volume was partially offset by the low rates during much of the first half of the year.

The yield earned on earning assets declined during 2004 to 4.85% from 5.00% as a result of the lower interest rate environment as compared to the prior year. The yield on loans and investments decreased 15 and 22 basis points, respectively, during 2004. These yields did improve noticeably, however, during the second half of the year partly as a result of the balance sheet de-leveraging program and a rising interest rate environment.

Earning assets increased during 2004, fully offsetting the reduced yield. Earning assets averaged $15.2 billion during the year, up from $13.3 billion during 2003. Strong growth occurred in the loan portfolio, specifically in commercial, commercial real estate and home equity loans. The acquisitions of FIRSTFED and First City during 2004, contributed to the growth in assets and interest income.

Interest Expense
Interest expense increased $18.7 million, or 7.6%, to $263.9 million for 2004 as compared to $245.2 million the previous year. The increase was primarily due to an increase in the volume of interest-bearing liabilities, partially offset, by a decline in the cost of funds due to the lower interest rate environment during most of the year. Deposits accounted for the majority of the rate decline as their costs decreased to 1.24% in 2004 from 1.40% the prior year. Savings, checking and certificate of deposit offering rates were repriced downward earlier in the year and these rates are maintained in the second half of the year as interest rates began to rise. The cost of borrowings in 2004 was 2.73% consistent with 2003, however, increased volume added $9.0 million of expense. The use of swaps to change fixed rate borrowings to floating rates contributed to the reduced funding costs.

The average balance of interest-bearing liabilities increased $2.1 billion for 2004 compared to 2003. The increase was primary due to deposits increasing $1.7 billion. The majority of this increase occurred in the lower costing core deposits (i.e. savings, NOW and money market accounts), as certificate of deposit balances declined during 2004.

Provision for Loan Losses
The provision for loan losses declined to $18.0 million for the year ended December 31, 2004 from $25.0 million a year earlier, a decrease of 28.0%. The decrease in the provision for 2004 is a result of an additional provision of $5.0 million that was taken in the third quarter of 2003 reflecting the charge-off of a single commercial nonperforming loan. Excluding this additional provision in 2003, the provision decreased $2.0 million or 10.0%, reflecting the favorable asset quality trends, partially offset by an increase in the loan portfolio and a shift in mix to more commercial loans. During 2004, net charge-offs and nonperforming assets declined when compared to 2003. See Tables 10 through 15 for more information on nonperforming assets, the allowance for loan losses and net charge-offs. Management performs a quarterly review of the loan portfolio to determine the adequacy of the allowance for loan losses. See the “Allowance for Loan Losses Methodology” section later in this Management’s Discussion and Analysis for further details.

At December 31, 2004, the allowance for loan losses totaled $150.1 million or 1.28% of total loans compared to $121.7 million or 1.32% the prior year.

Noninterest Income

Table 3: Noninterest income comparison of 2004 to 2003.

19

The decrease in noninterest income is explained by a decline of $19.0 million in financial advisory revenue due to the sale of Duff & Phelps in the first quarter of 2004. Otherwise, noninterest income, increased by $6.2 million, or 3%. Increases in core fee categories of deposit service fees, insurance revenue, loan and loan servicing and wealth and investment services were offset by a decline of $6.2 million in gains on sale of loans and loan servicing due to lower mortgage origination volumes. Wealth and investment services income increased due to improved market conditions and stronger business development activities and the restructuring of the WIS sales teams during 2004.

In October 2004, a probe initiated by the New York Attorney General into the insurance industry was widely publicized. This probe focused on the relationships between carriers and brokers and how insurance brokers are compensated. Subsequent to the publicity surrounding the New York probe, public reports indicated that Connecticut’s Attorney General also has begun a probe into insurance industry practices and has issued subpoenas to a number of insurance agents and brokers in Connecticut. While the initial outcome of the New York probe appears to be a bid rigging charge, the New York and Connecticut investigations also include a review of contingent payment practices by insurance companies to both brokers and agents. To date, Webster Insurance has not been subpoenaed.

Webster Insurance receives contingent payments under standard agreements written by the insurance carriers; this is the standard practice throughout the industry. Contingent payments to Webster Insurance represent compensation incremental to commissions, typically based on the claims experience of the insureds and/or the volume of business written. As of the date of this report, Webster has not been notified of any changes by its insurance carriers regarding the practice of paying contingent payments.

Noninterest Expenses

Table 4: Noninterest expenses comparison of 2004 to 2003.

The increase in noninterest expense is primarily attributable to $45.8 million of debt prepayment expenses against FHLB advances under the $750 million de-leveraging program in the fourth quarter of 2004. Excluding the de-leveraging, noninterest expenses increased by 6%.

The majority of the remaining increases is due to the combination of acquisitions during 2004 and late 2003 and the strategic investment in technology and de novo branch network. Capital securities expense decreased due to the adoption for FIN 46R on December 31 2003. Capital securities expense was recorded in interest expense for the 2004 year whereas in 2003 it was recorded in noninterest expense. Partially offsetting these increases were declines due to the Duff & Phelps sale during the first quarter of 2004.

Income Taxes
Income tax expense decreased from the prior year primarily due to a lower level of pre-tax income resulting from the $49.9 million de-leveraging program. Income tax expense was further reduced by $2.0 million from the favorable resolution of prior year tax audits in the fourth quarter of 2004. As a result of these two items, the effective tax rate was 30.9% in 2004, compared to 32.8% in the prior year.

20

Comparison of 2003 and 2002 Years
For the year 2003, net income was $163.2 million, or $3.52 per diluted common share, an increase of $10.5 million, or 6.9%, compared to net income of $152.7 million, or $3.16 per diluted common share for the previous year. Net interest income rose to $413.5 million for 2003, an increase of $7.8 million, or 1.9%. Growth in net interest income resulted from growth in the loan portfolio offset by a decrease in the net interest margin. The net interest margin declined to 3.14% during 2003 from 3.50% the prior year. Noninterest income reached $232.5 million, an increase of $46.9 million, or 25.3%, primarily due to increased gains and fees from mortgage banking activity and higher deposit service fees and insurance revenues. Noninterest expenses increased $49.7 million, or 15.1%, from the previous year as a result of strategic investment in new initiatives and acquisitions. The provision for loan losses decreased $4.0 million to $25.0 million for 2003 due to an increase in 2002 relating to the sale and writedown of classified telecommunication and cable credits.

Included in the net income for 2002 was a $7.3 million (net of taxes) writedown related to the cumulative effective of a change in method of accounting for the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets".

Net Interest Income
Net interest income totaled $413.5 million for the year ended December 31, 2003, an increase of $7.8 million or 1.9%. This resulted from an increase in average earning assets during the year offsetting a decline in the net interest margin (on a fully taxable-equivalent basis) to 3.14% for 2003 from 3.50% during the prior year. See the Table 2 above for further information.

The continued low interest rate environment during 2003 contributed to the margin compression. As rates declined during the first three quarters of the year mortgage related assets (loans and investments) and other fixed rate loans prepaid at increasing levels with the proceeds reinvested at lower yields. In addition, the high levels of prepayments on mortgage-backed securities resulted in the accelerated write-off of premium amortization in the second and third quarters of 2003. Premium amortization on securities totaled $16.7 million and $3.0 million for 2003 and 2002, respectively. As can be seen from the rate/volume table (Table 2) above, the increase in net interest income is entirely due to the volume growth in earning assets, offset by decreases in interest rates, with asset yields dropping faster than liability costs. See “Asset/Liability Management and Market Risk” section within Management’s Discussion and Analysis for additional information.

During the year, average earning assets increased $1.6 billion or 13.5% with most of the growth occurring in the loan portfolio. Interest bearing liabilities also grew $1.6 billion, with deposits and borrowed funds increasing $706 million and $912 million, respectively.

Net interest income also can be understood in terms of the impact of changing rates and changing volumes. Table 2 above 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 (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume) and (iii) the 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.

Interest Income
Total interest income decreased $33.3 million, or 4.8%, to $658.7 million for the year 2003 as compared to $692.0 million the previous year. The decline in the yield on earning assets was the primary cause of decreased interest income. This was due to the continued decline in interest rates during 2003.

The yield earned on earning assets declined during 2003 to 5.00% from 5.97% a year earlier. In addition to the higher volume of prepayments on mortgage related assets (loans and investments) during the year, the decline in interest rates impacted the yields on adjustable rate loans, which accounted for approximately 45% of total loans at December 31, 2003. Interest income from the investment portfolio was negatively impacted by the accelerated rate of premium amortized due to prepayments. The increase in premium amortization in 2003 over the prior year was $13.7 million.

Earning assets increased during 2003, partially offsetting the reduced yield. Earning assets averaged $13.3 billion during the year, up from $11.7 billion during 2002. Strong growth occurred in the loan portfolio, specifically commercial, commercial real estate and home equity lending.

21

Interest Expense
Interest expense declined $41.1 million, or 14.4%, to $245.2 million for 2003 as compared to $286.3 million the previous year. The decline was primarily due to the decrease in cost of funds, partially offset by an increase in the volume of deposits and borrowed funds. Due to the short maturity structure of funding sources, Webster was able to take advantage of falling interest rates throughout 2003. The cost of federal funds and repurchase agreements and FHLB advances decreased during 2003 by 50 and 69 basis points, respectively. Deposits accounted for 58% of the rate decline benefit as their costs declined to 1.40% in 2003 from 2.01% the prior year. Savings, checking and certificate of deposit offering rates were reprised downward as general market interest rates declined throughout the year. The use of swaps to change fixed rate borrowings to floating contributed to the reduced funding costs.

The average balance of interest-bearing liabilities increased $1.6 billion for 2003 compared to 2002. The increased funding was split between deposits and borrowed funds. The increase in deposits occurred in the lower costing core deposits (i.e. savings, NOW and money market accounts), as certificate of deposit balances declined during 2003.

Provision for Loan Losses
The provision for loan losses declined to $25.0 million for the year ended December 31, 2003 from $29.0 million a year earlier, a decrease of $4.0 million, or 13.8%. An additional provision of $5.0 million was taken in the third quarter of 2003 related to a charge-off of an asset-based loan. In the fourth quarter of 2002, an additional provision of $11.0 million was taken in connection with the writedown and transfer of certain syndicated telecommunication loans to held for sale. Excluding these additional provisions, the provision increased $2 million or 11%, reflecting the continued growth in commercial and consumer loans and a plan to reduce residential mortgages as a percentage of the total loan portfolio. Management performs a quarterly review of the loan portfolio to determine the adequacy of the allowance for loan losses. See the “Allowance for Loan Losses Methodology” section later in this Management’s Discussion and Analysis for further details.

At December 31, 2003, the allowance for loan losses totaled $121.7 million or 1.32% of total loans compared to $116.8 million or 1.48% the prior year.

Noninterest Income

Table 5: Noninterest income comparison of 2003 to 2002

The increase in noninterest income is primarily due to increased gains on the loan sales for the year of $13.7 million. The interest rate environment during 2003 was very favorable for the mortgage production areas. Higher origination volume contributed approximately $8.8 million of increased gains from sale of mortgage loans into the secondary markets. In addition, the sale of telecommunication loans carried in the held for sale portfolio generated $4.9 million of gains. Insurance revenue continued to show growth in 2003, due principally to the acquisitions of The Mathog and Moniello Holding Co., Inc. (“Mathog”) and LJF Insurance Services (“LJF”) agencies in 2003, which added $11.3 million of the $12.9 million increase in insurance revenue. Increased premiums for property and casualty insurance contributed to the balance of the increase. Deposit service fees increased $6.9 million due to fees associated with usage of checking products, including the continued growth of accounts from the High Performance Checking product and $1.5 million in ATM related fees. Loan fees increased chiefly due to prepayment penalties, as borrowers sought to refinance their loans as a result of declining rates. Acquisitions contributed an additional $6.3 million to loan fee revenue. The increase in other income was the result of $1.6 million demutualization of life insured proceeds as well as $1.7 million in net direct investment gains.

22

Noninterest Expenses

Table 6: Noninterest expenses comparison of 2003 to 2002.

The increase in compensation and benefits is chiefly the result of $27.5 million in salaries due to merit increases and increases in staffing due to the expansion of the business. As a result of the adoption of the provisions of SFAS No. 123 to expense stock options, expense in 2003 was $2.8 million higher than in 2002. Increased temporary help and higher commissions due to increased volume in our mortgage lending business contributed to the increase. The current year reflects additional expense related to the full year impact of 2002 acquisitions as well as the 2003 addition of Mathog, BIC, and LJF. Benefits expense comprised $4.8 million of the increase and is related to higher group insurance, pension expense and payroll taxes.

The increase in furniture and occupancy is driven by the de novo branch expansion as well as the full year impact of four regional mortgage offices. Occupancy expense rose due to increased rent expense from acquisitions and de novo branch openings. Other expenses rose due to increased volume of loan originations and from acquisitions and business expansion. In 2003, $1.5 million of acquisition-related expense resulted from the North American Bank and Trust Company (“NABT”) purchase, compared to $2.0 million in 2002 relating to the WBCC purchase.

Income Taxes
Income tax expense increased to $79.8 million in 2003 from $74.0 million in 2002. The effective tax rates were 32.8% in 2003 and 31.6% in 2002. The increase in 2003 is due to the increase in income before taxes. In addition, 2002 was favorably impacted by $2.9 million of additional tax benefits applicable to the recovery of prior years’ transaction costs, and the favorable settlement of other tax liabilities. Income tax expense for 2002 doesn’t include $3.9 million of tax benefit recorded in the cumulative effect of change in method of accounting.

Financial Condition

Webster had total assets of $17.0 billion at December 31, 2004, an increase of $2.5 billion, or 17%, from the previous year end. The growth was primarily due to total loans increasing $2.5 billion as a result of the FIRSTFED and First City acquisitions and organic growth. Total liabilities increased by $2.1 billion with total deposits increasing $2.2 billion, total borrowings decreasing $237.6 million and other liabilities increasing $99.2 million. The $2.2 billion or 26.3% increase in total deposits for the current year includes the impact of the acquisitions, the continued success with the High Performance checking product and the opening of five new branches during the 2004 year. Higher core deposits (checking, money market and savings) accounted for $1.4 billion of the total deposit increase. The decrease in total borrowings of $237.6 million was primarily due to the de-leveraging transaction in which $750.0 million of borrowings were prepaid partially offset by the issuance of $150.0 million long-term senior notes issued related to the FIRSTFED acquisition.

Total equity was $1.5 billion at year end up $391.1 million or 33.9% for the current year. This increase was primarily due to net income of $153.8 million for the year, $291.0 million related to shares issued for the acquisitions and $12.1 million from stock option exercises, partially offset by $44.4 million of common stock dividend payments and a $24.1 million unfavorable change in unrealized gains (losses) on the available for sale securities portfolio.

23

Investment Activities
Webster, either directly or through Webster Bank, maintains an investment portfolio that is primarily structured to provide a source of liquidity for operating needs, to generate interest income and to provide a means to balance interest-rate sensitivity. The investment portfolio may be classified into three major categories; available for sale, held to maturity and trading. On October 1, 2004, as permitted by the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, mortgage securities with a fair market value of $921.2 million were reclassified from available for sale to held to maturity. At December 31, 2004, the combined investment portfolios of Webster and Webster Bank totaled $3.7 billion. At December 31, 2004, Webster Bank’s portfolio consisted primarily of mortgage-backed securities and Webster’s portfolio consisted primarily of equity and corporate trust preferred securities. See Note 4 of Notes to Consolidated Financial Statements contained elsewhere within this report for additional information.

Webster Bank may acquire, hold and transact various types of investment securities in accordance with applicable federal regulations, state statutes and within the guidelines of its internal investment policy. The type of investments that it may invest in include: interest-bearing deposits of federally insured banks, federal funds, U.S. government treasury and agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), private issue MBSs and CMOs, municipal securities, corporate debt, commercial paper, banker’s acceptances, trust preferred securities, mutual funds and equity securities subject to restrictions applicable to federally charted institutions. Asset and liability management objectives also influence investment activities. While there may be no statutory limit on certain categories of investments, the OCC may establish an individual limit on such investments, if the concentration in such investments presents a safety and soundness concern.

Webster Bank has the ability to use the investment portfolio as well as interest-rate financial instruments, within internal policy guidelines, to hedge and manage interest-rate risk as part of its assets/liability strategy. See Note 16 of Notes to Consolidated Financial Statements contained elsewhere within this report.

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

In conjunction with the acquisition of FIRSTFED, Webster announced plans to de-leverage its balance sheet by up to $1.5 billion. During the second quarter of 2004, the first half of the de-leveraging took place with the sale of $750 million of FIRSTFED’s securities portfolio. The proceeds from the sale were used to reduce short-term borrowed funds.

During the fourth quarter of 2004, Webster completed its plan to de-leverage the balance sheet through the sale of $750.0 million of securities with an effective duration of 2.1 years. Proceeds from this de-leveraging were used to prepay approximately $500.0 million of FHLB advances that were swapped to floating rates and approximately $250.0 million of overnight borrowings. The aggregate yield on the securities sold was 3.53% while the aggregate cost on the borrowings prepaid was 4.27%. The objectives of the de-leveraging transaction were to improve the tangible capital ratio, reduce interest rate sensitivity and improve net interest margin.

Total securities, excluding the trading portfolio, decreased $577.6 million and reflects the de-leveraging transaction. The available for sale securities portfolio decreased $1.6 billion while the held to maturity portfolio increased $1.1 billion primarily due to a $921.0 million transfer of 15 year mortgage-backed securities from the available for sale to the held to maturity portfolio. The reclassification of these long duration securities provided further protection to tangible capital from upward movement in interest rates.

24

Table 7: Carrying value of investment securities

Loans

Table 8: Loan portfolio composition at December 31.