NOTE 7: Income Taxes

Income tax expense (benefit) applicable to income (loss) from continuing operations is comprised of the following:


	Years ended December 31,
(In thousands)	2011		2010 (a)			2009 (a)
Current:
Federal	$	27,674	$	(1,588	)	$	(71,180	)
State and local		1,302		1,575			3,828

		28,976		(13	)		(67,352	)

Deferred:
Federal		28,497		12,950			14,380
State and local		478		(579	)		(452	)

		28,975		12,371			13,928

Total:
Federal		56,171		11,362			(56,800	)
State and local		1,780		996			3,376

	$	57,951	$	12,358		$	(53,424	)

(a)	Certain previously reported information has been corrected to reflect the deferment of certain commercial loan fees. For more information refer to Note 1.

The following is a reconciliation of Webster's reported income tax expense (benefit) applicable to income (loss) from continuing operations to the amount that would result from applying the federal statutory rate of 35%:


	Years ended December 31,
	2011						2010 (a)						2009 (a)
(In thousands)	Amount			Percent			Amount			Percent			Amount			Percent
Income tax expense (benefit) at federal statutory rate	$	72,567			35.0	%	$	29,582			35.0	%	$	(45,715	)		35.0	%
Reconciliation to reported income tax expense (benefit):
(Decrease) increase in valuation allowance applicable to capital losses		(1,163	)		(0.6	)		(5,630	)		(6.7	)		4,351			(3.3	)
State and local income taxes, net of federal benefit		1,157			0.6			648			0.8			2,194			(1.7	)
Tax-exempt interest income, net		(10,052	)		(4.8	)		(10,116	)		(12.0	)		(10,126	)		7.8
Increase in cash surrender value of life insurance		(3,626	)		(1.7	)		(3,681	)		(4.4	)		(3,720	)		2.8
Other, net		(932	)		(0.5	)		1,555			1.9			(408	)		0.3

Income tax expense (benefit)	$	57,951					$	12,358					$	(53,424	)

Effective tax / tax-benefit rate					28.0	%					14.6	%					40.9	%

(a)	Certain previously reported information has been corrected to reflect the deferment of certain commercial loan fees. For more information refer to Note 1.

Refundable income taxes totaling $55.8 million and $57.7 million at December 31, 2011 and 2010, respectively, are reported as a component of accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. $55.5 million of the $55.8 million is attributable to U.S. carryback claims applicable to 2008 and 2009 losses. Because the receipt of those refunds is contingent upon the completion of an ongoing examination by the Internal Revenue Service and subsequent review and approval by the U.S. Congressional Joint Committee on Taxation, interest that is otherwise applicable has not been recognized at December 31, 2011.

The significant components of the Company's deferred tax assets, net ("net DTA") are reflected below:


	At December 31,
(In thousands)	2011			2010 (a)
Deferred tax assets:
Allowance for loan and lease losses	$	97,935		$	128,390
Net operating loss and credit carry forwards		66,662			74,421
Purchase accounting and fair-value adjustments		3,834			—
Compensation and employee benefit plans		41,830			26,077
Impairment losses on securities available for sale		8,765			8,657
Net losses on derivative instruments		11,302			—
Litigation reserve and settlement		175			8,171
Other		20,368			26,620

Gross deferred tax assets		250,871			272,336
Valuation allowance		(86,277	)		(86,436	)
Total deferred tax assets, net of valuation allowance		164,594			185,900

Deferred tax liabilities:
Net unrealized gain on securities available for sale		9,058			11,923
Deferred loan costs		8,221			11,052
Premises and equipment		5,313			5,321
Equipment financing leases		8,651			13,107
Deferred income on repurchase of indebtedness		10,627			12,108
Purchase accounting and fair-value adjustments		—			2,693
Prepaid expenses		4,370			4,344
Intangible assets		6,537			5,673
Other		6,152			12,650

Gross deferred tax liabilities		58,929			78,871

Deferred tax asset, net	$	105,665		$	107,029

(a)	Certain previously reported information has been corrected to reflect the deferment of certain commercial loan fees. For more information refer to Note 1.

Included in the $1.4 million decrease in the Company's net DTA during 2011 is a $29.2 million increase, recognized as an increase in shareholders' equity, and primarily applicable to increased pension benefit obligations and declines in values of derivative instruments and securities available for sale.

Webster's $86.3 million valuation allowance at December 31, 2011 consists of $78.2 million attributable to net state deferred tax assets ("DTAs") and $8.1 million attributable to capital losses, deductible only to the extent of offsetting capital gains. During 2011, the valuation allowance decreased by $0.2 million, net, and was attributable to a $0.7 million net decrease applicable to capital losses and a $0.5 million increase applicable to changes in certain net state DTAs, for which a full valuation allowance had been established at both the beginning and end of the year. The net decrease in the valuation allowance applicable to capital losses includes $0.2 million of tax expense recognized in discontinued operations and $0.3 million applicable to loss carryovers that expired unused in 2011, for which a full valuation allowance had been established at the beginning of the year.

Management believes it is "more likely than not" that Webster will realize its DTAs net of the valuation allowance. The Company did not incur a cumulative loss in the 2009-through-2011 period, and a significant majority of the DTAs at December 31, 2011 are supported by taxable-income sources apart from projected future income.

Significant "positive evidence" exists in support of management's more-likely-than-not conclusion regarding the realization of Webster's DTAs, including: book-taxable income levels in recent years and projected future years; recoverable taxes paid in 2010 and 2011; and future reversals of existing taxable temporary differences. There can, however, be no absolute assurance that any specific level of future income will be generated or that the Company's DTAs will ultimately be realized.

Webster has available for utilization U.S. alternative minimum tax credit carryovers totaling $0.9 million at December 31, 2011. The credits are indefinite-lived, having no expiration date. Connecticut net operating losses, totaling more than $1.3 billion at December 31, 2011, are scheduled to expire in varying amounts during tax years 2020 through 2031. Connecticut credits, totaling $3.3 million at December 31, 2011, have a five-year carryover period, with excess credits expiring unutilized annually. A full valuation allowance amounting to $65.7 million, net has been established for these Connecticut tax attributes, and is included in Webster's $78.2 million valuation allowance attributable to net state DTAs noted above.

A deferred tax liability has not been recognized for certain "thrift bad-debt" reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and profits; the redemption of Webster Bank's stock; or liquidation. Webster does not expect any of those events to occur. At December 31, 2011 and 2010, the cumulative taxable temporary differences applicable to those reserves amounted to approximately $58.0 million. A deferred tax liability of approximately $20.8 million has not been recognized for those temporary differences in accordance with the exception criteria of FASB ASC Topic 740 "Income Taxes."

The following is a reconciliation of the beginning and ending balances of Webster's unrecognized tax benefits ("UTBs"):


	Years ended December 31,
(In thousands)	2011			2010			2009
Balance at beginning of year	$	4,816		$	6,556		$	7,991
Additions as a result of tax positions taken during the current year		462			816			1,400
Additions as a result of tax positions taken during prior years		518			1,322			528
Reductions as a result of tax positions taken during prior years		(791	)		(2,046	)		(509	)
Reductions relating to settlements with taxing authorities		—			(1,286	)		(2,854	)
Reductions as a result of lapse of statute of limitations		(569	)		(546	)		—

Balance at end of year	$	4,436		$	4,816		$	6,556

If recognized, $2.9 million of the $4.4 million of UTBs at December 31, 2011 would affect the effective tax rate, while $3.1 million of the $4.8 million of UTBs at December 31, 2010 would have affected the effective tax rate.

Webster recognizes accrued interest and penalties related to UTBs, where applicable, in income tax expense. During the years ended December 31, 2011, 2010 and 2009, Webster recognized interest and penalties of $(0.7) million, $0.5 million and $1.2 million, respectively. At December 31, 2011 and 2010, the Company had accrued interest and penalties related to UTBs of $1.4 million and $2.2 million, respectively.

Webster has determined it is reasonably possible that its total UTBs could decrease $2.4 million by the end of 2012 as a result of potential settlements with state taxing authorities concerning tax-base determinations and/or lapses in statute-of-limitation periods.

Webster is currently under, or subject to, examination by various taxing authorities. Federal tax returns for all years subsequent to 2007 are either under or remain open to examination. For Webster's principal state tax jurisdictions of Connecticut, Massachusetts, New York and Rhode Island, tax returns for years subsequent to 2006 or 2007 are either under or remain open to examination.