UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2006.

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

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		06-1187536
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Webster Plaza, Waterbury, Connecticut		06702
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12B-2). Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12B-2). Yes o No þ

The number of shares of common stock outstanding as of April 30, 2006 was 52,785,808.

 

 

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Interim Financial Statements (unaudited)
Consolidated Statements of Condition at March 31, 2006 and December 31, 2005			3
Consolidated Statements of Income for the three months ended March 31, 2006 and 2005			4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2006 and 2005			5
Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2006 and 2005			6
Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005			7
Notes to Consolidated Interim Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38
Item 4. Controls and Procedures			39
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			40
Item 6. Exhibits			40
SIGNATURE			41
EXHIBITS
EX-2.1: AGREEMENT AND PLAN OF MERGER
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

		March 31,				December 31,
(In thousands, except share and per share data)		2006				2005
Assets:
Cash and due from depository institutions		$	267,541			$	293,706
Short-term investments			11,889				36,302
Securities: (Notes 4 and 13)
Trading, at fair value			1,042				2,257
Available for sale, at fair value			2,472,699				2,555,419
Held-to-maturity (fair value of $1,092,003 and $1,132,223)			1,116,386				1,142,909
Loans held for sale (Notes 5 and 15)			201,210				267,919
Loans, net (Notes 6 and 7)			12,444,254				12,138,800
Accrued interest receivable			94,602				85,779
Goodwill and other intangible assets (Note 8)			698,557				698,570
Cash surrender value of life insurance			240,426				237,822
Premises and equipment			184,831				182,856
Deferred tax asset (Note 9)			54,644				55,313
Prepaid expenses and other assets			119,105				138,910
Total assets		$	17,907,186			$	17,836,562
Liabilities and Shareholders’ Equity:
Deposits (Note 10)		$	12,078,277			$	11,631,145
Federal Home Loan Bank advances (Note 11)			2,383,118				2,214,010
Securities sold under agreements to repurchase and other short-term debt (Note 12)			1,007,439				1,522,381
Other long-term debt			631,568				640,906
Reserve for unfunded credit commitments (Note 7)			9,574				9,146
Accrued expenses and other liabilities			146,871				162,171
Total liabilities			16,256,847				16,179,759
Preferred stock of subsidiary corporation			9,577				9,577
Commitments and contingencies (Notes 5 and 6)			—				—
Shareholders’ equity (Note 13):
Common stock, $.01 par value;
Authorized — 200,000,000 shares at March 31, 2006 and December 31, 2005
Issued — 54,127,697 shares at March 31, 2006 and 54,117,218 shares at December 31, 2005			541				541
Paid-in capital			629,498				619,644
Retained earnings			1,106,463				1,075,984
Less: Treasury stock, at cost; 1,351,890 shares at March 31, 2006 and 455,426 shares at December 31, 2005			(58,931	)			(21,065	)
Accumulated other comprehensive loss			(36,809	)			(27,878	)
Total shareholders’ equity			1,640,762				1,647,226
Total liabilities and shareholders’ equity		$	17,907,186			$	17,836,562

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

		Three months ended March 31,
(In thousands, except per share data)		2006				2005
Interest Income:
Loans		$	195,574			$	158,787
Securities and short-term investments			41,595				40,899
Loans held for sale			3,339				2,732
Total interest income			240,508				202,418
Interest Expense:
Deposits (Note 10)			62,354				35,868
Federal Home Loan Bank advances and other borrowings			26,411				28,130
Other long-term debt			21,584				10,188
Total interest expense			110,349				74,186
Net interest income			130,159				128,232
Provision for credit losses (Note 7)			2,000				3,500
Net interest income after provision for credit losses			128,159				124,732
Noninterest Income:
Deposit service fees			21,869				19,129
Insurance revenue			10,724				11,802
Loan related fees			7,824				8,929
Wealth and investment services			6,354				5,395
Gain on sale of loans and loan servicing, net			3,273				2,536
Increase in cash surrender value of life insurance			2,371				2,238
Gain on sale of securities, net			1,012				756
Other income			1,775				2,243
Total noninterest income			55,202				53,028
Noninterest Expenses:
Compensation and benefits			65,003				57,902
Occupancy			12,182				10,859
Furniture and equipment			13,595				10,798
Intangible assets amortization (Note 8)			4,377				4,902
Marketing			3,624				3,283
Professional services			3,544				3,770
Conversion and infrastructure costs			—				1,134
Other expenses			16,846				15,126
Total noninterest expenses			119,171				107,774
Income before income taxes			64,190				69,986
Income taxes			20,338				22,491
Net Income		$	43,852			$	47,495

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME (unaudited), continued

		Three months ended March 31,
(In thousands, except per share data)		2006				2005
Net income		$	43,852				47,495
Basic earnings per share		$	0.83			$	0.89
Diluted earnings per share			0.82				0.88
Dividends paid per common share			0.25				0.23
Average shares outstanding:
Basic			53,094				53,571
Diluted			53,703				54,217

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

		Three months ended March 31,
(In thousands)		2006				2005
Net Income		$	43,852				47,495
Other comprehensive (loss) income, net of tax:
Unrealized net holding loss on securities available for sale arising during period (net of tax effect of $(4,623) and $(9,849) for 2006 and 2005, respectively)			(8,583	)			(18,292	)
Reclassification adjustment for net security gains included in net income (net of tax effect of $(261) and $(255) for 2006 and 2005, respectively)			(486	)			(473	)
Reclassification adjustment for cash flow hedge gain amortization included in net income			(42	)			(42	)
Reclassification adjustment for amortization of unrealized loss upon transfer of securities to held to maturity (net of tax effect of $97 and $108 for 2006 and 2005, respectively)			180				199
Other comprehensive loss			(8,931	)			(18,608	)
Comprehensive income		$	34,921				28,887

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

																		Accumulated
																		Other
		Common				Paid-in				Retained				Treasury				Comprehensive
(In thousands, except per share data)		Stock				Capital				Earnings				Stock				Loss				Total
Three months ended March 31, 2005:
Balance, December 31, 2004		$	536				605,696				942,830				(547	)			(4,541	)			1,543,974
Net income for the three months ended March 31, 2005			—				—				47,495				—				—				47,495
Dividends paid:
$.23 per common share			—				—				(12,362	)			—				—				(12,362	)
Exercise of stock options			2				3,529				—				—				—				3,531
Common stock repurchased			—				—				—				(3,023	)			—				(3,023	)
Stock-based compensation expense			—				831				—				1,256				—				2,087
Net unrealized loss on securities available for sale, net of taxes			—				—				—				—				(18,765	)			(18,765	)
Amortization of deferred hedging gain			—				—				—				—				(42	)			(42	)
Amortization of unrealized loss on securities transferred to held to maturity, net of taxes			—				—				—				—				199				199
Employee Stock Purchase Plan			—				500				—				—				—				500
Balance, March 31, 2005		$	538				610,556				977,963				(2,314	)			(23,149	)			1,563,594
Three months ended March 31, 2006:
Balance, December 31, 2005		$	541				619,644				1,075,984				(21,065	)			(27,878	)			1,647,226
Net income for the three months ended March 31, 2006			—				—				43,852				—				—				43,852
Dividends paid:
$.25 per common share			—				—				(13,373	)			—				—				(13,373	)
Exercise of stock options			—				(869	)			—				1,851				—				982
Tax benefit from stock options exercised			—				293				—				—				—				293
Common stock repurchased			—				—				—				(31,850	)			—				(31,850	)
Stock-based compensation expense			—				1,201				—				870				—				2,071
Unearned compensation transfer to treasury stock upon adoption of SFAS No. 123(R)			—				8,737				—				(8,737	)			—				—
Net unrealized loss on securities available for sale, net of taxes			—				—				—				—				(9,069	)			(9,069	)
Amortization of deferred hedging gain			—				—				—				—				(42	)			(42	)
Amortization of unrealized loss on securities transferred to held to maturity, net of taxes			—				—				—				—				180				180
Employee Stock Purchase Plan			—				492				—				—				—				492
Balance, March 31, 2006		$	541				629,498				1,106,463				(58,931	)			(36,809	)			1,640,762

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Three months ended March 31,
(In thousands)		2006				2005
Operating Activities:
Net income		$	43,852			$	47,495
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses			2,000				3,500
Depreciation and amortization			7,669				5,725
Amortization of intangible assets			4,377				4,902
Stock-based compensation			2,071				2,587
Net gain on sale of foreclosed properties			(3	)			(8	)
Net gain on sale of securities			(747	)			(728	)
Net gain on sale of loans and loan servicing			(3,273	)			(2,536	)
Increase in cash surrender value of life insurance			(2,371	)			(2,238	)
Net gain on trading securities			(265	)			(28	)
Decrease (increase) in trading securities			1,480				(1,010	)
Loans originated for sale			(302,680	)			(503,269	)
Proceeds from sale of loans originated for sale			372,662				300,783
Increase in interest receivable			(8,823	)			(3,610	)
Decrease in prepaid expenses and other assets			17,391				4,996
Decrease in accrued expenses and other liabilities			(26,119	)			(59,719	)
Proceeds from surrender of life insurance contracts			—				793
Net cash provided (used) by operating activities			107,221				(202,365	)
Investing Activities:
Purchases of available for sale securities			(14,712	)			(229,236	)
Purchases of held to maturity securities			(4,473	)			(18,702	)
Proceeds from maturities and principal payments of available for sale securities			81,638				89,380
Proceeds from maturities and principal payments of held to maturity securities			30,923				35,277
Proceeds from sales of available for sale securities			1,737				15,316
Net decrease in short-term investments			24,413				46,429
Net (increase) decrease in loans			(310,394	)			111,097
Proceeds from sale of foreclosed properties			4,172				689
Net purchases of premises and equipment			(9,369	)			(14,197	)
Net cash paid for acquisitions			—				(28,998	)
Net cash (used) provided by investing activities			(196,065	)			7,055
Financing Activities:
Net increase in deposits			447,132				263,306
Proceeds from FHLB advances			15,702,721				9,350,500
Repayment of FHLB advances			(15,529,878	)			(9,618,980	)
Net (decrease) increase in federal funds purchased and securities sold under agreement to repurchase			(513,840	)			239,601
Repayment of other long term debt			—				(10,000	)
Cash dividends to common shareholders			(13,373	)			(12,362	)
Exercise of stock options			1,275				3,531
Stock sold to Employee Stock Purchase Plan			492				—
Common stock repurchased			(31,850	)			(3,023	)
Net cash provided by financing activities			62,679				212,573
(Decrease) increase in cash and cash equivalents			(26,165	)			17,263
Cash and cash equivalents at beginning of period			293,706				248,825
Cash and cash equivalents at end of period		$	267,541			$	266,088

See accompanying Notes to Consolidated Interim Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

		Three months ended March 31,
(In thousands)		2006				2005
Supplemental Disclosures:
Income taxes paid		$	219			$	8,344
Interest paid			109,609				77,605
Supplemental Schedule of Noncash Investing and Financing Activities:
Transfer of loans to foreclosed properties		$	913			$	647
Purchase Transactions:
Fair value of noncash assets acquired		$	—			$	235,033
Fair value of liabilities assumed			—				210,686

See accompanying Notes to Consolidated Interim Financial Statements.

NOTE 1: Basis of Presentation and Principles of Consolidation

The Consolidated Interim Financial Statements include the accounts of Webster Financial Corporation (“Webster” or the “Company”) and its subsidiaries. The Consolidated Interim Financial Statements and Notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant inter-company transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results which may be expected for the year as a whole.

The preparation of the Consolidated Interim Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the Consolidated Interim Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for credit losses and the valuation allowance for the deferred tax asset. These Consolidated Interim Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Webster’s Annual Report on Form 10-K for the year ended December 31, 2005.

NOTE 2: Share-Based Compensation

Webster has a share-based compensation plan (the “Plan”) that covers employees and directors and a Director Retainer Fees Plan for non-employee directors (collectively, the “Plans”). The compensation cost that has been included in compensation and benefits expense for the Plans was $2.1 million for both the three month periods ended March 31, 2006 and 2005. The total income tax benefit recognized in the Consolidated Statements of Income for share-based compensation arrangements was $694,000 and $669,000 for the three month periods ended March 31, 2006 and 2005, respectively.

The Plan, which is shareholder-approved, permits the grant of incentive and nonqualified stock options, restricted stock and stock appreciation rights (“SARS”) to employees and directors for up to 6.7 million shares of common stock. Webster believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of Webster’s stock at the date of grant and vest over periods ranging from three to four years. These options grant the holder the right to acquire a share of Webster common stock for each option held and have a contractual life of ten years.

During the three month period ended March 31, 2006, there were 1,052 restricted common shares granted to senior management, which vest over a period ranging from three to five years. The Plan also permits performance-based restricted stock awards. These performance-based awards vest after three years in a range from zero to 200% of the target number of shares under the grant, dependent upon Webster’s ranking for total shareholder return among a blended peer group of companies in the S&P Midcap 400 Financial Services Subset index and the KBW 50 index. During the first quarter of 2006, there were no performance-based restricted stock awards granted while during 2005, two executive officers received performance-based restricted stock awards.

The Director Retainer Fees Plan provides non-employee directors with restricted shares in lieu of an annual cash retainer for their services rendered as directors. During the three month period ended March 31, 2006, no shares were granted to directors. The grant-date fair value of restricted share awards to directors and management under the Plans is amortized to noninterest expense over the service vesting period and such expense is reflected in compensation and benefits expense.

On January 1, 2006, Webster adopted the provisions of SFAS No. 123 (R), “Share-Based Payment”, which requires compensation cost relating to share-based payment transactions to be recognized in the financial statements, based upon the fair value of the instruments issued. SFAS No. 123 (R) covers a wide range of share-based compensation arrangements including share options, restricted stock plans, performance-based awards, share appreciation rights and employee purchase plans. SFAS No. 123 (R) replaces SFAS No. 123, which established as preferable a fair value based method of accounting for share-based compensation with employees, but permitted the option of continuing to apply the guidance of APB Opinion No. 25, as long as the notes to the financial statements disclosed the effects of the preferable fair value method. Since Webster adopted the provisions of SFAS No. 123, effective January 1, 2002, the adoption of SFAS No. 123 (R) as of January 1, 2006 did not have a material impact on Webster’s Consolidated Financial Statements.

The fair value of each option award is estimated on the date of grant using the Black-Scholes Option-Pricing Model. The weighted-average assumptions used for options granted in the first quarter of 2005 are noted in the following table (no options were granted in the first quarter of 2006). Webster uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

		Weighted Average Assumptions
		March 31,
		2006				2005
Expected term (years)			N/A				6.7
Expected dividend yield			N/A				2.00	%
Expected volatility			N/A				31.92
Expected forfeiture rate			N/A				5.00
Risk-free interest rate			N/A				4.23
Fair value of options granted			N/A			$	14.17

A summary of option activity under the Plans as of March 31, 2006, and changes during the quarter then ended, is presented below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual Term				Value
		Number				Price				(in years)				(in thousands)
Options outstanding at beginning of the period			3,256,967			$	35.22
Options granted			—				—
Options exercised			(40,052	)			24.61
Options forfeited			(11,027	)			42.40
Options expired			—				—
Options outstanding at end of the period			3,205,888			$	35.32				5.6			$	42,119
Options exercisable at end of the period			2,364,972			$	31.48				4.6			$	40,157

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between Webster’s closing stock price on the last trading day of the first quarter of 2006 and the weighted-average exercise price, multiplied by the number of shares) that would have been received by the option holders had all option holders exercised their options on March 31, 2006. The aggregate intrinsic value fluctuates based on changes in the fair market value of Webster’s stock.

The total intrinsic value of options exercised during the quarters ended March 31, 2006 and 2005 was $934,000 and $5.8 million, respectively.

The following table summarizes information about options outstanding and options exercisable at March 31, 2006:

		Options Outstanding												Options Exercisable
						Weighted-Average				Weighted-								Weighted-
						Remaining				Average								Average
		Number				Contractual Life				Exercise				Number				Exercise
Range of Exercise Prices		Outstanding				(in years)				Price				Exercisable				Price
$10.01 – 15.00			5,334				0.1			$	13.75				5,334			$	13.75
15.01 – 20.00			112,037				1.0				18.79				112,037				18.79
20.01 – 25.00			602,757				4.3				23.12				602,757				23.12
25.01 – 30.00			351,076				5.0				29.00				351,076				29.00
30.01 – 35.00			920,790				3.9				33.62				838,928				33.52
35.01 – 40.00			138,225				6.3				37.48				130,850				37.51
40.01 – 45.00			112,468				8.8				43.88				36,625				44.04
45.01 – 50.00			960,201				8.5				47.61				286,165				47.00
50.01 – 51.31			3,000				8.3				51.04				1,200				51.14
			3,205,888				5.6			$	35.32				2,364,972			$	31.48

The following table summarizes Webster’s restricted stock activity for the three months ended March 31, 2006:

						Weighted-
		Number				Average
		of				Grant Date
		Shares				Fair Value
Restricted stock at beginning of the period			259,167			$	44.37
Granted			19,493				47.52
Vested			(8,646	)			37.63
Forfeited			(3,625	)			34.22
Restricted stock at end of the period			266,389			$	44.94

As of March 31, 2006, there was $14.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.7 years. The fair value of shares that vested during the quarters ended March 31, 2006 and 2005 was $405,000 and $579,000, respectively.

NOTE 3: Purchase and Sale Transactions

No purchase or sale transactions were announced or completed during the first quarter of 2006.

NOTE 4: Securities

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

		March 31, 2006																December 31, 2005
		Amortized				Unrealized								Estimated				Amortized				Unrealized								Estimated
(In thousands)		Cost				Gains				Losses				Fair Value				Cost				Gains				Losses				Fair Value
Trading:
Municipal bonds and notes														$	1,042															$	2,257
Available for Sale:
Corporate bonds and notes		$	205,409				4,596				(1,654	)			208,351			$	197,101				5,384				(1,162	)			201,323
Equity securities (a)			226,874				6,169				(256	)			232,787				223,043				5,542				(559	)			228,026
Mortgage-backed securities			2,094,909				—				(63,348	)			2,031,561				2,176,121				27				(50,078	)			2,126,070
Total available for sale		$	2,527,192				10,765				(65,258	)			2,472,699			$	2,596,265				10,953				(51,799	)			2,555,419
Held to maturity:
Municipal bonds and notes		$	401,973				6,721				(1,480	)			407,214			$	401,112				8,237				(1,011	)			408,338
Mortgage-backed securities			714,413				—				(29,624	)			684,789				741,797				—				(17,912	)			723,885
Total held to maturity securities		$	1,116,386				6,721				(31,104	)			1,092,003			$	1,142,909				8,237				(18,923	)		$	1,132,223

The following table identifies temporarily impaired investment securities as of March 31, 2006 segregated by length of time the securities had been in a continuous unrealized loss position.

		Less Than Twelve Months								Twelve Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
Available for Sale:
Corporate bonds and notes		$	15,207				(447	)			22,812				(1,207	)			38,019				(1,654	)
Equity securities			2,268				(30	)			4,179				(226	)			6,447				(256	)
Mortgage-backed securities			410,288				(8,096	)			1,621,273				(55,252	)			2,031,561				(63,348	)
Total available for sale		$	427,763				(8,573	)			1,648,264				(56,685	)			2,076,027				(65,258	)
Held to maturity:
Municipal bonds and notes		$	92,496				(910	)			21,032				(570	)			113,528				(1,480	)
Mortgage-backed securities			134,027				(6,039	)			550,762				(23,585	)			684,789				(29,624	)
Total HTM Securities		$	226,523				(6,949	)			571,794				(24,155	)			798,317				(31,104	)
Total Securities		$	654,286				(15,522	)			2,220,058				(80,840	)			2,874,344				(96,362	)

The following table identifies temporarily impaired investment securities as of December 31, 2005 segregated by length of time the securities had been in a continuous unrealized loss position.

		Less Than Twelve Months								Twelve Months or Longer								Total
(In thousands)		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Available for sale:
Corporate bonds and notes		$	8,678				(431	)			15,353				(731	)			24,031				(1,162	)
Equity securities			22,601				(133	)			3,979				(426	)			26,580				(559	)
Mortgage-backed securities			688,628				(10,475	)			1,426,055				(39,603	)			2,114,683				(50,078	)
Total available for sale			719,907				(11,039	)			1,445,387				(40,760	)			2,165,294				(51,799	)
Held to maturity:
Municipal bonds and notes			62,907				(589	)			15,851				(422	)			78,758				(1,011	)
Mortgage-backed securities			522,006				(12,576	)			201,879				(5,336	)			723,885				(17,912	)
Total held to maturity securities			584,913				(13,165	)			217,730				(5,758	)			802,643				(18,923	)
Total securities		$	1,304,820				(24,204	)			1,663,117				(46,518	)			2,967,937				(70,722	)

Unrealized losses on fixed income securities result from the cost basis of securities being greater than current market value. This will generally occur as a result of an increase in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer. Management has and will continue to evaluate impairments, whether caused by adverse interest rate or credit movements, to determine if they are other-than-temporary.

In accordance with applicable accounting literature, Webster must demonstrate an ability and intent to hold impaired securities until full recovery of their cost basis. Management uses both internal and external information sources to arrive at the most informed decision. This quantitative and qualitative assessment begins with a review of general market conditions and changes to market conditions, credit, investment performance and structure since the prior review period. The ability to hold the impaired securities will involve a number of factors, including: forecasted recovery period based on average life; whether its return provides satisfactory carry relative to funding sources; Webster’s capital, earnings and cash flow positions; and compliance with various debt covenants, among other things. Webster currently intends to hold all temporarily impaired securities to full recovery, which may be until maturity.

Estimating the recovery period for equity securities will include analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment will incorporate general market data, industry and sector cycles and related trends to determine a reasonable recovery period.

Webster’s determination of impairment at March 31, 2006 began with a recognition that market yields increased during 2005 and the first quarter of 2006, reflecting the impact of fifteen interest rate increases of 25 basis points, or 375 basis points in total, by the Federal Reserve from June 2004 through March 2006.

At March 31, 2006, Webster had $2.2 billion of impaired securities with an unrealized loss of $80.8 million for twelve months or longer. These securities have had varying levels of unrealized loss due to higher interest rates subsequent to their purchase. Approximately 68 percent of that unrealized loss, or $55.2 million, was concentrated in mortgage-backed securities available for sale totaling $1.6 billion in fair value. These securities carry AAA ratings or Agency-implied AAA credit ratings and are currently performing as expected. Management does not consider these investments to be other-than-temporarily impaired and Webster has the ability and intent to hold these investments to full recovery of the cost basis. Management expects that recovery of temporarily impaired available for sale mortgage-backed securities will occur over the weighted-average estimated remaining life of these securities. Market-accepted pricing and prepayment models are used to project the estimated average life, which for this group of securities is presently estimated to be 2.7 years. Further, the majority of these securities are hybrid adjustable rate mortgage-backed securities, which tend to prepay faster than similar coupon fixed-rate mortgage-backed securities and as the collateral loans approach their interest rate reset dates, management expects the securities to trade at par or at a premium when fully indexed.

Available for sale corporate securities totaling $22.8 million at March 31, 2006, with an unrealized loss of $1.2 million, were impaired for twelve consecutive months or longer due to higher interest rates subsequent to their purchase. Several corporate securities are unrated, but have undergone an internal credit review. The remaining securities are a mix of investment grade and below investment grade bonds. As a result of the credit review of the issuers, management has determined that there has been no deterioration in credit quality subsequent to purchase or last review period. These securities are currently performing as projected. Management does not consider these investments to be other-than-temporarily impaired based on experience with these types of investments. Webster has the ability and intent to hold these investments to full recovery of the cost basis. Management expects recovery of temporarily impaired available for sale corporate securities over their weighted-average estimated remaining life, which is presently estimated to be 1.9 years.

Held to maturity mortgage-backed securities totaling $550.8 million at March 31, 2006, with an unrealized loss of $23.6 million, were impaired for twelve consecutive months or longer due to higher interest rates subsequent to their purchase. These securities carry AAA ratings or Agency-implied AAA credit ratings and are currently performing as expected. Management does not consider these investments to be other-than-temporarily impaired. Webster has the ability and intent to hold these investments to full recovery of the cost basis. Management expects that recovery of temporarily impaired held to maturity mortgage-backed securities will occur over the weighted-average estimated remaining life of these securities. Management uses market-accepted pricing and prepayment models to project the estimated average life, which for this group of securities is presently estimated to be 4.4 years. Further, this group of securities continues to record acceptable levels of prepayments monthly at par, which reduces the amount of fair value and unrealized loss accordingly.

Held to maturity municipal securities totaling $21.0 million at March 31, 2006, with an unrealized loss of $0.6 million, were impaired for twelve consecutive months or longer due to higher interest rates subsequent to their purchase. Most of these bonds are insured AAA rated general obligation bonds with stable ratings. There were no credit downgrades since the last review period. These securities are currently performing as anticipated. Management does not consider these investments to be other-than-temporarily impaired. Webster has the ability and intent to hold these investments to full recovery of the cost basis. Management expects recovery of temporarily impaired held to maturity municipal securities over their weighted-average estimated remaining life, which is presently estimated to be 10.2 years.

Available for sale equity securities totaling $4.2 million at March 31, 2006, with an unrealized loss of $0.2 million, were impaired for twelve consecutive months or longer. Most of Webster’s equity holdings are issuers in the financial services industry, which is experiencing performance pressures from a flatter yield curve and slowing mortgage originations. The severity of the impairment is consistent with those market developments. Management believes the declines in price have stabilized and the securities are not other-than-temporarily impaired. Based on our internal evaluation and analyst forecasts, management believes that Webster has the ability and intent to hold these securities to full recovery of the cost basis.

There were no impairment writedowns of securities during the first quarter of 2006 and 2005.

NOTE 5: Loans Held for Sale

Loans held for sale totaled $201.2 million and $267.9 million at March 31, 2006 and December 31, 2005, respectively.

Included in the March 31, 2006 balance are approximately $2.2 million in commercial loans and $2.0 million in consumer loans. Included in the December 31, 2005 balance are approximately $3.2 million in commercial loans and $2.2 million in consumer loans. The remainder of the loans held for sale at March 31, 2006 and December 31, 2005 are residential mortgages.

At March 31, 2006 and December 31, 2005, residential mortgage origination commitments totaled $181.7 million and $137.2 million, respectively. Residential commitments outstanding at March 31, 2006 consisted of adjustable rate and fixed rate mortgages of $18.1 million and $163.6 million, respectively, at rates ranging from 1.0% to 13.8%. Residential commitments outstanding at December 31, 2005 consisted of adjustable rate and fixed rate mortgages of $14.8 million and $122.4 million, respectively, at rates ranging from 1.0% to 12.3%. Commitments to originate loans generally expire within 60 days. At March 31, 2006 and December 31, 2005, Webster also had outstanding commitments to sell residential mortgage loans of $394.3 million and $343.0 million, respectively. See Note 15 for a further discussion of loan origination and sale commitments.

NOTE 6: Loans, Net

A summary of loans, net follows:

(In thousands)		March 31, 2006								December 31, 2005
		Amount				%				Amount				%
Residential mortgage loans		$	4,890,887				38.8	%		$	4,828,564				39.3	%
Commercial loans:
Commercial non-mortgage			1,532,804				12.2				1,435,512				11.7
Asset-based lending			705,027				5.6				661,234				5.4
Equipment financing			801,099				6.4				779,782				6.3
Total commercial loans			3,038,930				24.2				2,876,528				23.4
Commercial real estate			1,851,035				14.7				1,808,494				14.7
Consumer loans:
Home equity credit loans			2,776,913				22.0				2,736,274				22.3
Other consumer			32,872				0.3				35,426				0.3
Total consumer loans			2,809,785				22.3				2,771,700				22.6
Total loans			12,590,637				100.0	%			12,285,286				100.0	%
Less: allowance for loan losses			(146,383	)							(146,486	)
Loans, net		$	12,444,254							$	12,138,800

At March 31, 2006, total loans included $24.6 million of net premiums and $39.0 million of net deferred costs, compared with $24.5 million of net premiums and $36.9 million of net deferred costs at December 31, 2005. The unadvanced portions of closed loans totaled $538.3 million and $547.5 million at March 31, 2005 and December 31, 2005, respectively.

At March 31, 2006 and December 31, 2005, unused portions of home equity credit lines extended were $1.8 billion and $1.7 billion, respectively. Unused commercial lines of credit, letters of credit, standby letters of credit, equipment financing commitments and outstanding commercial loan commitments totaled $3.3 billion at March 31, 2006 and $3.4 billion at December 31, 2005. Consumer loan commitments totaled $95.8 million and $83.2 million at March 31, 2006 and December 31, 2005, respectively.

Webster is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commitments to sell residential first mortgage loans and commercial loans. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Condition.

The estimated fair value of commitments to extend credit is considered insignificant at March 31, 2006 and December 31, 2005. Future loan commitments represent residential and commercial mortgage loan commitments, commercial loan and equipment financing commitments, letters of credit and commercial and home equity unused credit lines. The interest rates for these loans are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate.

A majority of the outstanding letters of credit are performance standby letters of credit within the scope of FASB Interpretation No. (“FIN”) 45. These are irrevocable undertakings by Webster, as guarantor, to make payments in the event a specified third party fails to perform under a nonfinancial contractual obligation. Most of the performance standby letters of credit arise in connection with lending relationships and have a term of one year or less.

The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. At March 31, 2006, Webster’s standby letters of credit totaled $190.6 million. At March 31, 2006, the fair value of stand-by letters of credit is not material to the unaudited interim financial statements.

NOTE 7: Allowance for Credit Losses

The allowance for credit losses is maintained at a level adequate to absorb probable losses inherent in the loan portfolio and in unfunded credit commitments. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off, and reduced by charge-offs on loans.

The following table provides a summary of activity in the allowance for credit losses:

		Three months ended March 31,
(In thousands)		2006				2005
Balance at beginning of period		$	155,632				150,112
Provisions charged to operations			2,000				3,500
Subtotal			157,632				153,612
Charge-offs			(2,066	)			(2,464	)
Recoveries			391				1,371
Net charge-offs			(1,675	)			(1,093	)
Balance at end of period		$	155,957				152,519

		March 31,				March 31,
(In thousands)		2006				2005
Components:
Allowance for loan losses		$	146,383				152,519
Reserve for unfunded credit commitments (1)			9,574				—
Allowance for credit losses		$	155,957				152,519
Net loan charge-offs as a percentage of average total loans			0.05	%			0.04
Allowance for loan losses as a percentage of total loans			1.16				1.30
Allowance for credit losses as a percentage of total loans			1.24				1.30

NOTE 8: Goodwill and Other Intangible Assets

The following tables set forth the carrying values of goodwill and other intangible assets, net of accumulated amortization:

		March 31,				December 31,
(In thousands)		2006				2005
Balances not subject to amortization:
Goodwill		$	647,217				642,889
Pension assets			1,880				1,844
Balances subject to amortization:
Core deposit intangibles			43,019				47,227
Other identified intangibles			6,441				6,610
Total goodwill and other intangible assets		$	698,557				698,570

Changes in the carrying amount of goodwill for the three months ended March 31, 2006 are as follows:

		Retail				Commercial
(In thousands)		Banking				Banking				Total
Balance at December 31, 2005		$	611,378				31,511				642,889
Purchase price adjustments			(504	)			4,832				4,328
Balance at March 31, 2006		$	610,874				36,343				647,217

The addition to the Commercial Banking goodwill is due to a final year earnout of contingent consideration related to an earlier acquisition.

Amortization of intangible assets for the three months ended March 31, 2006, totaled $4.4 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

(In thousands)
For years ending December 31,
2006 (full year)		$	14,085
2007			9,441
2008			5,000
2009			4,816
2010			4,745
Thereafter			15,750

NOTE 9: Deferred Tax Asset

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31, 2006 and December 31, 2005 are summarized below. Temporary differences result from the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance has been established for the full amount of the deferred tax assets applicable to Connecticut, Massachusetts and Rhode Island due to uncertainties of realization.

		March 31,				December 31,
(In thousands)		2006				2005
Deferred tax assets:
Allowance for loan losses		$	60,872				60,721
Net operating loss and tax credit carry forwards			19,262				19,350
Net unrealized loss on securities available for sale			19,180				14,296
Compensation and employee benefit plans			8,540				9,265
Intangible assets			4,932				5,314
Deductible acquisition costs			1,970				2,793
Other			3,055				3,594
Total deferred tax assets			117,811				115,333
Less: valuation allowance			(22,089	)			(21,320	)
Deferred tax assets, net of valuation allowance			95,722				94,013
Deferred tax liabilities:
Deferred loan costs			14,361				11,575
Premises and equipment			8,698				8,811
Equipment financing leases			7,174				7,174
Purchase accounting and fair-value adjustments			5,213				4,968
Mortgage servicing rights			2,578				2,728
Other			3,054				3,444
Total deferred tax liabilities			41,078				38,700
Deferred tax asset		$	54,644				55,313

Management believes it is more likely than not that Webster will realize its net deferred tax assets, based upon its recent historical and anticipated future levels of pre-tax income. There can be no absolute assurance, however, that any specific level of future income will be generated.

NOTE 10: Deposits

The following table summarizes the composition of deposits:

		March 31, 2006								December 31, 2005
						% of								% of
(In thousands)		Amount				total				Amount				total
Demand		$	1,459,855				12.1	%		$	1,546,096				13.3	%
NOW			1,419,330				11.8				1,412,821				12.2
Money market			1,761,016				14.6				1,789,781				15.4
Savings			2,004,375				16.6				2,015,045				17.3
Health savings accounts (“HSA”)			264,347				2.1				209,582				1.8
Retail certificates of deposit			4,392,731				36.4				4,249,874				36.5
Treasury certificates of deposit			776,623				6.4				407,946				3.5
Total		$	12,078,277				100.0	%		$	11,631,145				100.0	%

Interest expense on deposits is summarized as follows:

		Three months ended March 31,
(In thousands)		2006				2005
NOW accounts		$	1,216				921
Money market deposit accounts			12,065				7,606
Savings accounts			5,006				4,126
HSA			1,521				306
Certificates of deposit			42,546				22,909
Total		$	62,354				35,868

NOTE 11: Federal Home Loan Bank Advances

Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

		March 31, 2006								December 31, 2005
		Total								Total
(In thousands)		Outstanding				Callable				Outstanding				Callable
Fixed Rate:
2.88 % to 4.90 % due in 2006		$	1,417,103				—			$	1,213,468				—
4.09 % to 7.45 % due in 2007			441,788				—				442,383				—
3.93 % to 5.93 % due in 2008			175,002				74,000				175,119				74,000
4.98 % to 5.96 % due in 2009			138,000				123,000				138,000				123,000
4.80 % to 8.44 % due in 2010			135,295				35,000				135,311				35,000
4.58 % to 6.60 % due in 2011			11,365				10,000				41,421				40,000
5.22 % to 5.49 % due in 2013			49,000				49,000				49,000				49,000
0.00 % to 6.00 % due in 2015 to 2023			1,317				—				1,325				—
			2,368,870				291,000				2,196,027				321,000
Unamortized premiums and hedge accounting adjustments			14,248				—				17,983				—
Total advances		$	2,383,118				291,000			$	2,214,010				321,000

Webster Bank had additional borrowing capacity of approximately $0.7 billion from the FHLB at March 31, 2006 and $1.0 billion at December 31, 2005. Advances are secured by a blanket security agreement against certain qualifying assets, principally residential mortgage loans. At March 31, 2006 and December 31, 2005, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at March 31, 2006 and December 31, 2005 would have been increased by an additional $645.8 million and $737.1 million, respectively. At March 31, 2006 Webster Bank was in compliance with the FHLB collateral requirements.

NOTE 12: Securities Sold Under Agreements to Repurchase and Other Short-Term Debt

The following table summarizes securities sold under agreements to repurchase and other short term borrowings:

		March 31,				December 31,
(In thousands)		2006				2005
Securities sold under agreements to repurchase		$	793,119				792,838
Federal funds purchased			205,485				246,375
Treasury tax and loan			3,843				477,066
Other			70				77
			1,002,517				1,516,356
Unamortized premiums and hedge accounting adjustments			4,922				6,025
Total		$	1,007,439				1,522,381

The following table sets forth certain information on short-term borrowings:

		March 31,				December 31,
(In thousands)		2006				2005
Repurchase agreements:
Quarter end balance		$	403,871				401,137
Quarter average balance			424,129				510,084
Highest month end balance during quarter			440,448				572,722
Weighted-average maturity (in months)			1.27				1.30
Weighted-average interest rate			3.40	%			3.16	%

NOTE 13: Shareholders’ Equity

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) require Webster and its banking subsidiary to maintain certain minimum ratios, as set forth below. At March 31, 2006, Webster and Webster Bank, were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios.

		Actual								Capital Requirements								Well Capitalized
(In thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
At March 31, 2006
Webster Financial Corporation
Total capital (to risk-weighted assets)		$	1,538,546				11.0	%		$	1,119,797				8.0	%		$	1,399,746				10.0	%
Tier 1 capital (to risk-weighted assets)			1,180,066				8.4				559,898				4.0				839,848				6.0
Tier 1 leverage capital ratio (to average assets)			1,180,066				6.9				684,873				4.0				856,091				5.0
Webster Bank, N.A.
Total capital (to risk-weighted assets)		$	1,505,704				10.9	%		$	1,104,558				8.0	%		$	1,380,698				10.0	%
Tier 1 capital (to risk-weighted assets)			1,149,747				8.3				552,279				4.0				828,419				6.0
Tier 1 leverage capital ratio (to average assets)			1,149,747				6.8				677,269				4.0				846,587				5.0
At December 31, 2005
Webster Financial Corporation
Total capital (to risk-weighted assets)		$	1,537,032				11.1	%		$	1,107,805				8.0	%		$	1,384,756				10.0	%
Tier 1 capital (to risk-weighted assets)			1,179,158				8.5				553,902				4.0				830,853				6.0
Tier 1 leverage capital ratio (to average assets)			1,179,158				6.9				688,133				4.0				860,166				5.0
Webster Bank, N.A.
Total capital (to risk-weighted assets)		$	1,532,996				11.2	%		$	1,092,476				8.0	%		$	1,365,595				10.0	%
Tier 1 capital (to risk-weighted assets)			1,177,364				8.6				546,238				4.0				819,357				6.0
Tier 1 leverage capital ratio (to average assets)			1,177,364				6.9				680,675				4.0				850,844				5.0