Webster Financial Corporation Commercial Real Estate The End

Webster Financial Corporation Commercial Real Estate “The End of Extend and Pretend” March 2012

How Did We Get Here? Déjà Vu All Over Again Too much capital – debt and equity Aggressive deal terms – free options Overpriced values 2

Industry Dynamics 1990 s 2008+ Tax code change (1986) Cap rate paradigm shift Overbuilding Too much capital / leverage Aggressive underwriting (S&Ls) Recession – unemployment peaks at 8. 2% Office overbuilt Aggressive underwriting (CMBS) Severe recession – unemployment at 9+% Consumer impact on retail supply 3

Regulator’s / Lender’s Approach 1990 s 2008+ Hands were tied More flexibility Aggressive Regulatory environment; came in with biased mindset from experiences in Texas Regulators applying lessons learned from 1990 s; will not dictate values Regulators dictating values; performing / nonperforming More adversarial with Borrowers Tightening underwriting standards Increasing pricing; risk premium back in Refinancing maturing loans; no alternative source of capital More collegial with Borrowers 4

Portfolio Realities Falling market values Stressed cash flows with near term lease rollovers and declining rents Increasing covenant defaults Near term maturities Increasing payment defaults, sponsor liquidity issues Negative risk rating migration and capital issues 5

Portfolio Strategies Early identification and resolution of the problems Timely risk rating changes and aggressive action is critical to avoid regulatory scrutiny Favorable regulatory guidance, work with sponsors wherever possible Negotiate permanent solutions, do not “kick the can” 6

Loan Decision Tree Loan Work with Sponsor A/B Structure Renewal / Mod / Extension • Retain B note or equity kicker for future upside • Retain loan • Higher LTV • Control economics • Increased income from higher rate Don’t Work with Sponsor Note Sale to 3 rd Party Foreclosure REO Bankruptcy • Put A note back as performing loan Discounted Payoff • Removal of substandard / non-accrual loans • Fix / lock in charges 7

Renewal / Modification LTV @ Maturity Problem Solution: Loan: $10 million $500, 000 pay down Maturity: 11/01/11 Term: 3 year extension Occupancy: 85% LTV: 90% DSCR: 1. 10 X Cash flow sweep to fund T/I escrow reserve $125, 000 interest reserve (add’l collateral) LTV: 85% DSCR: 1. 20 X TDR Status 8

A/B Note Structure Problem Loan: Solution: $10 million “A” Note - $7. 5 million Occupancy: 70% LTV approx 100% LTV: above 130% DSCR – 1. 10 X DSCR: Below 1. 0 X Cash flow sweep Performing status TDR Status “B” Note - $2. 5 million charge off (not forgiven) Accruing at 1% rate 9

Conundrum Are TDRs a true measure of a bank’s future defaults? TDR problems and implications: - Classification inconsistency across the industry - Went from simple accounting classification to 1. ) a metric used by Wall Street to access future defaults and 2. ) incremental FDIC requirements given classified status Due to capital and valuation implications with TDR labels, workout structures may change to include: - Larger charge offs on A/B structures - No perceived concessions – need for “market” transaction 10

Scorecard Regulatory / lender approach definitely a plus Banks able to resolve liquidity issues Banks raised or shored up their capital positions Minimized charge offs and costs Pressure today for banks to clean up their balance sheets Myth vs. reality – are TDRs the next shoe to drop? 11