DBRS Rates Webster Financial Corporation at BBB (high)

Dominion Bond Rating Service (“DBRS”) has initiated rating coverage of Webster Financial Corporation (“Webster” or the “Company”) and its principal bank subsidiary – Webster Bank, N.A. The ratings assigned are indicated above. The trend for all ratings is Stable.

Webster’s ratings reflect a sound Connecticut retail and commercial banking franchise, with a loan portfolio that is gradually diversifying away from its thrift roots into commercial lending areas in which the Company has developed expertise. Webster focuses its lending efforts on consumers, as well as small- and middle-market businesses. Retail Banking, which includes small business customers, accounts for about 75% of earnings and revenues, while Commercial Banking accounts for the remaining 25% of earnings. A solid core deposit base that provides stable loan funding, strong loan and deposit growth, consistently good asset quality, and declining interest rate risk due to the reduction of debt from the contracting securities portfolio, also contribute positively to the Company’s ratings.

Webster’s core profitability and operating efficiency are near, or slightly lower than, the respective medians for its peer group, similarly rated by DBRS. Capitalization is less robust than peer levels. These characteristics reflect, in part, the costs and capital requirements associated with a crisp growth and expansion strategy, and the attendant rise in goodwill. In DBRS’s opinion, the long-term shift from residential real estate to commercial lending could result in improved core earnings, but also may increase the Company’s risk profile, which could potentially elevate loan losses. DBRS notes, however, that Webster has a good track record of managing its credit quality over the past decade.

The Company has grown primarily through acquisitions, but also organically through de novo branching and increasing customer penetration. Acquisitions have bolstered both the existing branch footprint and expanded Webster’s presence in contiguous markets. The Company has a good integration track record, having successfully acquired 11 banks over ten years and has a pending transaction, NewMil Bancorp, Inc., that is expected to close in the fourth quarter of 2006.

The commercial loan portfolio is well diversified, highly granular, and lacks major risk concentrations. Webster has developed or acquired expertise in commercial real estate, asset-based lending, and equipment lending among other commercial lending specialties. It is these areas that have primarily driven the robust organic loan growth.

Webster has a healthy and growing deposit franchise, ranked second with a 13% deposit market share in Connecticut. The Company has been expanding its presence into Southeastern Massachusetts, Rhode Island, and Westchester County, New York, based on potential growth opportunities. DBRS notes that Connecticut, Massachusetts, and Westchester County have the highest household median incomes in the U.S. Enhancing the composition of deposits are $1.3 billion (11%) from small business customers, and $210 million in health savings accounts at year-end 2005, a growing business in which Webster is the national leader. Still challenging for the Company, however, is core deposit funding, which is only 81% of net loans and results in a 38% reliance on less stable and more expensive wholesale funding. Additionally, Webster’s deposit mix has both a high proportion of certificates of deposits (CDs) and Jumbo deposits.

In 2004, The Company converted its charter from a thrift to a national bank, but some thrift financial characteristics remain and will take time to evolve. Webster’s earnings and credit quality are influenced by a loan portfolio that is composed of nearly 40% residential mortgages and 23% home equity loans – which, although reduced from even higher historical levels, is part of the Company’s thrift legacy. These home loans typically produce lower yields than other asset classes, which negatively impacts core profitability yet also sustains fewer credit losses due to their lower risk characteristics. Webster has also successfully reduced its dependence on investment security income over the past few years, which has reduced, but has not eliminated, pressure on its net interest margins.

Standalone parent company financial fundamentals are sound. Double-leverage is moderate and declining at 112% (at the end of 2005), while the amount of unencumbered liquidity maintained is more than sufficient to cover all operating expenses, debt service obligations, and expected dividend payment in excess of one year, without taking into account dividends from Webster Bank, N.A.

DBRS expects Webster will continue to produce recurrent earnings and adequate profitability from its diverse business mix, and will preserve its underwriting discipline, coupled with systematic loan review and prudent interest rate risk management. These expectations support the Stable ratings trend.

Webster Financial Corporation, a diversified financial services provider, reported US$17.9 billion in assets, US$1.6 billion in shareholders’ equity, 155 branches, 306 ATMs, and 3,217 employees at March 31, 2006.

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