DBRS Downgrades Webster Financial Corporation to BBB – Trend Stable

DBRS has today downgraded all ratings for Webster Financial Corporation (Webster or the Company) and its related entities, including its Issuer & Senior Debt rating to BBB from BBB (high). At the same time, DBRS has changed the trend to Stable from Negative.

The ratings action follows Webster’s pre-earnings announcement related to several items including a $129.6 million other then temporary impairment (OTTI) securities charge. The vast majority of the charge was related to pooled and single issuer trust preferred securities, and, to a far lesser extent, equity securities. Furthermore, the Company will report a substantial increase in provisions for loan loss reserves. Although Webster did not disclose a full set of financial statements, the charges will ultimately result in a loss for Q4 2008 and the full year. The Company is also evaluating a potential goodwill impairment charge, which could be disclosed with the fourth quarter results on January 23, 2009. In certain circumstances, DBRS can tolerate losses equivalent to one year’s worth of income before provisions and taxes, however when losses exceed this amount, negative rating action is normally taken. DBRS notes that Webster has surpassed this threshold for fiscal year 2008, and as noted in our press release on November 26, 2008, the occurrence of an additional loss would likely result in a ratings downgrade.

Ratings are underpinned by the Company’s solid Connecticut-based franchise, which provides stable and low cost funding, solid and augmented capital and adequate liquidity. Ratings also reflect Webster’s lack of sustained profitability and elevated asset quality issues, most of which relate to its home equity and national construction liquidation portfolios and residential development loans. DBRS notes that the sustained absence of solid earnings and internal capital generation could place additional pressure on ratings. Conversely, sustained good profitability in the absence of significant future credit costs and charges may result in positive ratings action.

Webster indicated in the release that it expects non-performing loans to total $232.6 million at December 31, 2008, up slightly from $226.9 million at September 30, 2008. Net charge-offs (NCOs) are expected to be $52.8 million, up from $41.2 million for Q3 2008 and loan loss provisions will increase to $100 million from $45.5 million for Q3 2008. The total allowance for credit losses to non-accruing loans is expected to be roughly 106%. DBRS notes that the bulk of the NCOs are residential development exposures. DBRS remains concerned about the potential for increased credit costs, as Webster’s loan portfolio contains roughly $296 million (at September 30, 2008) in higher-risk broker-originated liquidating home equity exposures. Moreover, as the recession intensifies, credit quality erosion will likely creep into other portfolios.

Webster’s capital position is adequate and reflects the new reality of capital thresholds for banks with strained asset quality. Reflecting its recent preferred stock issuances, which aggregate to $625 million, and includes $400 million as part of the Treasury’s Capital Purchase Program, Webster’s regulatory capital has been augmented, providing additional loss absorption capacity.

The Company’s liquidity profile remains acceptable and is underpinned by a core deposit base that accounts for approximately 80% (at September 30, 2008) of net loans. At September 30, 2008, Webster’s securities portfolio represented 17% of total assets and consisted mostly of mortgage-backed securities. Webster’s access to the Federal Home Loan Bank, Treasury Auction Facility and Federal Reserve Discount Window round out its liquidity portfolio.

The assignation of a Stable trend by DBRS reflects the expectation that Webster’s fourth quarter 2008 results will not contain any additional negative information that has not already been disclosed in its 8K filing, as of January 15, 2009.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Banks and Bank Holding Companies operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.