DBRS Comments on Q1 Results of Webster Financial Corporation – BBB, Trend Stable

DBRS commented today on the Q1 2009 results of Webster Financial Corporation (Webster or the Company). Webster reported a loss of $21.5 million for the quarter, which was much improved from the $307.6 million loss for the prior quarter, yet down from $24 million of net income for Q1 2008. On a sequential quarterly basis, the improved results reflected two significant Q4 2008 charges, including a $189 million goodwill impairment charge and a $130 million securities write-down. Furthermore, Q1 2009 results benefited from a 34% decrease in provisions for loan loss reserves and gains related to the sale of securities and the early extinguishment of debt and swaps. Partially offsetting was a 21 basis point (bps) narrowing of net interest margin (NIM) to 2.99%. On an annual quarter basis, net income was negatively impacted by a 3.2x increase in provisions for loan loss reserves, a 28 bps narrowing of NIM and a 1.8% increase in non-interest expenses. Webster’s credit fundamentals continue to support the current rating levels – BBB for its senior obligations and Stable trend.

In light of the weakening economy, Webster’s asset quality continued to erode. At March 31, 2009, the Company’s non-performing assets (NPAs) increased to 2.87% of loans and OREO from 2.15% at December 31, 2008 and 1.22% at March 31, 2008. Meanwhile, Webster’s Q1 2009 net charge-offs (NCOs) decreased to 0.99% of average loans from 1.66% for the prior quarter, yet up from 0.75% for Q1 2008. The linked-quarter increase in NPAs was related to higher levels of commercial and industrial (C&I) loans and to a lesser extent residential, consumer and asset based loans. Charge-offs were mostly consumer and C&I loans. For Q1 2009, loan loss provisions of $66 million exceeded NCOs by $36 million. Webster’s allowance for credit losses to non-performing loans was adequate at 89%. DBRS anticipates that further deterioration in the Company’s asset quality is likely, given the declining economy.

During Q1 2009, the Company’s NIM narrowed 21 bps to 2.99%, due to the significant decline in interest rates during December 2008, as decreasing loan yields outpaced decreasing funding costs. Moreover, the Company’s NIM was pressured by increased levels of nonaccruals.

Webster’s liquidity position remains solid and is underpinned by a core deposit base that accounts for approximately 84% (at December 31, 2008) of net loans. A securities portfolio, which represents 21% of total assets and access to the Federal Home Loan Bank and the Federal Reserve Discount Window, round out the Company’s liquidity profile. The Company’s securities portfolio consists largely of agency mortgage backed securities, municipal bonds and corporate securities. DBRS comments that Webster’s corporate securities portfolio, which consist of various trust preferred securities, both pooled and single issuer have evidenced sizeable impairment charges over the past year.

On November 21, 2008, Webster issued $400 million of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program. The capital infusion helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. At March 31, 2009, Webster’s Total-risk based capital ratio was solid at 14.4%. Nonetheless, DBRS comments that Webster’s tangible common equity-to-tangible asset ratio was low at 4.05%. DBRS anticipates that Webster will augment its tangible common equity position over the intermediate term.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.