DBRS Confirms Webster Financial Corporation at BBB; Changes Trend to Negative

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

The change in trend to Negative from Stable reflects DBRS’s view that 2009 will continue to be a challenging year for Webster. The negative trend reflects DBRS’s perception that significant amounts of potential losses remain within the Company’s loan portfolio and that additional valuation and impairment losses remain within its $135 million single issuer and pooled trust preferred securities (TRUPs) portfolio. DBRS anticipates that elevated credit costs, and valuation and impairment charges are likely to continue to pressure earnings and capital, especially if the recession deepens. DBRS comments that sustained credit deterioration, additional significant charges to Webster’s securities portfolio, and a substantive weakening of capital, would likely result in negative rating actions.

Webster’s ratings are underpinned by its resilient Connecticut-based franchise, which provides stable and low cost funding, its recently bolstered capital position and adequate liquidity. Ratings also reflect the Company’s continued lack of profitability and elevated asset quality issues.

The ratings actions follows the Company’s announcement of its Q2 2009 consolidated net loss of $31.6 million and net income available to common shareholders of $16.8 million. The loss reflected a significant $85 million provision for loan loss reserves, a $27 million loss on write-down of investments to fair value, and a $13.6 million net loss on sale of investment securities, partially offset by a $24 million gain on the exchange of TRUPs for common stock, and a 5 basis points widening of net interest margin to 3.04%. Net income available to common shareholders benefited from a $58.6 million gain related to the Company’s exchange of Series A Convertible Preferred Stock for common stock and cash. Positively the two capital exchanges contributed $173 million in additional Tier 1 common equity.

Given the declining economy, Webster continues to struggle with asset quality erosion and high credit costs. The Company’s non-performing assets expanded to 3.02% of total loans at June 30, 2009, from 2.61% at March 31, 2009 and 1.91% at December 31, 2008. Meanwhile net charge-offs increased to 1.66% of average loans for Q2 2009, from 0.99% for the prior quarter. DBRS comments that Webster’s total allowance for credit losses to non-performing loans was adequate at 90.2%. The majority of the increase in nonaccrual loans reflected equipment financing and residential mortgage loans.

Webster’s capital position has been bolstered by the two aforementioned capital exchanges. At June 30, 2009, the Company’s tier 1 and total risk based capital ratios were estimated to be 11.7% and 13.8%, respectively, providing substantial cushions above regulatory minimums. Although Webster’s tangible common equity position improved, due to the capital exchanges, its tangible common equity to tangible assets ratio was moderate at 4.92%.

The Company’s liquidity profile remains acceptable and is underpinned by a growing core deposit base that accounts for approximately 92% (at March 31, 2009) of net loans. Webster’s securities portfolio, which represents 24% of total assets, access to the Federal Home Loan Bank and the Federal Reserve Discount Window round out its liquidity profile. DBRS notes that the Company’s securities portfolio is overwhelmingly agency related mortgage backed securities.

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.