DBRS Comments on Q3 Results of Webster Financial Corp.: Ratings Unaffected – BBB, Negative Trend

DBRS has today commented that the ratings of Webster Financial Corporation (Webster or the Company), including its Issuer & Senior Debt rating of “BBB”, were unaffected by the Company’s Q3 2009 earnings results. The trend on all ratings remains Negative.

Webster reported a net loss for common shareholders of $26.1 million for the quarter, down from net income of $16.8 million for the prior quarter. On a sequential quarter basis, results reflected numerous non-recurrent gains/losses, and write-downs, including the Q2 2009, $58.6 million gain related to the Company’s exchange of Series A convertible preferred stock for common stock and cash. Provisions for loan loss reserves remained flat.

Net interest income increased by 6%, reflecting a 14 basis points (bps) widening of net interest margin (NIM) to 3.18%, and a slight increase in average earnings assets. The Company’s non-interest income increased by 25%, yet on a recurrent basis, was up slightly. DBRS comments that during Q3 2009, Webster’s non-core items included a $1.3 million loss on the write-down of investments to fair value, and a $4.7 million net loss related to the sale of investment securities. Meanwhile, during Q2 2009, Webster reported several non-core items, including the aforementioned gain related to the conversion of preferred stock, a $27.1 million loss related to the write-down of investments to fair value, a $24.3 million gain related to the Company’s trust preferred securities exchange, a $13.6 million net loss related to the sale of securities and a $1.9 million Visa related gain. Although Webster’s non-interest expenses decreased modestly on a linked-quarter basis, when viewed on a recurrent basis, excluding severance related expenses for both quarters and the Q2 2009 $8 million FDIC special assessment fee, non-interest expenses increased slightly.

In light of the challenging economic environment and high unemployment, Webster continues to struggle with elevated asset quality deterioration and credit costs. The Company’s non-performing assets increased to 3.47% of total loans at September 30, 2009, up from 3.30% at June 30, 2009. Meanwhile net charge-offs increased to 2.25% of average loans during Q3 2009, from 1.66% for Q2 2009. DBRS notes that the bulk of net charge-offs reflected asset based and commercial loans. DBRS comments that Webster’s allowance for credit losses to non-performing assets was adequate at 85.5%.

Since Q2 2009, Webster enhanced its common equity by $285 million, bolstered by the Q2 2009 exchanges of convertible preferred stock and trust preferred securities, and a significant equity investment by Warburg Pincus (Warburg). On July 27, 2009, Warburg purchased $40 million in Webster common stock, and on October 15, 2009, purchased an additional $30 million in common stock and $45 million in convertible preferred stock. The preferred stock will convert into common stock and warrants, subject to the receipt of shareholder approval. Following receipt of shareholder and regulatory approval, and on a pro-forma basis, Warburg will own 15.2% of Webster’s common stock. At September 30, 2009, Webster’s tangible common equity and estimated Tier 1 common and Total capital ratios were 5.10%, 6.39%, and 14.05%, respectively. DBRS comments that Webster’s capital includes $400 million in TARP funds.

Webster’s liquidity profile remains solid and is underpinned by a growing core deposit base that accounts for approximately 102% (at June 30, 2009) of net loans. Webster’s securities portfolio, which represents 26% 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.