DBRS Comments on Q4 Results of Webster Financial Corporation – Senior at BBB, Negative Trend

DBRS has today commented on the Q4 2009 results of Webster Financial Corporation (Webster or the Company). DBRS rates the Company’s Issuer & Senior Debt at “BBB”, with a Negative trend. Webster reported a net loss attributable to common shareholders of $54 million for the quarter, down from a net loss of $26 million for the prior quarter. On a sequential quarter basis, the higher net loss reflected $34 million of non-recurrent imputed dividends related to Warburg Pincus (Warburg) investments and convertible preferred exchanges completed during the quarter. Excluding the $34 million of non-recurring items, Webster’s net loss to common shareholders was roughly $20 million, up from the $26 million net loss for Q3 2009. The linked-quarter improvement reflected a 21% decrease in provisions for loan loss reserves, an 8% increase in total revenues, partially offset by a 4% increase in non-interest expense.

Webster’s higher linked-quarter revenues reflected 21% and 8% increases in non-interest income and net-interest income, respectively. Elevated non-interest income reflected several Q3 2009 charges, including a $4.7 million loss on the sale of securities and a $1.3 million OTTI investment write-down, a Q4 2009 $3.5 million fair value gain on warrants issued to Warburg, and a 17% increase in loan related fees, driven by increased amendment, prepayment and other commercial fees. The moderate expansion in net interest income reflected an 8 basis points (bps) widening of net interest margin (NIM) and slight increase in average earning assets. Webster’s NIM widened, as decreasing funding costs outpaced declining earning asset yields. Higher non-interest expenses, mostly reflected higher compensation and benefits, severance costs and foreclosure related write-downs and expenses. Moreover, Webster reported higher marketing costs during Q4 2009, the bulk of which were connected to the opening of Webster’s new flagship office in Boston, Massachusetts and its new Providence, Rhode Island location.

Due to the macroeconomic headwinds, the Company continues to struggle with elevated credit quality erosion. Webster’s non-performing assets increased to 3.63% of total loans at December 31, 2009, from 3.47% at September 30, 2009. Net charge-offs decreased to 1.85% of average loans during Q4 2009, from 2.25% for the prior quarter. DBRS notes that the bulk of the increase in non-performing loans reflected commercial real estate and residential development exposures. Most of the Company’s net charge-offs were attributed to consumer and equipment financing exposures. DBRS comments that Webster’s allowance for credit losses to non-performing assets was adequate at 87.4%.

Since Q2 2009, Webster has enhanced its common equity through exchanges of convertible preferred stock and trust preferred securities, and a significant equity investment by Warburg. DBRS notes that Warburg currently owns 15.2% of Webster’s common stock. At December 31, 2009, Webster’s tangible common equity and estimated Tier 1 common and Total Capital ratios were 5.64%, 7.83%, and 15.34%, 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 109% (at September 30, 2009) of net loans. Webster’s securities portfolio, which represents 27% of total assets, access to the Federal Home Loan Bank and the Federal Reserve 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.