DBRS Comments on Webster’s 3Q12 Results; Ratings Unchanged - Senior at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for Webster Financial Corporation (Webster or the Company), including its BBB Issuer & Senior Debt rating are unchanged following the release of 3Q12 results. The trend on all ratings is Stable. For the quarter, Webster reported $44.4 million in earnings available for common shareholders, up 9.2% from $40.6 million for 2Q12. The sequential increase in earnings was driven by higher mortgage banking income, continued loan growth, and disciplined expense control.

Despite the difficult operating environment, DBRS sees third quarter results as reflecting positive underlying trends. Revenues increased and Webster achieved positive operating leverage in the quarter. In addition, loans and transaction deposits continue to exhibit growth. Higher levels of earning assets led to modest QoQ growth in net interest income, despite continued NIM pressure. In addition, provisions were flat QoQ. Despite a modest linked-quarter increase in net charge-offs (NCOs), the overall trend in credit quality remains positive, in DBRS’s view.

The Company reported 3Q12 revenues of $193.3 million, up from $191.7 million for 2Q12, as noninterest income increased by 2.3% to $48.5 million and net interest income increased by 0.3% to $144.9 million. Excluding securities gains, fee income increased 6.4% to $47.7 million, QoQ, mostly driven by strong mortgage banking income, which was up 80.0%.

The modest increase in spread income reflected a 1.4% increase in average earnings assets, partially offset by a 4 bps narrowing of net interest margin (NIM) to 3.28%. Higher earning assets were attributable to increased levels of loans and securities. Positively, Webster continues to report growth in its C&I, CRE, and asset based loan portfolios. The narrower NIM reflected declining earning asset yields outpacing decreasing funding costs.

Total 3Q12 noninterest expenses decreased $3.3 million, or 2.6%, from 2Q12. Excluding non-core items, such as debt prepayment penalties, contract termination and severance, and branch facility optimization costs, core expenses decreased $646,000, or 0.5%, QoQ. Combined with the above noted revenue growth, Webster’s core efficiency ratio declined 150 bps from 2Q12 to 62.25% (Company reported). The Company remains committed to reaching a 60% core efficiency ratio by 4Q12.

Positively, Webster’s asset quality continues to improve. Although NCOs increased modestly to a manageable 0.61% of average loans for 3Q12, from 0.58% for 2Q12, nonperforming assets (NPAs) declined further during the quarter. Specifically, NPAs contracted to 1.43% of total loans (excluding performing troubled debt restructurings) at September 30, 2012, down from 1.50% at June 30, 2012. With a provision $12.7 million below quarterly NCOs, Webster’s loan loss reserves declined 6.4% from June 30, 2012. Nonetheless, at 114.4% of NPLs and 1.59% of total loans, DBRS views Webster’s loan loss reserves as adequate, especially given the sustained positive trends in its NPLs and levels of commercial classified loans.

In DBRS’s view, Webster’s capital position provides solid loss absorption capacity, especially at current loss rates. At September 30, 2012, the Company’s tangible common equity ratio was 7.39% and preliminary Tier 1 common ratio was 11.89%. Webster’s funding profile also remains sound and is underpinned by an ample core deposit base. Overall, the Company’s deposits increased 3.1% from June 30, 2012, led by higher levels of money market and demand deposits. Webster’s securities portfolio, which represents 31.7% of total assets, access to the Federal Home Loan Bank and the Federal Reserve round out its liquidity profile.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating includes company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.