DBRS Comments on Webster’s 4Q12 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 4Q12 results. The trend on all ratings is Stable. For the quarter, Webster reported $47.9 million in earnings available for common shareholders, up from $44.4 million for 3Q12. The sequential increase in earnings was mostly driven by higher mortgage banking income and loan related fees, continued loan growth, and disciplined expense control.

Despite the difficult operating environment, DBRS sees fourth quarter results as reflecting positive underlying trends. Higher revenues and lower noninterest expense resulted in positive operating leverage for 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 net interest margin (NIM) pressure. Notwithstanding higher linked-quarter nonperforming assets (NPAs), due to recent regulatory guidance (chapter 7 discharged related), asset quality remains sound, in DBRS’s view.

The Company reported 4Q12 revenues of $199.2 million, up from $193.3 million for 3Q12, as noninterest income increased by 9.2% to $52.9 million and net interest income increased by 1.0% to $146.3 million. Excluding securities gains in 3Q12, fee income increased 11.1%, QoQ, mostly driven by strong mortgage banking income, which was up 30.7%, and loan related fees, which increased 37.9%.

The modest increase in spread income reflected a 1.1% increase in average earnings assets, partially offset by a 1 bp narrowing of NIM to 3.27%. Higher earning assets were attributable to increased levels of loans. Positively, Webster continued to report solid loan growth (period-end loans up 2.7% during 4Q12), despite the difficult business environment. Specifically, higher QoQ loans were driven by a 9.0% increase in commercial non-mortgage loans, a 6.1% increase in commercial real estate loans, and a 4.4% increase in equipment financing loans. Despite its modest narrowing, the Company’s NIM benefited from $1.3 million of deferred fee income from prepayments and past due borrowers paying current in the quarter, which added approximately 3 bps to the margin. Nonetheless, the low interest rate environment continued to pressure NIM, as declining earning asset yields outpaced decreasing funding costs.

Total 4Q12 noninterest expenses decreased $962,000, or 0.8%, from 3Q12. Excluding non-core items, such as debt prepayment penalties, contract termination and severance, branch facility optimization expense and stock registration costs, expenses decreased $1.2 million, or 1.0%, QoQ. Combined with the above noted revenue growth, Webster’s core efficiency ratio declined 257 bps from 3Q12 to 59.68% (Company reported), surpassing its 60.00% core efficiency ratio goal for the quarter.

Despite higher levels of nonperforming loans (NPLs), due to the new regulatory guidance related to customers who have gone through chapter 7 bankruptcy, Webster’s asset quality continues to stabilize. Specifically, the new regulatory guidance resulted in $44.1 million of loans being placed in nonaccrual status. Excluding these reclassified loans, NPLs actually declined by $6.6 million, QoQ. Overall, the Company’s NPLs increased by 19.8% to $194.8 million, during 4Q12, and represented a manageable 1.62% of loans and OREO at December 31, 2012. Positively, net charge-offs were slightly improved at 0.56% of average loans for 4Q12, down from 0.61% for 3Q12. DBRS notes that $5.3 million of Webster’s charge-offs were chapter 7 discharge related. Webster’s loan loss reserves declined 4.8% from September 30, 2012, but loan loss reserves remain adequate in DBRS’s view, especially given current loss rates. Specifically, the loan loss reserves comprised 91% of NPLs and 1.47% of total loans. In DBRS’s view, Webster’s capital position provides solid loss absorption capacity, especially at current loss rates. At December 31, 2012, the Company’s tangible common equity ratio was 7.17% and preliminary Tier 1 common ratio was 10.78%. DBRS notes that the Company’s capitalization reflects the November 27, 2012 issuance of $126.5 million of non-cumulative preferred stock, as well as a $50 million stock buyback in connection with an underwritten secondary offering of 10 million shares of the Company’s common stock by a selling shareholder.

Webster’s funding profile remains sound and is underpinned by an ample core deposit base. Overall, the Company’s period-end deposits increased 0.8% from September 30, 2012, led by higher levels of interest bearing checking, demand and savings deposits. Webster’s securities portfolio, which represents 31.0% 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.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]