DBRS Comments on Webster’s 1Q13 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 1Q13 results. The trend on all ratings is Stable. For the quarter, Webster reported $39.2 million in earnings available for common shareholders, down 18.1% from $47.9 million for 4Q12.

The quarter was somewhat noisy, as the sequential decrease in earnings in part reflected a $2.3 million increase in preferred stock dividends, a $1.5 million held for sale (HFS) loan write-down and some seasonal 1Q13 expenses. Lower QoQ earnings also reflected two fewer days in the quarter which negatively impacted net interest income. Overall, lower QoQ earnings were attributable to a 2.6% decrease in total revenues and a 2.1% increase in non-interest expense. Meanwhile, provisions for loan loss reserves remained flat QoQ. DBRS notes that the higher 1Q13 preferred stock dividend reflected the Company’s November 27, 2012 issuance of $126.5 million of non-cumulative preferred stock

The Company reported 1Q13 total revenues of $194.1 million, down from $199.2 million for 4Q12, as noninterest income decreased by 8.8% to $48.3 million and net interest income decreased by 0.3% to $145.8 million. Excluding one-time items, fee income decreased 6.0% QoQ, mostly driven by a 17.4% decline in mortgage banking income and a 3.3% decrease in deposit service fees. Meanwhile, the modest QoQ decrease in spread income reflected two fewer days in 1Q13.

During 1Q13, average earning assets increased 1.5% driven by a 2.0% increase in loans. However, on a period-end basis, loans slightly edged down sequentially, as lower levels of residential mortgages and consumer loans modestly offset higher levels of commercial loans. DBRS notes that loan originations during 1Q13 were down substantially to $919 million, well below the $1.5 billion of originations in 4Q12. The higher 4Q12 originations in part reflected customers pulling forward loan demand, as they viewed higher taxes going into 2013. Despite the lower level of loan originations in 1Q13, management expects 2Q13 average loan growth to be in the 1.0% to 2.0% range.

Non-interest expense increased $2.6 million ($1.8 million, excluding severance and debt prepayment penalty), QoQ, reflecting approximately $2.0 million in seasonal compensation and benefits expense, and a $1.7 million increase in marketing cost. Combined with the above noted revenue contraction, Webster’s core efficiency ratio increased 248 bps from 4Q12 to 62.16% (Company reported), slightly above its efficiency ratio goal of 60.0%.

Despite the difficult business environment, Webster’s asset quality remains sound. Nonperforming loans (NPLs) increased by a moderate $4.0 million to $198.8 million and represented a manageable 1.66% of loans and OREO at March 31, 2013, up from 1.62% at December 31, 2012. Higher NPLs reflected an $8.8 million increase in commercial real estate loans. Meanwhile, 1Q13 net charge-offs remained flat, sequentially, at 0.56% of average loans. Finally, Webster’s loan loss reserves remained adequate at 84.4% of NPLs and 1.4% of total loans, at March 31, 2013.

In DBRS’s view, Webster’s capital position provides solid loss absorption capacity, especially at current loss rates. At March 31, 2013, the Company’s tangible common equity ratio was 7.35% and preliminary Tier 1 common ratio was 11.02%.

Finally, Webster’s funding profile remains sound and is underpinned by an ample core deposit base. Overall, the Company’s period-end deposits increased 0.6% from December 31, 2012, led by higher levels of interest-bearing checking deposits. Webster’s securities portfolio, which represents 32.0% 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.]