DBRS Comments on Webster Financial Corp’s 2Q13 Results - Senior at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented on the 2Q13 results of Webster Financial Corporation (Webster or the Company). DBRS rates the Company’s Issuer & Senior Debt at BBB with a Stable trend. For the quarter, Webster reported $43.7 million in earnings available for common shareholders, up 11.5% from the $39.2 million earned in 1Q13. Results equated to a ROA of 0.92% in 2Q13 improved from 0.84% in 1Q13.

During the quarter, earnings benefited from both revenue growth and lower expenses, creating positive operating leverage, partially offset by a modestly higher loan loss provision. A stable net interest margin (NIM) and loan growth contributed to higher net interest income. The growth in noninterest income was broad based and more than compensated for a decline in mortgage banking activity. Overall, the Company reported 2Q13 total revenues of $199.3 million, up 2.7% from $194.1 million for 1Q13, as noninterest income increased by 8.2% to $52.3 million and net interest income increased by 0.9% to $147.1 million.

During 2Q13, average earning assets including average loans increased modestly. On a period-end basis, growth was more pronounced with loans increasing at an annualized rate of 8.1% QoQ with particularly strong growth in commercial non-mortgage and asset-based lending. DBRS notes that loan originations during 2Q13 were up substantially to $1.4 billion, as compared to $919 million in 1Q13. The higher 2Q13 originations underscore some momentum in the Company’s business lines.

Non-interest expense decreased $1.9 million, QoQ, reflecting lower marketing, professional services and non-core severance, contract and other expenses. Combined with the above noted revenue expansion, Webster’s core efficiency ratio decreased a solid 218 basis points (bps) from 1Q13 to 59.98% (Company reported), meeting its efficiency ratio goal of 60.0%.

Webster’s asset quality remains sound and is improving. Nonperforming assets (NPAs) decreased by $12.8 million to $190.5 million and represented a manageable 1.56% of loans and OREO at June 30, 2013, down from 1.69% at March 31, 2013. Likewise, 2Q13 net charge-offs also declined to 0.43% of average loans (annualized). Finally, Webster’s loan loss reserves remained adequate at 87.6% of NPLs and 1.33% of total loans, at June 30, 2013.

In DBRS’s view, Webster’s capital position provides solid loss absorption capacity, especially at current loss rates. At June 30, 2013, the Company’s tangible common equity ratio was 7.27% and preliminary Tier 1 common ratio was 11.22%. With the finalization of capital rules adding clarity to regulatory capital levels, the Company plans to target a 10% Tier 1 common to risk-weighted assets to provide an adequate cushion above proposed minimums. However, management expects to move slowly to reduce capital levels. Additionally, Webster expects to maintain a dividend payout ratio of earnings at the 30% level.

Finally, Webster’s funding profile remains sound and is underpinned by an ample core deposit base. Overall, the Company’s period-end deposits increased 1.5% from March 31, 2013, driven by higher levels of transaction accounts. Webster’s securities portfolio, which represents about 31% 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.]