DBRS: Webster’s Lower QoQ Earnings Reflect OTTI Charge Related to Volcker Rule

Summary:

• 4Q13 earnings to common shareholders of $41.1 million down 8.0% from 3Q13, driven by a one- time OTTI related charge
• Importantly, on an adjusted basis, the Company attained positive operating leverage in 4Q13, as revenues grew faster than expenses
• DBRS rates Webster Financial Corporation Issuer & Senior debt at BBB with a Stable trend

DBRS, Inc. (DBRS) considers Webster Financial Corporation’s (Webster or the Company) 4Q13 earnings as sound, despite a $7.3 million (pre-tax) OTTI charge against certain CDO & CLO securities, driven by the Volcker Rule. Importantly, on an adjusted basis, which excludes non-core items, Webster’s core earnings (income before provisions and taxes) increased 7.0%. DBRS considers Webster’s strong funding, as well as its improving earnings generation and still pressured asset quality (including restructurings) as supportive of its current rating level.

Excluding the 4Q13 OTTI charge related to the Volcker Rule and securities gains in 3Q13, core revenues were up 4.8% QoQ, reflecting an increase in both adjusted fee income and spread income. Higher adjusted non-interest income was broad based, yet mostly attributable to increased levels of mortgage banking activities and wealth/investment services income. Meanwhile, improved spread income reflected continued average loan growth across most loan categories and a modest widening of the net interest margin, driven by higher securities yields.

Expenses, excluding non-core items were up 3.5%, sequentially, reflecting higher professional and outside services fees, and compensation/benefits expense. Higher compensation expense in part was attributable to additional expense from deferred compensation programs.

Webster’s asset quality continued to stabilize, reflecting lower sequential net charge-offs and non-performing assets. DBRS considers the Company’s loan loss reserves as satisfactory at 1.2% of total loans.

Webster’s funding and capital profiles remain sound. Positively, the Company continues to build capital.

DBRS rates Webster Financial Corporation’s Issuer & Senior debt at BBB with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]