DBRS: Webster’s Higher 1Q14 Earnings QoQ, Mostly Reflected its 4Q13 Volker Related OTTI Charge

Summary:
• 1Q14 earnings to common shareholders of $47.8 million, up from $41.1 million in 4Q13 and $39.2 million in 1Q13.
• On an adjusted basis, excluding non-core items, Webster’s income before provisions and taxes decreased 5.2%, QoQ, mostly due to lower levels of mortgage banking revenues and loan related fees; year-on-year, IBPT increased 6.6%, reflecting solid commercial loan growth and a modestly higher net interest margin.
• DBRS rates Webster Financial Corporation Issuer & Senior debt at BBB with a Stable trend.

DBRS, Inc. (DBRS) views Webster Financial Corporation’s (Webster or the Company) 1Q14 results as sound, despite the difficult business environment. As with many banks, lower linked-quarter earnings on a core basis, which excludes gains on securities, other-than-temporary impairment charges (OTTI) and severance related expenses, primarily reflected lower mortgage banking income. Overall, DBRS considers Webster’s strong funding and solid capital position as supportive of its current rating level.

Adjusted core revenues, which exclude several items, including the 4Q13 $7.3 million OTTI charge related to the Volcker Rule (regarding certain CDO & CLO securities), decreased 2.2%, sequentially, reflecting a decrease in adjusted fee income, partially offset by modest improvement in spread income. Lower core fee income mostly reflected declines in mortgage banking income, loan related fees, and wealth and investment services revenues. The decline in mortgage banking income was due to lower levels of consumer re-financings.

Importantly, the Company reported average loan growth of 2.5% in 1Q14, which drove the slight linked-quarter increase in spread income, despite a 1 bp narrowing of the net interest margin. Sustained average loan growth was mostly driven by higher levels of commercial & industrial loans and to a lesser extent, higher levels of commercial real estate exposures and residential mortgage loans. Management anticipates continued loan growth in 2Q14, albeit at a more moderate pace. Meanwhile, core expenses remained well managed during the quarter, and were slightly down, quarter-on-quarter (QoQ), reflecting lower levels of compensation and benefits, and professional and outside services expense. Finally, Webster’s efficiency ratio was a sound 60.3%, but up slightly from 59.3% for 4Q13.

Positively, the Company’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 approximately 1.2% of total loans.

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.]