DBRS Comments on Webster Financial Corp’s 3Q13 Results - Senior at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $44.7 million in earnings available for common shareholders, up slightly from the $43.7 million earned in 2Q13. Results equated to a ROA of 0.93% in 3Q13 roughly flat with the 0.92% ROA earned in 2Q13.

During the quarter, earnings benefited from both higher net interest income and lower expenses, as well as lower income tax expense. A stable net interest margin (NIM) and loan growth contributed to the increase in net interest income. This was partially offset by a decline in non-interest income driven by lower mortgage banking activity. Overall, the Company reported 3Q13 total revenues of $196.2 million, down 1.5% from $199.3 million for 2Q13, as non-interest income decreased by $6.0 million (or 11.5%) to $46.3 million and net interest income increased by $2.9 million (or 2.0%) to $150.0 million. Income tax expenses were lower by $2.7 million as the company recorded a $2.1 million net tax benefit in the quarter which included a $1.7 million correction applicable to prior periods, with the remainder reflecting a decline in the effective tax rate due to an increase in tax credits. The provision for loan losses was unchanged at $8.5 million.

During 3Q13, average earning assets including average loans increased by 1.31% as compared to the linked quarter. On a period-end basis, the recent growth trend continued with loans increasing at an annualized rate of 7.6% QoQ with particularly strong growth in commercial and commercial real estate. Loan originations intended for portfolio during 3Q13 were $1.1 billion, as compared to $1.2 billion in 2Q13 and $0.8 billion in 3Q12. DBRS notes that the solid level of originations underscore continued momentum in the Company’s business lines.

Webster’s non-interest expense, excluding one-time costs, decreased $1.9 million QoQ, reflecting lower compensation and benefits expense, technology and equipment expense and loan workout expenses. Despite the slight drop in revenues, Webster’s core efficiency ratio stayed near its targeted 60% level.

Webster’s asset quality remains sound. Nonperforming assets decreased by $5.0 million to $185.6 million and represented a manageable 1.49% of loans and OREO at September 30, 2013, down from 1.56% at June 30, 2013. Staying in a similarly narrow range, 3Q13 net charge-offs increased a modest 4 bps to 0.47% of average loans (annualized). Finally, Webster’s loan loss reserves remained adequate at 88.7% of nonperforming loans and 1.26% of total loans as of September 30, 2013.

In DBRS’s view, Webster’s capital position provides solid loss absorption capacity, especially at current loss rates. As of September 30, 2013, the Company’s tangible common equity ratio was 7.37% and preliminary Tier 1 common ratio was 11.33%. The Company is currently targeting a 10% Tier 1 common to risk-weighted assets to provide an adequate cushion above Basel III fully-phased in minimums and stress testing buffers. It is expected that management will cautiously evaluate reducing capital levels in coming quarters.

Finally, Webster’s funding profile remains sound and is underpinned by an ample core deposit base. Overall, the Company’s period-end deposits increased 4.4% (annualized) from June 30, 2013, driven by higher levels money market accounts. Webster’s securities portfolio, which represents a sizable 31% of total assets, and access to the Federal Home Loan Bank round out the Company’s liquidity profile.

Late in the quarter, Gerald Plush, President and COO of the Company resigned effective September 30, 2013 following a personal decision to pursue other career interests. Mr. Plush had been with the Company since July 2006 and served in a number of key roles. DBRS views this as a loss for the Company although Webster has deepened its management depth and strength in recent years.

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

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