Interpreting Webster Financial Corp.'s second quarter is about as messy as the results.
Though it lost $31.6 million before one-time items, the Waterbury, Conn., company highlighted an impressive boost to its capital cushion, a surge in deposits and slower growth in nonperforming assets.
James C. Smith, its chairman and chief executive officer, said that the $17.5 billion-asset Webster would even set in motion plans to repay its government capital this quarter.
"It's a priority," Smith told analysts on a conference call.
Still, some analysts puzzled over a sharp morning surge in Webster's stock, citing their lingering credit concerns.
The shares, which had been beaten down over the past year as Webster's loan trouble worsened, jumped 15% before retreating later in the day. They closed at $9.29, up 8%.
"It's hard for me to get excited about the results," said David Darst, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets Corp. "The credit trends have not begun to turn. They point to delinquencies being down two quarters in a row, but it did not translate into nonperforming loans declining."
Nonperforming loans rose to $350 million, or 3.02% of total loans, from $316 million, or 2.61%, in the first quarter.
But the 11% increase in the nonperformers since March 31 was slower than the 36% increase in the previous quarter which Smith said was a sign that credit stabilization might not be far off.
Emphasis on might.
"You did see some reasonably positive metrics where you had deceleration in the rate of deterioration and in some areas actually saw some moderation. I don't think we want to say that's a trend. But it's better than what we've seen in previous quarters," Smith said. "So it could possibly be a hopeful sign, but at this point I think we shouldn't be counting on it."
To continue building reserves, Webster took an $85 million provision for loan losses, which exceeded its loan chargeoffs of $50 million.
Amanda Larsen, an analyst at Raymond James & Associates, characterized the quarterly results as "solid," saying the company has been proactive in managing credit and capital.
She singled out deposit growth as particularly encouraging. By her calculations, core deposits climbed 9.5% from the previous quarter, and 14.6% from a year earlier.
Larsen also said the margin is poised to go up, since Webster has room to lower its deposit pricing.
The analysts had nothing but praise for the company's boosting of its tangible common equity by $173 million.
It did so through an exchange offer for convertible preferred stock and trust preferred securities.
Webster pegged the tangible common equity ratio at 4.92%, up from 4.05% at March 31.
The ratio had been a concern for investors, who get uncomfortable when a company dips below 5%.
Smith called the exchange "extraordinarily successful."
The company accepted $168.5 million of convertible preferred stock, the 75% maximum level of participation. It also took all $63.9 million of trust-preferreds that had been tendered, a participation rate of 32%.
Webster issued 11.3 million common shares and paid $59 million in cash to complete the exchange.
Smith said the price of the shares came out to $14.68 each, or about double where Webster's stock had been trading when it announced the exchange.
Beyond the dilution of common shareholders, Daniel Trigg, a partner at McGladrey & Pullen LLP, said there is little disadvantage to doing such exchanges.
Still, Trigg said that they are time-consuming and difficult to execute, so he does not expect to see a lot of banks trying to take the same route as Webster. Given that preferred shares and trust-preferreds pay fixed dividends, investors can be unwilling to budge.
"The planets really have to align for it to happen," Trigg said.
Smith said the benefits of the exchange go beyond capital ratios; it reduced dividend expenses by about $19.2 million annually.
All told, Webster ended up with a gain of $48 million as a result which more than offset the investment losses and higher deposit insurance costs that also dented its results.
So despite the loss before one-time items, Webster posted net income available to common shareholders of $16.8 million, or 31 cents a share.
Smith said getting Treasury Department approval to pay some cash was key to the success of the exchange and underscores the strength of Webster's capital. Its regulatory ratios are "well in excess" of the requirements.
He said Webster, which received $400 million through the Treasury's Troubled Asset Relief Program, would file a plan this quarter to return it.
Smith said he was unsure when the company might complete the repayment or whether it would do so all at once.
"Most likely, I think, it would be in pieces, but that call has not been made," Smith said.
Asked whether Webster expected to raise more capital to exit Tarp, he said, "Not necessarily, no." But he did not rule out the option.
The analysts said Webster's decision to repay Tarp seems ambitious, but stopped short of calling it overambitious.
"If it's feasible, we'd like to see it," Larsen said.
Mark Fitzgibbon, the head of research at Sandler O'Neill & Partners LP, said Webster began feeling the stress of the economic downturn before some other banking companies. Including the second quarter, it has posted five consecutive quarterly losses.
"So you could make the argument that it entered this difficulty earlier and therefore it might come out earlier," he said.
But just how soon remains uncertain.
"They did some smart things in the quarter, but they're not out of the woods yet," Fitzgibbon said. "Credit is still a challenge."
