Webster Financial Corp. in Waterbury, Conn., continues to work its way through credit woes and securities writedowns with a belief that, when its problems subside, its capital position will enable it to book loans aggressively and even buy banks again.
"There's no question that we are in the down leg of the credit cycle, and we expect that nonaccruals have not yet peaked," chief executive James C. Smith said in a recent interview. "But Webster is in a very strong position to manage through the credit cycle, and we also have ample capital to capitalize on future growth."
After the credit crisis subsides, Mr. Smith said, he believes "a great re-intermediation" will take place, "where assets come back onto the balance sheets of banks."
"Sometime in 2009, we will be able to use our excess capital to capitalize on what I think will be above average loan growth for years to come," he said. Webster, an active acquirer in the past, will probably start buying banks again in the not so distant future, he added.
But for now, the company, like most in the industry, is mired in credit troubles and writedowns, Mr. Smith said.
The $17.5 billion-asset Webster, which has struggled with losses on residential construction and home equity loans made through brokers in high-growth markets like Florida and Arizona, expects to record an additional $10.5 million provision for the third quarter and write off about $12.5 million of real estate loans as it continues to liquidate its national construction loan portfolio, Mr. Smith told investors last week at a Lehman Brothers conference.
The company has set aside $4.8 million of reserves to cover that portfolio's remaining $23.7 million balance. In February, Webster stopped making out-of-market residential construction and home equity loans through brokers.
In the interview Friday, Mr. Smith said that Webster will be able to weather its credit issues, particularly since it raised $225 million through an issuance of convertible preferred stock in the second quarter, raising its Tier 1 and total risk-based capital ratios to 11.1% and 13.5%, respectively, at June 30.
Second-quarter nonperforming assets rose more than threefold from a year earlier, to $224 million, and Webster is evaluating whether to write down the remaining $12.7 million of nonperforming home equity loans made by out-of-state brokers, Mr. Smith said. Webster also expects to take a $2 million charge for the third quarter on its loss in selling $5 million of Fannie Mae and Freddie Mac preferred stock, he said. The company will also write down 90% of the value of the remaining $9 million of GSE stock in its securities portfolio.
It adjusted downward the valuation of its trust-preferred securities portfolio in August but will review its cash flow at the end of this quarter to determine whether an impairment charge is needed, Mr. Smith said.
In the second quarter, Webster lost $28.9 million, after recording $53.7 million of writedowns on investment losses and a nearly sixfold increase in its provision from a year earlier, to $25 million. It also recorded $12.5 million of other pretax charges, including $7.7 million related to its OneWebster earnings optimization initiative, which was started in January.
On Friday, Mr. Smith said:"I'd like to think there's some light at the end of the tunnel, and that there won't be too many quarters before things start to improve."
However, analysts say Webster's credit issues will dog the company for some time to come.
Some said they believe Webster's credit woes — like those of many other banking companies — may spread to other lending sectors, such as commercial and industrial loans, as the economy continues to falter.
"Increased credit deterioration will be with us until at least 2010 — not just for Webster but for all of the banks," Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said in an interview.
James Abbott, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a July 23 research note that he expects the company's nonperforming assets to reach 2.5% to 3% of total loans by the end of 2009, assuming that unemployment climbs to a range of 6% to 6.5%. The nonperformer ratio was 1.8% at June 30, and the unemployment rate jumped to 6.1% in August.
"In the final analysis, we believe Webster is still facing an uphill battle on credit as the Northeast is just beginning to falter and" commercial and industrial "credit is just beginning to fail, regardless of region," Mr. Abbott wrote.
But Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said he believes that Webster's woes will subside faster than others predict because of the company's past aggressive actions and that next year should bring some relief.
"By the end of the first quarter of 2009, we should start to see the majority of" Webster's "bad loans flushed out," Mr. DelMonte said. Added Mr. DelMonte, "There's hope for all banks - not just Webster
On top of that, the company should begin to realize material results from its OneWebster initiative next year, Mr. DelMonte said.
In the Lehman presentation, Mr. Smith told investors that the OneWebster initiative remains on track to affect earnings positively by $50 million in 2009, including $40 million of expense reductions and $10 million of revenue enhancements.
"In 2009, the credit and securities headwinds will begin to fade," Mr. DelMonte said, "and the benefits of Webster's deposit-gathering efforts, as well as its OneWebster implementation, will start to flow [to] the bottom line."
However, Collyn Bement Gilbert, an analyst at Stifel, Nicolaus & Co., said that she "would like to see a few quarters of earnings stabilization and growth before having full faith in these initiatives' coming to fruition."
In an effort to improve its margin, Webster has been aggressively targeting commercial customers to boost its core deposits, which at June accounted for 62% of total deposits, up from 58% a year earlier. Still, deposit pricing pressures dampened its margin to 3.26%, from 3.47% a year earlier.