So much for that Trump bump.
On Wednesday, Webster Financial’s shares hit a 52-week high after President Trump's address to Congress seemed to cheer banks and their investors. Then on Thursday, Webster’s shares fell more than 3% after the Waterbury, Conn., company disclosed that its auditor had identified a “material weakness” in its internal controls.
Specifically, Webster said in its annual report, filed late Wednesday, that its auditor, KPMG, identified an instance during 2016 when the company failed to document a change in the way it calculates its provision for problem loans.
The good news is that the issue appears to be related only to documentation, not credit quality. Indeed, analysts view the disclosure as a minor stumble for a regional bank that is otherwise on a tear, emphasizing that Webster executives had already addressed the problem by hiring a new director of internal controls.
“They seem to have handled it well,” Mark Fitzgibbon, an analyst with Sandler O’Neill, said in an interview. Still, he described such issues as “uncharacteristic” for a $26 billion-asset company that has otherwise “been squeaky clean.”
Webster’s shares fell 3.4% Thursday, closing at $55.38. The KBW Bank Index fell 2%.
The company does not expect to restate its results, nor does it expect to incur any meaningful increase in costs because of the problem, according to Fitzgibbon.
A spokesperson could not be reached for comment.
Webster has been in an impressive run of late, fueled by strong growth in health savings account balances and record originations of commercial and commercial real estate loans. Its profits in the fourth quarter increased
Webster is also expanding its presence across the Northeast; in late 2015 it took over the leases of 17 Citigroup branches in the Boston area, after the New York megabank pulled out of the market.
Cracking into the Boston metropolitan
Webster is among several companies across the industry that said in annual reports this week that they found material weaknesses in their internal controls.
Central Pacific Financial in Honolulu also reported problems with its loan-loss accounting procedures, while CIT Group said Wednesday that it would delay filing its annual report after discovering a material weakness related to its controls in information technology.
In their conversations with analysts, Webster executives emphasized that the tweaks made to its loan-loss accounting model were appropriate, according to client notes. KPMG did not offer an opinion on the nature of the changes that were made.
Banks modify their loan-loss accounting models frequently throughout the year, according to Fitzgibbon. Where Webster slipped up was in failing to properly document its changes.
As part of its remediation efforts, Webster said in its 10-K that it has contracted with a third-party expert to evaluate its internal controls.
Analysts were quick to praise Webster executives for being up front and open about the accounting matter. Still, there are a number of questions about what, exactly, happened. It’s unclear, for instance, what changed about the company’s allowance model. Also unclear is when the undocumented changes were put in place.
Collyn Gilbert, an analyst with Keefe, Bruyette & Woods, said it is encouraging that KPMG signed off on Webster's annual report and that the bank did not have to delay its filing.
“At the same time," she added, "when you get flagged for a flaw in the process, you have to scrutinize the process.”
