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Webster Financial Corp. (WBS - Snapshot Report) reported second-quarter 2013 earnings of 48 cents per share, beating the Zacks Consensus Estimate by a penny. Moreover, this compares favorably with the year-ago earnings of 44 cents.

Better-than-expected results came on the back of top-line growth and a fall in operating expenses. Improvement in loan and deposit balances was another positive. However, profitability and capital ratios, along with asset quality depicted mixed results.

Net income available to shareholders in the reported quarter came in at $43.7 million, up 7.6% year over year.

Performance in Detail

Webster’s total revenue increased marginally from the prior-year quarter to $222.3 million. Further, revenues surpassed the Zacks Consensus Estimate of $199.0 million.

Net interest income in the reported quarter rose 1.9% year over year to $145.8 million. The rise was mainly attributable to lower interest expenses.

However, net interest margin fell 9 basis points (bps) from the prior-year quarter to 3.23%. The decline was mainly due to a drop in yields on interest-earning assets, partially offset by decline in funding cost.

Non-interest income grew 10.3% year over year to $52.3 million. The rise was primarily due to an increase in all fee income components, excepting for net gain on investment securities and other income.

Non-interest expense was $122.7 million, down 1.0% from the prior-year quarter. The decline was largely attributable to fall in all components other than compensation and benefits, foreclosed and repossessed assets expenses and other expenses.

The efficiency ratio for Webster improved to 59.98% from 62.16% in the prior-year quarter. The reduction in efficiency ratio indicates increased profitability.

Asset Quality

Webster’s asset quality was a mixed bag in the reported quarter. The ratio of net charge-offs to annualized average loans came in at 0.43%, down 15 bps from the prior-year quarter.

However, total nonperforming assets were $190.5 million, up 9.7% from the year-ago quarter. The ratio of nonperforming loans to total loans rose 5 bps year over year to 1.52%. Further, provision for loan losses jumped 70% from the year-ago quarter to $8.5 million.

Loans and Deposits

Webster’s total loans as of Jun 30, 2013 were $12.2 billion, rising 6.1% from the year-ago quarter. The improvement was mainly driven by an increase in commercial loans, commercial real estate loans and residential mortgages, partly offset by limited growth in consumer loans.

Webster’s total deposits for the quarter climbed 5.7% year over year to $14.8 billion. This was primarily due to an increase in demand deposits as well as interest-bearing checking and money market instruments, partly mitigated by a decline in certificates of deposits.

Profitability and Capital Ratios

Webster’s profitability and capital ratios exhibited moderate results. As of Jun 30, 2013, Tier 1 risk-based capital ratio was 12.90%, compared with 12.75% as of Mar 31, 2013 and 12.82% as of Jun 30, 2012.

Total risk-based capital ratio came in at 14.15% as against 14.01% in the prior quarter and 14.08% in the prior-year quarter. Tangible common equity ratio was 7.27%, down from 7.35% as of Mar 31, 2013 but up from 7.20% as of Jun 30, 2012.

The return on average assets was 0.92% in the reported quarter, compared with 0.84% as of Mar 31, 2013 and 0.86% as of Jun 30, 2012. As of Jun 30, 2013, return on average stockholders' equity came in at 8.78%, up from 8.01% as of Mar 31, 2013 and 8.62% as of Jun 30, 2012.

Book value per common share was recorded at $21.88, down from $21.90 in the prior quarter but up from $21.65 in the year-ago period.

Our Viewpoint

Webster’s decent top-line improvement and expense management are expected to bolster its growth prospects. Moreover, improving credit quality and strong balance sheet will likely prove beneficial in the company’s overall expansion. However, we are concerned about the present low interest rate environment and stringent regulatory issues, which might act as headwinds for the company’s financials in the coming quarters.

Webster currently carries a Zacks Rank #2 (Buy).

Among other regional banks, Westamerica Bancorp. (WABC - Analyst Report) is expected to report second-quarter earnings on Jul 16, Washington Federal Inc. (WAFD - Analyst Report) on Jul 18 and Hancock Holding Company (HBHC - Analyst Report) on Jul 25.

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