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Webster Financial Gains on Stable Earnings

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The stock price of Webster Financial Corp. (WBS - Free Report) rose 2.6% since the company reported third-quarter 2013 earnings of 49 cents per share on Friday. Results were in line with the Zacks Consensus Estimate and compared favorably with 48 cents earned in the year-ago quarter.

Results benefited from a rise in net interest income and a fall in operating expenses, partially offset by a decline in non-interest income. Loan and deposit balances showed continued improvement. However, profitability and capital ratios as well as asset quality depicted mixed results.

Net income available to shareholders came in at $44.7 million, marginally up year over year.

Performance in Detail

Webster’s total revenue was down 1.2% from the prior-year quarter to $218.0 million. However, revenues surpassed the Zacks Consensus Estimate of $201.0 million.

Net interest income rose 3.5% year over year to $150.0 million. The rise was mainly attributable to lower interest expenses.

However, net interest margin fell 5 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 costs.

Non-interest income decreased 4.6% year over year to $46.3 million. The fall was primarily due to a decline in mortgage banking activities and net gain on investment securities.

Non-interest expense was $122.3 million, down 1.3% from the prior-year quarter. All categories of expense reduced, apart from foreclosed and repossessed assets expenses and other expenses.

The efficiency ratio for Webster Financial improved to 60.07% from 62.25% in the prior-year quarter. A reduction in efficiency ratio indicates increase in profitability.

Asset Quality

Webster Financial’s asset quality was a mixed bag in the quarter. The ratio of net charge-offs to annualized average loans came in at 0.47%, down 14 bps from the prior-year quarter.

On the other hand, total nonperforming assets were $185.6 million, up 10.8% from the year-ago quarter. The ratio of nonperforming loans to total loans rose 3 bps year over year to 1.42%. Further, provision for loan losses rose 70% from the year-ago quarter to $8.5 million.

Loans and Deposits

Webster Financial’s total loans as of Sep 30, 2013 were $12.5 billion, rising 6.4% from the year-ago quarter. The improvement was mainly driven by increase in commercial loans, commercial real estate loans as well as residential mortgages, partly offset by limited growth in consumer loans.

Webster’s total deposits for the quarter climbed 4.2% year over year to $15.0 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.

Capital and Profitability Ratios

Webster’s profitability and capital ratios were decent. As of Sep 30, 2013, Tier 1 risk-based capital ratio was 12.99%, compared with 12.93% as of Jun 30, 2013 and 11.90% as of Sep 30, 2012.

Total risk-based capital ratio came in at 14.19%, in line with the prior quarter. In the prior-year quarter, total risk-based capital ratio was 13.16%. Tangible common equity ratio was 7.37%, up from 7.27% as of Jun 30, 2013 and in line with the ratio as of Sep 30, 2012.

The return on average assets was 0.93% in the reported quarter, compared with 0.92% as of Jun 30, 2013 and 0.92% as of Sep 30, 2012. As of Sep 30, 2013, return on average stockholders' equity came in at 8.93%, up from 8.78% as of Jun 30, 2013 but down from 9.19% as of Sep 30, 2012.

Book value per common share was recorded at $22.34, up from $21.88 in the prior quarter and $22.24 in the year-ago period.

Our Viewpoint

Improvement in net interest income and disciplined expense management are expected to drive the company’s growth going forward. Moreover, a stable credit quality and strong balance sheet will likely benefit the company’s overall expansion. However, we are concerned about the still low interest rate environment and stringent regulations, which might act as headwinds in the coming quarters.

Webster currently carries a Zacks Rank #3 (Hold).

Among other regional banks, Westamerica Bancorp. and Hancock Holding Company are expected to report third-quarter 2013 earnings on Oct 16 and Oct 24, respectively. Washington Federal Inc. (WAFD - Free Report) will likely post its fiscal fourth-quarter 2013 earnings on Oct 22.

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