A month has gone by since the last earnings report for Webster Financial (WBS - Free Report) . Shares have lost about 5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Webster Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Webster Financial Q1 Earnings Top Estimates
Webster Financial reported a positive earnings surprise of 5% in first-quarter 2019. Adjusted earnings per share of $1.06 surpassed the Zacks Consensus Estimate of $1.01. Also, the bottom line increased 24.7% from the prior-year quarter.
Results reflect growth in revenues, with support from higher loans and deposits, along with improving interest margin. Also, lower provisions and the company’s strong capital position were a tailwind. However, rise in expenses and lower fee income were the downsides.
After considering several non-recurring items, the company reported earnings applicable to common shareholders of $97.5 million or $1.06 per share, significantly up from $78.1 million or 85 cents in the prior-year quarter.
Revenue Growth Mitigates Higher Expenses, Loans Increase
Webster Financial’s total revenues in the first quarter increased 9.6% year over year to $310.2 million. The top-line figure came in line with the Zacks Consensus Estimate.
Net interest income grew 12.8% year over year to $241.6 million. Moreover, net interest margin expanded 30 basis points (bps) to 3.74%.
Non-interest income was around $68.6 million, slightly down year over year. The downside primarily resulted from a fall in income from wealth and investment services, mortgage banking activities and other income.
Non-interest expenses of $175.7 million escalated 2.4% from the year-ago quarter. This upswing mainly resulted from higher compensation and benefits expenses, technology and equipment, along with other expenses, partially offset by a fall in marketing and occupancy costs.
Efficiency ratio (on a non-GAAP basis) came in at 55.93% compared with 59.76% as of Mar 31, 2018. A lower ratio indicates improved profitability.
The company’s total loans and leases as of Mar 31, 2019 were $18.81 billion, up 1.9% sequentially. Further, total deposits increased 4.1% from the previous quarter to $22.8 billion.
Credit Quality: A Mixed Bag
Total non-performing assets were $164.4 million, up 17.4% from the year-ago quarter. In addition, the ratio of net charge-offs to annualized average loans came in at 0.21%, up 8 bps year over year.
However, allowance for loan losses represented 1.12% of total loans as of Mar 31, 2019, down 3 bps from Mar 31, 2018. Also, the provision for loan and lease losses slipped 21.8% to $8.6 million.
Improved Capital & Profitability Ratios
As of Mar 31, 2019, Tier 1 risk-based capital ratio was 12.17% compared with 11.75% as of Mar 31, 2018. Additionally, total risk-based capital ratio came in at 13.60% compared with 13.24% in the prior-year quarter. Tangible common equity ratio was 8.16%, up from 7.65% as of Mar 31, 2018.
Return on average assets was 1.44% in the reported quarter compared with the year-ago quarter’s 1.20%. As of Mar 31, 2019, return on average common stockholders' equity came in at 14.01%, up from 12.15% as of Mar 31, 2018.
Management expects average loans to be up around 2-3% on a sequential basis, led by commercial loans and late portfolio purchase in the quarter.
The average earnings assets are expected to be up about 2% sequentially.
NIM is expected to contract 6-8 bps sequentially.
NII is anticipated to be up modestly. Non-interest income will likely be up between $2 million and $3 million.
Management expects provision for loan losses to increase in the second quarter, considering loan growth, portfolio mix and portfolio quality.
Efficiency ratio is expected to be below 58%.
Management expects the tax rate on a non-FTE basis to be around 21%.
The average diluted share count is estimated to be about 92 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Webster Financial has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Webster Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.