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Webster Tops Estimates

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Webster Financial Corp. (WBS - Free Report) reported its fourth quarter 2012 earnings of 52 cents per share, marginally surpassing the Zacks Consensus Estimate of 49 cents. The results also compared favorably with the prior-quarter earnings of 48 cents.

The improvement in the quarterly results came on the back of increased top line and reduced operating expenses. Moreover, loan and deposit balances witnessed growth in the quarter. However, a rise in total nonperforming assets was the dampener.

Net income available to shareholders for the reported quarter came in at $47.9 million, up from $44.4 million in the prior quarter.

For the year 2012, Webster reported net income available to common shareholders of $171.24 billion or $1.86 per share up from $148.09 billion or $1.61 per share recorded in 2011. Net income also compared favorably with the Zacks Consensus Estimate of $1.84.

Performance in Detail

Webster’s total revenue inched up 2.2% from $220.7 million in the prior quarter to $225.5 million. Moreover, revenue surpassed the Zacks Consensus Estimate of $196.0 million by 12.6%.

Net interest income edged up 1.0% sequentially to $146.3 million. The rise was mainly attributable to lower interest expenses. However, net interest margin dipped 1 basis point from the prior-year quarter to 3.27%. The decline was attributable to a drop in yield on interest-earning assets and the reduction in the cost of funds.

Non-interest income stood at $52.9 million, rising 9.2% from $48.5 million in the prior quarter. The increase was primarily due to higher loan related fees, higher income from mortgage banking activities, increased wealth and investment services, higher deposit service fees as well as other income.

Non-interest expense was $122.9 million, marginally down by 0.8% from $123.9 million in the prior quarter. The marginal decline was attributable to lower compensation and benefits as well as marketing expenditure, partly offset by increase in loan workout expenses and other expenses.

The efficiency ratio improved to 59.68% from 62.25% in the prior quarter. The reduction in efficiency ratio indicates rise in profitability.

Asset Quality

Asset quality was a mixed bag in the quarter. The ratio of nonperforming loans to total loans rose to 1.62% from 1.39% in the prior quarter.

Further, ratio of net charge offs to annualized average loans came in at 0.56% in the reported quarter, down from 0.61% in the previous quarter. Total nonperforming assets stood at $198.2 million, increasing 18.3% from the last quarter.

Loans and Deposits

Webster’s total loans in the reported quarter were $12.0 billion, rising 2.6% from the previous quarter. The improvement was mainly driven by increases in commercial loans and commercial real estate loans.

Total deposits, for the quarter, marginally climbed 0.8% sequentially to $14.5 billion. The increase was primarily due to the higher levels of demand deposits including interest-bearing checking and savings deposits.

Profitability and Capital Ratios

Webster’s profitability and capital ratios exhibited a modestly cautious approach. As of Dec 31, 2012, tier 1 risk-based capital ratio was 12.48% compared with 11.90% as of Sep 30, 2012 and 13.05% as of Dec 31, 2011.

Total risk-based capital ratio came in at 13.73% as against 13.16% in the prior quarter and 14.61% in the prior-year quarter. Tangible common equity ratio stood at 7.17%, down from 7.39% as of Sep 30, 2012 but up from 7.03% as of Dec 31, 2011.

The return on average assets was 0.99% in the reported quarter compared with 0.92% as of Sep 30, 2012 and 0.88% as of Dec 31, 2011. As of Dec 31, 2012, return on average stockholders' equity came in at 9.54%, up from 9.18% from Sep 30, 2012 and 8.67% as of Dec 31, 2011. Book value per common share was recorded at $22.75, up from $22.24 in the prior quarter and $20.74 in the year-ago period.

Our Viewpoint

We are quite impressed with Webster’s decent top-line growth as well as reducing operating expenses. Moreover, the company’s constantly improving credit quality and strong balance sheet are expected to be beneficial to its overall expansion in the near future. Nevertheless, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company’s financials in the subsequent quarters.

Webster currently retains a Zacks Rank #3 (Hold). Among other North-east banks, Center Bancorp Inc. retains a Zacks Rank #1 (Strong Buy), while Horizon Bancorp. (HBNC - Free Report) and MB Financial Inc. (MBFI - Free Report) carries a Zacks Rank #2 (Buy).

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