It has been about a month since the last earnings report for Webster Financial (WBS - Free Report) . Shares have added about 7.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Webster Financial due for a pullback? 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 drivers.
Webster Financial Tops Q1 Earnings Estimates, Revenues Slump
Webster Financial’s first-quarter 2020 earnings per share of 39 cents surpassed the Zacks Consensus Estimate of 36 cents. However, the reported figure declined from the prior-year quarter number of $1.06.
Higher non-interest expenses and provision for loan losses along with contracting NIM acted as major headwinds. Nonetheless, growth in loan and deposit balances as well as impressive capital ratios were positives.
The company reported earnings applicable to common shareholders of $36 million, down from the prior-year quarter’s $97.5 million.
Revenues Decline, Expenses Rise, Loans & Deposits Improve
Webster Financial’s total revenues declined around 2% year over year to $304.2 million. Nonetheless, the top line outpaced the Zacks Consensus Estimate of $303.8 million.
Net interest income declined 4.5% year over year to $230.8 million. Moreover, NIM contracted 51 basis points (bps) to 3.23%.
Non-interest income was $73.4 million, up 7% year over year. The rise resulted from higher other income, increase in mortgage banking activities, and wealth and investment services.
Non-interest expenses of $178.8 million flared up 1.8% from the year-ago quarter. The upswing mainly resulted from rise in all components except for marketing, loan workout expenses and other expenses.
Efficiency ratio (on a non-GAAP basis) was 58.03% compared with 55.93% as of Mar 31, 2019. A higher ratio indicates lower profitability.
The company’s total loans and leases as of Mar 31, 2020, were $20.9 billion, up 4.3% sequentially. Also, total deposits increased 5.2% from the previous quarter to $24.5 billion.
Credit Quality Deteriorates
Total non-performing assets were $169.1 million as of Mar 31, 2020, up 2.9% from the year-ago quarter. In addition, the ratio of net charge-offs to annualized average loans was 0.15%, down 6 bps year over year. Also, the provision for loan and lease losses increased to $76 million as of Mar 31, 2020, compared with $8.6 million in the prior year.
Moreover, allowance for loan losses represented 1.60% of total loans, up 48 bps from Mar 31, 2019.
Capital Ratios Improve, Profitability Ratios Decline
As of Mar 31, 2020, Tier 1 risk-based capital ratio was 11.60% compared with 12.17% as of Mar 31, 2019. Additionally, total risk-based capital ratio was 13.11% compared with the prior-year quarter’s 13.60%. Tangible common equity ratio was 7.67% compared with the year-ago figure of 8.16%.
Return on average assets was 0.50% in the reported quarter compared with the year-ago quarter’s 1.44%. As of Mar 31, 2020, return on average common stockholders' equity came in at 4.75%, down from 14.01% year over year.
Management expects the average earnings assets to grow about 4% sequentially, mainly driven by loan growth.
Management expects net interest income to be flat sequentially as loan growth, Paycheck Protection Program volume and lower deposit and borrowing costs are expected to be offset by lower asset yields as average market rates have come down since the first quarter.
Non-interest income will likely be flat to modestly down.
Non-interest expenses are likely to be flat sequentially.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 16.88% due to these changes.
Currently, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Webster Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.