Top-Line Drives Webster Financial's Earnings Beat - Analyst Blog

A rise in top line and higher commercial and commercial real estate lending drove Webster Financial Corp.'s WBS first-quarter 2014 earnings per share of 50 cents, which beat the Zacks Consensus Estimate by a penny. The reported figure also compared favorably with 45 cents per share earned in the prior-year quarter.

Webster Financial's intraday stock price movement following the earnings release on April 17, reflected positive investor response. The stock closed at $31.50, increasing 3.9% from the previous day.

Results benefited from a rise in both net interest income and non-interest income as well as a fall in non-interest expenses. These factors were partly offset by an increase in provision for loan losses. Loan and deposit balances showed continued improvement. Moreover, steady credit quality and improvement in both capital and profitability ratios were tailwinds for the quarter.

Net income available to shareholders came in at $47.8 million, up 21.8% year over year.

Performance in Detail

Webster Financial's total revenue rose nearly 4.2% from the prior-year quarter to $227.6 million. Revenues surpassed the Zacks Consensus Estimate of $206.0 million.

Net interest income rose 6.5% year over year to $155.3 million. The rise was mainly attributable to higher interest income and lower interest expenses.

Net interest margin was 3.26% compared with 3.23% in the prior-year quarter.

Non-interest income increased 3.2% year over year to $49.8 million. The growth was primarily due to a rise in deposit service fees, wealth and investment services fee, net gain on investment securities as well as other income. These positives were partially offset by a decline in mortgage banking activities and loan related fees.

Non-interest expense was $124.6 million, down 0.7% from the prior-year quarter. The year-over-year decline was mainly due a decline in occupancy expenses, technology and equipment expenses, marketing costs and loan workout expenses. The efficiency ratio for Webster Financial decreased to 60.34% from 62.16% in the prior-year quarter. A fall in efficiency ratio indicates increase in profitability.

Webster Financial's total loans as of Mar 31, 2014 were $13.0 billion, rising 8.3% from the year-ago quarter. The company's total deposits for the quarter climbed 2.8% year over year to $15.0 billion.

Asset Quality

Apart from higher provision, Webster Financial's asset quality reflected improvement in the quarter. The ratio of net charge-offs to annualized average loans came in at 0.25%, down 31 basis points (bps) from the prior-year quarter.

On the other hand, total nonperforming assets were $152.9 million, down 24.8% from the year-ago quarter. This decrease reflects reclassification of $17.6 million of residential and consumer loans as accrued in the quarter under regulatory guidance. The ratio of nonperforming loans to total loans fell 54 bps year over year to 1.12%. However, provision for loan losses rose 20% from the year-ago quarter to $9.0 million.

Capital and Profitability Ratios

Webster Financial's capital ratios and profitability ratios were strong. As of Mar 31, 2014, Tier 1 risk-based capital ratio was 13.07% versus 12.75% as of Mar 31, 2013.

Total risk-based capital ratio came in at 14.20%, rising from 14.01% in prior-year quarter. Tangible common equity ratio was 7.53%, up from 7.35% as of Mar 31, 2013.

The return on average assets was 0.96% in the reported quarter, compared with 0.84% as of Mar 31, 2013. As of Dec 31, 2013, return on average stockholders' equity came in at 9.16%, up from 8.01% as of Mar 31, 2013.

Book value per common share was recorded at $23.13, up from $21.90 in the year-ago period.

Our Viewpoint

Sluggish economic recovery, a low interest rate scenario and various regulatory issues could dampen the company's growth prospects. However, a rise in both deposits and loans shows Webster Financial's strength to grow organically.

Furthermore, Webster Financial's prudent expense management, steady capital position, strong asset quality and profitability will expectedly bolster its financials in the quarters ahead.

At present, Webster Financial has a Zacks Rank #3 (Hold).

Among other banks, SVB Financial Group SIVB, BankUnited, Inc. BKU and City National Corp. CYN are slated to announce first-quarter 2014 results on Apr 24.