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Why Is Webster Financial (WBS) Up 16% Since Last Earnings Report?

It has been about a month since the last earnings report for Webster Financial (WBS). Shares have added about 16% 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 its most recent earnings report in order to get a better handle on the important drivers.

Webster Financial Q3 Earnings Top on High Mortgage Banking

Webster Financial reported impressive third-quarter 2020 results, driven by solid mortgage banking revenues. Earnings per share of 75 cents beat the Zacks Consensus Estimate of 69 cents. However, the reported figure declined 25% from the prior-year quarter.

Higher fee income drove the results. Moreover, growth in loan and deposit balances as well as impressive capital ratios were positives. Elevated non-interest expenses and provision for loan losses, along with contracting net interest margin (NIM), acted as major headwinds. Also, decline in revenues on account of lower interest income affected the bank’s performance.

The company reported earnings applicable to common shareholders of $66.9 million, down from the prior-year quarter’s $91.4 million.

Revenues Decline, Expenses Rise, Loans & Deposits Improve

Webster Financial’s total revenues decreased 5.2% year over year to $294.4 million. Also, the top line missed the Zacks Consensus Estimate of $295.3 million.

Net interest income declined 8.8% year over year to $219.3 million.  Moreover, NIM contracted 61 basis points (bps) to 2.88%.

Non-interest income was $75.1 million, up 7.4% year over year. This rise mainly resulted from strong mortgage banking and other income.

Non-interest expenses of $184 million flared up 2.3% from the year-ago quarter. This upswing chiefly resulted from rise in almost all components except other costs.

Efficiency ratio (on a non-GAAP basis) came in at 59.99% compared with 56.60% as of Sep 30, 2019. A higher ratio indicates lower profitability.

The company’s total loans and leases as of Sep 30, 2020 were $21.9 billion, slightly up sequentially. Also, total deposits inched up 1.9% from the previous quarter to $26.9 billion.

Credit Quality: A Mixed Bag

Total non-performing assets were $167.3 million as of Sep 30, 2020, slightly up from the year-ago quarter. Moreover, allowance for loan losses represented 1.69% of total loans, up 62 bps from Sep 30, 2019. Also, the provision for loan and lease losses more than doubled to $22.8 million as of Sep 30, 2020.

Yet, the ratio of net charge-offs to annualized average loans came in at 0.21%, down 7 bps year over year.

Steady Capital and Profitability Ratios

As of Sep 30, 2020, Tier 1 risk-based capital ratio was 11.88% compared with 12.32% as of Sep 30, 2019. Additionally, total risk-based capital ratio came in at 13.47% compared with the prior-year quarter’s 13.68%. Tangible common equity ratio was 7.75%, down from 8.34%.

Return on average assets was 0.84% in the reported quarter compared with the year-ago quarter’s 1.27%. As of Sep 30, 2020, return on average common stockholders' equity came in at 8.8%, down from 12.36%.

Outlook

Looking forward to the fourth quarter, management expects stable loan balances with modest PPP forgiveness. Assuming a flat rate environment, with an average one-month LIBOR in the range of 15 basis points and an average 10-year treasury swap rate around 70 basis points, management believes to be near the bottom of core NIM compression. Non-interest income will likely be lower sequentially due to reduction in mortgage banking income and lower HSA fees on TPA account. Core non-interest expense will remain in the range of Q3 and tax rate is expected to be around 21%.

Management anticipates reducing current expense base by 8-10% fully realized on a run rate basis by the fourth quarter of 2021.

Management remains confident that even if the current operating environment persists with low interest rates and economic uncertainty, execution on the company’s identified revenue enhancements and efficiency opportunities will help Webster Financial to sustainably generate returns in excess of estimated 10% cost of capital by the end of 2021.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -5.45% due to these changes.

VGM Scores

At this time, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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.


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