Webster Financial Corp. (WBS) reported its third quarter 2012 earnings of 48 cents per share, marginally surpassing the Zacks Consensus Estimate of 46 cents. The results also compares favorably with the prior-quarter earnings of 44 cents and prior-year quarter earnings of 45 cents.
The improvement in the quarterly results came on the back of increased top line, partially offset by a marginal increase in operating expenses. Moreover, asset quality, loan, and deposit balances witnessed growth in the quarter. However, weak capital ratios were the dampeners.
Net income available to shareholders for the reported quarter came in at $44.4 million, up from $40.6 million in the prior quarter and $41.4 million in the year-ago quarter.
Performance in Detail
Webster’s total revenue inched up 0.7% from $219.3 million in the prior-year quarter to $220.7 million. Moreover, revenue surpassed the Zacks Consensus Estimate of $194.0 million by 13.8%.
Net interest income improved 2.3% year over year to $144.9 million. The surge was mainly attributable to lower total interest expenses. However, net interest margin dipped 21 basis points from the prior-year quarter to 3.28%.
Non-interest income stood at $48.5 million, rising 8.5% from $44.7 million in the prior-year quarter. The increase was primarily due to higher income from mortgage banking activities, wealth and investment services as well as net gain on investment securities and other income, partly offset by lower deposit service fees and loan related fees.
Non-interest expense was $123.9 million, marginally up 0.5% from $123.2 million in the prior-year quarter. The marginal rise was mainly a result of higher compensation and benefits, marketing expenditure and deposit insurance, partly offset by lower occupancy costs, professional and outside services cost, foreclosed and repossessed asset expenses, other expenses as well as contract termination and severance expenditure along with branch and facility optimization costs.
The efficiency ratio climbed to 62.25% from 62.22% in the prior quarter. The hike in efficiency ratio indicates deterioration in profitability.
Asset Quality
Asset quality witnessed improvement in the quarter. The ratio of nonperforming loans to total loans dipped to 1.59% from 1.72% in the prior quarter and 2.33% in the prior-year quarter.
Further, ratio of net charge offs to annualized average loans came in at 0.61% in the reported quarter, up from 0.58% in the previous quarter but down from 1.05% in the year-ago quarter. Total nonperforming assets stood at $167.5 million, declined 3.5% from last quarter and 30.2% from the year-ago period.
Loans and Deposits
Webster’s total loans in the reported quarter were $11.7 billion, rising 1.6% from previous quarter and 6.1% from the prior-year quarter. The improvement was mainly driven by increases in loans held for sale, commercial loans and commercial real estate loans.
Total deposits, for the quarter, expanded 3.1% sequentially and 6.1% on a year-over-year basis to $14.4 billion. The increase was primarily due to the higher levels of demand deposits including interest-bearing checking and money market deposits.
Profitability and Capital Ratios
Webster’s profitability and capital ratios exhibited a modestly cautious approach. As of September 30, 2012, tier 1 risk-based capital ratio was 11.89% compared with 12.82% as of June 30, 2012 and 13.04% as of September 30, 2011.
Total risk-based capital ratio came in at 13.15% as against 14.08% in the prior quarter and 14.60% in the prior-year quarter. Tangible common equity ratio stood at 7.39%, up from 7.22% as of June 30, 2012 and 7.16% as of September 30, 2011.
The return on average assets was 0.92% in the reported quarter compared with 0.86% as of June 30, 2012 and 0.94% as of September 30, 2011. As of September 30, 2012, return on average stockholders' equity came in at 9.18%, up from 8.62% from June 30, 2012 and 9.14% as of September 30, 2011. Book value per common share was recorded at $22.24, up from $21.65 in the prior quarter and $20.65 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 #2 Rank, which translates into a short-term Buy rating. Other Zacks #2 Rank bank stocks include U.S. Bancorp (USB).
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