It has been about a month since the last earnings report for Webster Financial Corporation WBS. Shares have lost about 2.7% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted 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 Beats Q3 Earnings, Costs Increase
Webster Financial reported third-quarter 2017 earnings per share of 67 cents, which surpassed the Zacks Consensus Estimate of 64 cents. The reported figure was up 24.1% from 54 cents earned in the prior-year quarter.
Results reflected growth in revenues. Also, loan and deposit balances showed continued improvement along with a strong capital position. However, lower fee income and higher non-interest expenses were the undermining factors.
Net income available to shareholders came in at $64.5 million, up 24.5% year over year.
Revenue Growth Offsets Higher Expenses
Webster Financial’s total revenues rose 7.8% from the prior-year quarter to $266.8 million. However, revenues lagged the Zacks Consensus Estimate of $269 million.
Net interest income grew 11.5% year over year to $200.9 million. The rise was mainly attributable to higher interest income. Moreover, net interest margin increased 20 basis points (bps) from the year-ago quarter to 3.30%.
Non-interest income was around $65.8 million, down nearly 1% year over year. The decline was primarily prompted by a fall in mortgage banking activities along with loan and lease related fees. These were, however, partially offset by higher deposit service fees and other income.
Non-interest expenses of $161.8 million climbed 3.7% from the prior-year quarter. The rise was mainly due to higher compensation and benefits expenses, deposit insurance along with technology and equipment. The increase was partially offset by a fall in intangible assets amortization, marketing expenses and loan workout costs.
Efficiency ratio came in at 59.18% compared with 61.43% as of Sep 30, 2016. A lower ratio indicates improved profitability.
The company’s total loans and leases as of Sep 30, 2017 were $17.4 billion, up 1% sequentially. Further, total deposits rose 1.9% from the prior month to $20.9 billion.
Credit Quality: A Mixed Bag
The ratio of net charge-offs to annualized average loans came in at 0.18%, up 2 bps from the prior-year quarter. Also, total nonperforming loans were $163.6 million, up 27.6% from $128.2 in the year-ago quarter. Further, the allowance for loan losses represented 1.16% of total loans as of Sep 30, 2017 compared with 1.13% as of Sep 30, 2016.
However, the provision for loan and lease losses fell 28.8% from the year-ago quarter to $10.2 million.
Improved Capital & Profitability Ratios
As of Sep 30, 2017, Tier 1 risk-based capital ratio was 11.62% compared with 11.16% as of Sep 30, 2016. Also, total risk-based capital ratio came in at 13.14% compared with 12.64% in the prior-year quarter. Tangible common equity ratio was 7.55%, up from 7.25% as of Sep 30, 2016.
The return on average assets was 0.98% in the reported quarter compared with 0.82% in the prior-year quarter. As of Sep 30, 2017, return on average common stockholders' equity came in at 9.95%, up from 8.36% as of Sep 30, 2016.
Management expects average loans to increase 1-2% on a sequential basis.
The average earning assets are expected to grow 1-2% as well.
NIM is expected to expand 1-3 bps sequentially, assuming a rate hike in December 2017. NII is anticipated to grow $3-$5 million and non-interest income is expected to remain flat.
Management expects provision for loan losses to increase in fourth-quarter 2017, considering the loan growth, portfolio mix and net charge-offs.
Efficiency ratio is expected to be around 60%.
Management expects the tax rate to be around 32%.
The diluted share count is expected to be about 92.5 million.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been five moves higher compared to two lower in the last two months.
Webster Financial Corporation Price and Consensus
Webster Financial Corporation Price and Consensus | Webster Financial Corporation Quote
At this time, Webster Financial's stock has a poor Growth Score of F, however its Momentum is doing a lot better with a C. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is suitable for momentum and value investors.
While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.
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