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Webster Financial (WBS) Stock Down Despite Q1 Earnings Beat

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Webster Financial WBS reported first-quarter 2021 adjusted earnings per share of $1.25, which surpassed the Zacks Consensus Estimate of 89 cents. The reported figure excluded noteworthy items such as charges related to strategic optimization initiatives.

Growth in deposit balances as well as higher fee income benefited the company. Also, a strong capital base during the quarter was a tailwind.

However, elevated non-interest expenses, along with lower net interest margin (NIM), were key concerns. Additionally, decline in revenues on account of lower net interest income affected the bank’s performance. The company’s shares lost 5.7% following the earnings release most likely due to these concerns.

The company reported earnings applicable to common shareholders (on GAAP basis) of $105.5 million or $1.17 per share, up from the prior-year quarter’s $36 million or 39 cents.

Revenues Decline, Expenses Rise, Deposits Improve

Webster Financial’s total revenues in the quarter edged down 1.2% year over year to $300.5 million. However, the top line surpassed the Zacks Consensus Estimate of $294.7 million.

Net interest income declined 3% year over year to $223.8 million. Moreover, NIM contracted 31 basis points (bps) to 2.92%.

Non-interest income was $76.8 million, up 4.6% year over year. This rise mainly resulted from higher loan and lease related fees, wealth and investment services and other income.

Non-interest expenses of $188 million flared up 5.1% from the year-ago quarter. This upswing chiefly resulted from rise in almost all components, except marketing, loan workout expenses, deposit insurance and other expenses.

Efficiency ratio (on a non-GAAP basis) came in at 58.46% compared with 58.03% as of Mar 31, 2020. A higher ratio indicates lower profitability.

The company’s total loans and leases as of Mar 31, 2021 were $21.3 billion, down 1.4% sequentially. However, total deposits were up 4.4% from the previous quarter to $28.5 billion.

Credit Quality Improves

Total non-performing assets were $152.8 million as of Mar 31, 2021, down 9.6% from the year-ago quarter. In addition , allowance for loan losses represented 1.54% of total loans, down 6 bps from Mar 31, 2020.

Furthermore, a benefit to provision for loan and lease losses of $25.75 million was recorded against the provision expense of $76 million seen in the prior-year quarter.

The ratio of net charge-offs to annualized average loans came in at 0.10%, down 5 bps year over year.

Capital Ratios Mixed and Profitability Ratios Improve

As of Mar 31, 2021, Tier 1 risk-based capital ratio was 12.55% compared with 11.60% as of Mar 31, 2020. Additionally, total risk-based capital ratio was 14.09% compared with the prior-year quarter’s 13.10%. Tangible common equity ratio was 7.85%, up from 7.67%.

Return on average assets was 1.31% in the reported quarter compared with the year-ago quarter’s 0.50%. As of Mar 31, 2021, return on average common stockholders' equity was 13.65%, up from 4.75%.

Recent Developments

Webster Financial has announced an all-stock merger of equals deal with Sterling Bancorp STL, in a bid to strengthen its commercial banking, health savings and consumer and digital banking business. The transaction, expected to close in the fourth quarter of 2021, is still subject to customary closing conditions.

Per the terms of the deal, shareholders of Sterling will get 0.46 of share of Webster Financial common stock for each share of Sterling. Thus, following the closure, Sterling shareholders will own roughly 49.6% of Webster Financial.

After the deal’s conclusion, Sterling will be merged into Webster Financial, and the combined company will retain the Webster name. The combined entity is likely to have $63 billion in assets and $52 billion in deposits.

Notably, post completion of the deal, the combined firm is expected to generate a return on average assets and return on average tangible common equity of 1.40% and 17%, respectively. Further, it will lead to cost savings of almost $120 million and generate $440 million of excess capital per year.

The deal is expected to be accretive to GAAP earnings in 2021, with more than 20% and 10% to Webster and Sterling shareholders, respectively.

Our Viewpoint

Webster Financial’s performance in the January-March quarter was decent. Given the rise in deposit balances, Webster Financial displays a strong liquidity profile. Further, the company has a robust capital position. Nonetheless, decline in revenues on lower interest income was a major drag.

Webster Financial Corporation Price, Consensus and EPS Surprise

Webster Financial Corporation Price, Consensus and EPS Surprise
Webster Financial Corporation Price, Consensus and EPS Surprise

Webster Financial Corporation price-consensus-eps-surprise-chart | Webster Financial Corporation Quote

Webster Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Ally Financial’s ALLY first-quarter 2021 adjusted earnings of $2.09 per share comfortably surpassed the Zacks Consensus Estimate of $1.18. Also, the bottom line showed a significant rebound from a loss of 44 cents incurred a year ago.

M&T Bank Corporation MTB reported first-quarter earnings surprise of 15%. Net operating earnings per share of $3.41 beat the Zacks Consensus Estimate of $2.96. Also, the bottom line compared favorably with the $1.95 per share recorded in the year-ago quarter.

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