It has been about a month since the last earnings report for Webster Financial (WBS Quick QuoteWBS - Free Report) . Shares have lost about 2.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Webster Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Webster Financial’s Q2 Earnings Miss Estimates

Webster Financials’ adjusted quarterly earnings per share of $1.26 missed Zacks Consensus Estimate of $1.34. This compares unfavorably with earnings of $1.50 reported a year ago.

Results were affected by a fall in net interest income (NII) and non-interest income. However, lower expenses and an increase in deposits offer some support.

Net income applicable to common shareholders (GAAP basis) was $177.5 million, down 23.1% from the prior-year quarter’s tally.

Revenues & Expenses Decline

The company’s total revenues in the quarter dropped 8.7% year over year to $614.6 million. The top line lagged the Zacks Consensus Estimate of $672 million.

NII decreased 1.9% year over year to $572.3 million. The net interest margin was 3.32%, down 3 basis points (bps).

Non-interest income was $42.3 million, down 52.7% year over year. It included a loss from the sale of investment securities and a net gain on the sale of investment securities. Excluding this, non-interest income was up 3.1% from the previous year’s quarter to $92.2 million. The increase was primarily due to the addition of Ametros and a rise in other income, partially offset by lower deposit and loan servicing fees.

Non-interest expenses were $326 million, down 5.3% from the year-ago quarter’s figure. The reported figure included a charge of $40.8 million of merger charges. Excluding these charges, non-interest expenses would have been $336.8 million, up 6.6% year over year. The increase was a result of the addition of Ametros and higher performance-based incentive accruals and higher compensation.

The efficiency ratio was 46.22% compared with 42.20% in the prior-year quarter. A rise in the efficiency ratio indicates a deterioration in profitability.

As of Jun 30, 2024, total loans and leases fell marginally year over year to $51.6 billion. However, total deposits increased 6.1% from the year-ago quarter’s levels to $62.3 billion.

Credit Quality Deteriorate

Total non-performing assets were $374.9 million as of Jun 30, 2024, up 68.7% from the year-ago quarter. Allowance for loan losses was 1.30% of the total loans, which increased from 1.22% reported in second-quarter 2023.

The ratio of net charge-offs to annualized average loans was 0.26%, up 10 bps year over year.

The provision for credit losses was $59 million, up 87.3% year over year.

Capital Ratios: Mixed Bag

As of Jun 30, 2024, the Tier 1 risk-based capital ratio was 11.13%, which fell from 11.16% as of Jun 30, 2023. The total risk-based capital ratio was 13.28%, up from the prior-year quarter’s 13.25%.

Profitability Ratios Worsen

Return on average assets was 0.96%, which declined from 1.23% reported in the prior-year quarter. At the end of the second quarter, the return on average common stockholders' equity was 8.40%, which fell from 11.38% in the prior-year quarter.

2024 Outlook

The company expects loans to grow between 4% and 5% from $50.1 billion reported in 2023.

The deposit balance is expected to grow approximately 5% from the previous year’s reported figure of $60.8 billion.

NII is projected between $2.32 billion and $2.34 billion (GAAP), excluding $55 million of FTE adjustments. Management assumes one Fed funds rate cut in December.

Also, non-interest income is expected to be approximately $375 million compared with $314.3 million reported in 2023.

Adjusted expenses are projected in the range of $1.3-$1.33 billion, while the efficiency ratio is expected in the mid-40 % range.

Management envisions the 2024 common equity tier 1 capital ratio to be 11%.

Webster Financial anticipates the effective tax rate to be around 21%.

Mid-Term Outlook (Ended 2025)

At its 2023 Investor Day, management provided the following mid-term guidance:

In the Commercial Banking segment, loans, deposits, and pre-provision net revenues are expected to grow, seeing a three-year CAGR of 7-9%, 4-6%, and 12-14%, respectively.

In the Consumer Banking segment, loans, deposits, and pre-provision net revenues are expected to grow, witnessing a three-year CAGR of 2-4%, 3-5% and 3-5%, respectively.

HSA assets are expected to grow, seeing a CAGR of 13% from 2021 to 2024. This is expected to be supported by growth in investments and deposits, witnessing a CAGR of 16% and 12%, respectively, over the same period.

In the HSA Bank segment, accounts, deposits, assets under administration, and pre-provision net revenues are expected to grow, seeing a three-year CAGR of 6-8%, more than 10%, more than 15% and 15-17%, respectively.

Ametros acquisition is expected to be accretive to the earnings by 3%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -5.7% 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 bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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. It's no surprise Webster Financial has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.