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May 8, 2020, 5:34 p.m. EDT

10-Q: WEBSTER FINANCIAL CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2019, included in the Company's Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (SEC) on February 28, 2020, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2020 are not necessarily indicative of results that may be attained during the full year ending December 31, 2020, or any future period. Executive Summary COVID-19 During the first quarter of 2020, a global health pandemic known as COVID-19, or the Coronavirus, emerged, which has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. The broad impact and preventive measures taken to contain or mitigate the outbreak have, and are likely to continue to have, significant negative effects on the U.S. and global economy, employment levels, employee productivity, and financial market conditions. The pandemic may cause increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, demand for loans and other financial services products, and consumer discretionary spending. As a result of these and other consequences, the outbreak has adversely affected our business, results of operations and financial condition. The extent to which the outbreak will continue to impact our results will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak, the actions taken to contain or mitigate the outbreak, and the pace and extent of economic recovery in the United States and, in particular, in the states in which we operate. Webster is taking the following steps to operate through this crisis, including: Support for our Employees: 75% of Webster bankers are currently working remotely, special pay considerations and additional paid time off have been implemented for essential front line employees, no employees have been furloughed, bankers are at 100% pay, and zero-interest loans up to $5,000 are available to assist employees and their families facing unforeseen challenges due to COVID-19; Support for Individuals and Businesses: Webster instituted a 90-day foreclosure moratorium on residential loans, increased deposit limits, is waiving penalties for early CD withdrawals, waiving or reducing certain fees, not reporting payment deferrals to credit bureaus, participating in the SBA Paycheck Protection Program with approximately $1.4 billion in approved SBA loan applications, and addressing payment modifications (needs based / COVID-19 related impact); Support for the Communities We Serve: Webster is providing more than $375,000 in donations for urgent basic needs including to Feeding America, American Red Cross, and United Way (CT, RI, MA, NY, WI), and re-targeting existing sponsorships and grants to nonprofits to support COVID-19 related activities including Masks for Heroes, Junior Achievement, and Governor's Prevention Partnership. Additional information regarding the effects and potential effects of the ongoing coronavirus pandemic on our business, operating results, and financial condition is described in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Refer to "Use of Estimates" for information related to the potentially adverse impact of COVID-19 on accounting estimates which could affect the carrying value of certain assets and "Supervision and Regulation" for updated legal and regulatory matters that may have an impact on our business. Also, refer to Part II - Item 1A Risk Factors for an update to the Company's risk factors.







        Results of Operations
        The Company's financial position and results of operations as of and for the
        three months ended March 31, 2020 have been significantly impacted by the
        COVID-19 pandemic. The economic environment and uncertainty related to the
        pandemic contributed to the $76.0 million provision for credit losses recognized
        during the three months ended March 31, 2020 under the new CECL accounting
        standard adopted by the Company on January 1, 2020. While the Company has not
        yet experienced charge-offs related to the COVID-19 pandemic, the continued
        uncertainty regarding the severity and duration of the pandemic and related
        economic effects will continue to affect the Company's estimate of its allowance
        for credit losses and resulting provision for credit losses. The Company's
        interest income may also be negatively impacted in future periods as the Company
        continues to work with its affected borrowers to defer payments, interest, and
        fees. Additionally, net interest margin may be reduced generally as a result of
        the low rate environment. These uncertainties and the economic environment will
        continue to affect earnings and growth projections which may result in
        deterioration of asset quality in the Company's loan and investment portfolios.
        Selected financial highlights are presented in the following table:
                                                                                         At or for the three months ended
                                                                                                     March 31,
        (In thousands, except per share and ratio data)                                       2020                 2019
        Earnings:
        Net interest income                                                             $   230,801            $ 241,551
        Provision for credit losses                                                          76,000                8,600
        Total non-interest income                                                            73,378               68,612
        Total non-interest expense                                                          178,836              175,686
        Net income                                                                           38,199               99,736
        Earnings applicable to common shareholders                                           36,021               97,549
        Share Data:
        Weighted-average common shares outstanding - diluted                                 91,206               92,225
        Diluted earnings per common share                                               $      0.39            $    1.06
        Dividends and dividend equivalents declared per common share                           0.40                 0.33
        Dividends declared per Series F preferred share                                      328.13               328.13
        Book value per common share                                                           32.66                30.62
        Tangible book value per common share (non-GAAP)                                       26.46                24.51
        Selected Ratios:
        Net interest margin                                                                    3.23    %            3.74  %
        Return on average assets (annualized basis)                                            0.50                 1.44
        Return on average common shareholders' equity (annualized basis)                       4.75                14.01
        CET1 risk-based capital                                                               10.95                11.46
        Tangible common equity ratio (non-GAAP)                                                7.67                 8.16
        Return on average tangible common shareholders' equity (annualized basis)              5.95                17.70
        (non-GAAP)
        Efficiency ratio (non-GAAP)                                                           58.03                55.93
        Providing the non-GAAP (U.S. Generally Accepted Accounting Principles) financial
        measures identified in the preceding table provides investors with information
        useful in understanding the Company's financial performance, performance trends
        and financial position. These measures are used by management for internal
        planning and forecasting purposes, as well as by securities analysts, investors
        and other interested parties to compare peer company operating performance.
        Management believes that the presentation, together with the accompanying
        reconciliations provides a more complete understanding of the factors and trends
        affecting the Company's business and allows investors to view its performance in
        a similar manner. These non-GAAP financial measures should not be considered a
        substitute for GAAP basis measures and results. Because non-GAAP financial
        measures are not standardized, it may not be possible to compare these measures
        with other companies that present measures having the same or similar names.
                                               2
        --------------------------------------------------------------------------------
        The following tables reconcile the non-GAAP financial measures with financial
        measures defined by GAAP:
                                                                                        At March 31,
        (Dollars and shares in thousands, except per share data)                 2020                  2019
        Tangible book value per common share (non-GAAP):
        Shareholders' equity (GAAP)                                         $  3,090,242          $  2,966,255
        Less: Preferred stock (GAAP)                                             145,037               145,037
             Goodwill and other intangible assets (GAAP)                         559,328               563,176
        Tangible common shareholders' equity (non-GAAP)                     $  2,385,877          $  2,258,042
        Common shares outstanding                                                 90,172                92,125
        Tangible book value per common share (non-GAAP)                     $      26.46          $      24.51
        Tangible common equity ratio (non-GAAP):
        Tangible common shareholders' equity (non-GAAP)                     $  2,385,877          $  2,258,042
        Total assets (GAAP)                                                 $ 31,654,874          $ 28,238,129
        Less: Goodwill and other intangible assets (GAAP)                        559,328               563,176
        Tangible assets (non-GAAP)                                          $ 31,095,546          $ 27,674,953
        Tangible common equity ratio (non-GAAP)                                     7.67  %               8.16  %
                                                                                  Three months ended March 31,
        (Dollars in thousands)                                                      2020                   2019
        Return on average tangible common shareholders' equity (non-GAAP):
        Net income (GAAP)                                                    $       38,199           $    99,736
        Less: Preferred stock dividends (GAAP)                                        1,969                 1,969
        Add: Intangible assets amortization, tax-affected (GAAP)                        760                   760
        Income adjusted for preferred stock dividends and intangible assets  $       36,990           $    98,527
        amortization (non-GAAP)
        Income adjusted for preferred stock dividends and intangible assets  $      147,960           $   394,108
        amortization, annualized basis (non-GAAP)
        Average shareholders' equity (non-GAAP)                              $    3,193,525           $ 2,935,653
        Less: Average preferred stock (non-GAAP)                                    145,037               145,037
         Average goodwill and other intangible assets (non-GAAP)                    559,786               563,646
        Average tangible common shareholders' equity (non-GAAP)              $    2,488,702           $ 2,226,970
        Return on average tangible common shareholders' equity (non-GAAP)              5.95   %             17.70  %
        Efficiency ratio (non-GAAP):
        Non-interest expense (GAAP)                                          $      178,836           $   175,686
        Less: Foreclosed property activity (GAAP)                                      (250)                 (253)
        Intangible assets amortization (GAAP)                                           962                   962
        Other expense (non-GAAP) (1)                                                      -                     7
        Non-interest expense (non-GAAP)                                      $      178,124           $   174,970
        Net interest income (GAAP)                                           $      230,801           $   241,551
        Add: Tax-equivalent adjustment (non-GAAP)                                     2,473                 2,338
         Non-interest income (GAAP)                                                  73,378                68,612
         Other income (non-GAAP) (2)                                                    299                   342
        Less: Gain on sale of investment securities, net (GAAP)                           8                     -
        Income (non-GAAP)                                                    $      306,943           $   312,843
        Efficiency ratio (non-GAAP)                                                   58.03   %             55.93  %
        (1)Other expense (non-GAAP) includes facility optimization charges.
        (2)Other income (non-GAAP) includes low income housing tax credits.
        Financial Performance
        


The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:







                                                                                                    Three months ended March 31,
                                                                                    2020                                                                    2019
                                                                   Average                                               Average
        (Dollars in thousands)                                     Balance       Interest      Yield/ Rate               Balance       Interest       Yield/ Rate
        Assets
        Interest-earning assets:
        Loans and leases                                       $ 20,324,799    $ 216,918               4.24  %       $ 18,509,174    $ 229,385                4.96  %
        Investment Securities                                     8,319,747       58,408               2.85             7,308,946       56,954                3.09
        FHLB and FRB stock                                          126,364        1,251               3.98               113,016        1,712                6.14
        Interest-bearing deposits                                    68,307          191               1.11                55,372          329                2.37
        Securities                                                8,514,418       59,850               2.86             7,477,334       58,995                3.13
        Loans held for sale                                          22,297          175               3.14                13,451          148                4.40
        Total interest-earning assets                            28,861,514    $ 276,943               3.84  %         25,999,959    $ 288,528                4.43  %
        Non-interest-earning assets                               1,930,996                                             1,795,430
        Total Assets                                           $ 30,792,510                                          $ 27,795,389
        Liabilities and Shareholders' Equity
        Interest-bearing liabilities:
        Demand deposits                                        $  4,516,906    $       -                  -  %       $  4,191,870    $       -                   -  %
        Health savings accounts                                   6,761,358        3,296               0.20             6,140,062        2,949                0.19
        Interest-bearing checking, money market and savings       9,716,974       12,403               0.51             8,958,522       12,793                0.58
        Time deposits                                             3,067,557       12,144               1.59             3,244,714       15,278                1.91
        Total deposits                                           24,062,795       27,843               0.47            22,535,168       31,020                0.56
        Securities sold under agreements to repurchase and
        other borrowings                                          1,296,925        3,730               1.14               597,107        2,752                1.84
        FHLB advances                                             1,325,899        6,869               2.05             1,119,035        7,785                2.78
        Long-term debt                                              551,250        5,227               4.00               249,169        3,082                4.95
        Total borrowings                                          3,174,074       15,826               2.00             1,965,311       13,619                2.77
        Total interest-bearing liabilities                       27,236,869    $  43,669               0.64  %         24,500,479    $  44,639                0.74  %
        Non-interest-bearing liabilities                            362,116                                               359,257
        Total liabilities                                        27,598,985                                            24,859,736
        Preferred stock                                             145,037                                               145,037
        Common shareholders' equity                               3,048,488                                             2,790,616
        Total shareholders' equity                                3,193,525                                             2,935,653
        Total Liabilities and Shareholders' Equity             $ 30,792,510                                          $ 27,795,389
        Tax-equivalent net interest income                                     $ 233,274                                             $ 243,889
        Less: Tax-equivalent adjustments                                          (2,473)                                               (2,338)
        Net interest income                                                    $ 230,801                                             $ 241,551
        Net interest margin                                                                            3.23  %                                                3.74  %
        


(1)For purposes of yield/rate computation, unrealized gain (loss) balances on available-for-sale securities and senior fixed-rate notes hedges are excluded.

Net interest income (NII) and net interest margin are impacted by the level of interest rates, mix of assets earning and liabilities bearing those interest rates, and the volume of interest-earning assets and interest-bearing liabilities. These factors are influenced by changes in economic conditions that impact interest rate policy, competitive conditions that impact loan and deposit pricing strategies, as well as the extent of interest lost to non-performing assets.







                                                         Three months ended March 31,
                                                                 2020 vs. 2019
                                                          Increase (decrease) due to
        (In thousands)                                 Rate (1)     Volume       Total
        Interest on interest-earning assets:
        Loans and leases                             $ (33,035)   $ 20,568    $ (12,467)
        Loans held for sale                                (61)         88           27
        Securities (2)                                  (7,244)      8,099          855
        Total interest income                        $ (40,340)   $ 28,755    $ (11,585)
        Interest on interest-bearing liabilities:
        Deposits                                     $  (3,725)   $    548    $  (3,177)
        Borrowings                                      (6,262)      8,469        2,207
        Total interest expense                       $  (9,987)   $  9,017    $    (970)
        Net change in net interest income            $ (30,353)   $ 19,738    $ (10,615)
        


(1)The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.

Average loans and leases for the three months ended March 31, 2020 increased $1.8 billion compared to the average for the three months ended March 31, 2019. The loan and lease portfolio comprised 70.4% of the average interest-earning assets at March 31, 2020 compared to 71.2% of the average interest-earning assets at March 31, 2019. The loan and lease portfolio yield decreased 72 basis points to 4.24% for the three months ended March 31, 2020 compared to 4.96% for the three months ended March 31, 2019. The decrease in the yield on the average loan and lease portfolio is primarily due to the impact of variable-rate loans resetting lower and commercial loan growth at a lower yield.







        Non-Interest Income
                                                                      Three months ended March 31,                                      Increase (decrease)
        (Dollars in thousands)                                           2020              2019               Amount      Percent
        Deposit service fees                                       $      42,570     $      43,024          $  (454)         (1.1) %
        Loan and lease related fees                                        6,496             7,819           (1,323)        (16.9)
        Wealth and investment services                                     8,739             7,651            1,088          14.2
        Mortgage banking activities                                        2,893               764            2,129         278.7
        . . .
        


May 08, 2020

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