(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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