2023-07-06 06:44:08 ET
Summary
- Webster Financial Corporation's shares are trading lower than they were at the end of February 2023, despite the company showing a promising financial trajectory.
- The company's total loans at the end of the most recent quarter were $50.9 billion, a significant increase from $22.3 billion at the end of 2021, largely due to a merger with Sterling Bancorp.
- Despite an increase in borrowings, WBS's revenue and profit data have improved, with net interest income more than doubling from $753.6 million in 2020 to $1.75 billion in 2022.
- The firm seems to offer an attractive upside from current levels for investors who are patient enough to hop in.
For most stocks across most industries, 2023 is proving to be a fantastic year. But not every company and not every industry is being treated the same way. The financial sector, for instance, has been hit rather hard, with banking failures that began in March of this year creating a fear of contagion and sending shares of many of the banks out there tumbling lower. Some of these companies deserved to take a beating. Some deserved to fail. But I do believe that the market was rash in how it treated many of the firms that are out there. Some of them, for instance, did not deserve to take a meaningful fall lower. And even some that did deserve it have not recovered like they should have.
One really good example of a company that fits this description is Webster Financial Corporation ( WBS ), a bank holding company and financial holding company with a variety of operations. Shares are still trading meaningfully lower than they were at the end of February. Although the company is not the strongest prospect I have seen since then, it does seem to offer some upside potential. Because of this, I have decided to assign the stock a soft 'buy' rating at this time.
Digging into Webster Financial
According to the management team at Webster Financial, the company operates as a bank holding company and financial holding company that operates in a commercial capacity. Its commercial banking operations provide business customers that have more than $2 million in annual revenue with solutions centered around things like financing commercial real estate, equipment financing activities, business banking, and more. It even provides public sector financing solutions. Another unit of the company, HSA Bank, offers consumer directed healthcare programs like HSAs, health reimbursement arrangements, commuter benefits, and more. And finally, the company also has a consumer banking division with locations largely throughout parts of New England and the New York metro and suburban markets. In all, imposts 201 banking centers and 352 ATMs in the areas in which it operates. Through these assets, the company provides small business banking services, consumer lending centered around deposit taking, residential mortgages, and more.
Digging deeper, it would help to start on understanding the loans that the company has on its books. Total loans at the end of the most recent quarter came in at $50.9 billion. This represents a modest improvement over the $49.8 billion that were on the company's books at the end of 2022. But it marks a massive change compared to the $22.3 billion the company had at the end of 2021. This is only the first instance where we would see a significant change in the company's balance sheet or income statement from 2021 to 2022. This is because, in January of 2022, the company merged with another institution called Sterling Bancorp. Naturally, the merger involved bringing on significant additional assets.
The vast majority of the loans on the company's books, about $41.3 billion in all, fall under its commercial banking operations. $20.7 billion of this amount was categorized as commercial loans. This is basically a catch all term for a variety of different my own products. The largest category here would be the $13.7 billion associated with commercial and industrial loans. But the company also has $6.6 billion in sponsor and specialty products. Another $20.3 billion of the $41.3 billion, meanwhile, was in the form of commercial real estate. I do understand that many investors are worried right now when it comes to office properties. The good news is that only 2.8% of the company's entire loan book is in the form of office space. This means that investors have very little exposure should that niche continue to suffer moving forward. Outside of the $41.3 billion amount, the company also has $9.6 billion that falls under small business and consumer lending activities. The vast majority of this amount, about $9.3 billion in all, is consumer lending in nature.
Nobody will deny that the most important thing for these companies right now is not the loan portfolio, but instead the deposit base. From 2020 through 2022, the deposits that the company has grew from $27.3 billion to $54.1 billion. Even though many banks experienced a decline in overall deposits during the first quarter of 2023, that was not the case here. Total deposits came in at $55.3 billion. That's an increase of $1.2 billion in the course of a single quarter. Deeper, what's even more important than the value of the deposit base is how much of it is currently uninsured. As of the end of the most recent quarter, management pegged this number at about $13.9 billion. That translates to 23.4% of the overall deposit base. Even though this is still a fairly large chunk of capital, the company has liquidity that is immediately available in the amount of $16 billion. $5.8 billion of this is in the form of unencumbered cash and securities. The rest involves borrowing capacity from the Federal Reserve and from the Federal Home Loan Bank program.
Perhaps the only negative thing that I have seen regarding the company is the fact that borrowings have increased. At the end of 2021, the company only had about $1.2 billion in borrowings. That number jumped to $7.7 billion in 2022 before climbing further to $9.9 billion in the first quarter of 2023. This rise in borrowings has not stopped the company from seeing its revenue and profit data improve. From 2020 through 2022, net interest income more than doubled from $753.6 million to $1.75 billion. Non-interest income grew over this time from $285.3 million to $440.8 million. And overall net income roughly tripled from $212.7 million to $628.4 million.
By most accounts, this picture for the company continues to improve in the current fiscal year. Net interest income of $548.5 million dwarfed the $205.4 million reported the same time last year. It is true that non-interest income managed to drop from $104 million to $70.8 million. But this did not stop overall net profits for the company growing from a loss of $20.2 million to a gain of $216.8 million. This recent strength has helped the company's book value per share improve slightly. Overall book value per share expanded from $44.67 at the end of 2022 to $45.85 as of the end of the first quarter of this year. Tangible book value per share, meanwhile, inched up from $29.07 to $29.47. While this is still lower than the $38.33 per share that the stock is currently going for, shares of the company still appear reasonably priced, as evidenced by the fact the stock is trading at only about 10.5 times last year's earnings.
Takeaway
So far, Webster Financial has demonstrated fantastic resiliency during scary and uncertain economic times. It is true that we will need to wait and see if this trend continues. But the overall financial trajectory has been promising and shares are priced at levels that make sense to me. It's perplexing to me that the stock is still down 27% after having initially dropped as much as 40.9% since the end of February. But to me, this decline seems to offer an interesting buying opportunity for those who are patient enough to jump in.
For further details see:
Webster Financial Corporation Is Down By An Unreasonable Amount