Washington Trust Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Washington Trust is a bank holding company operating primarily in Rhode Island, eastern Massachusetts, and Connecticut, with commercial, residential and consumer banking and wealth management businesses.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $33.0 million | $33.4 million | $101.4 million | $98.4 million |
| Net income | $18.8 million | $17.5 million | $53.6 million | $51.4 million |
| Diluted EPS | $1.08 | $1.01 | $3.07 | $2.95 |
| Net interest margin, FTE | 2.72% | 2.99% | 2.82% | 3.03% |
| Return on average assets | 1.44% | 1.47% | 1.39% | 1.48% |
- Q3 total revenue rose 5% to $51.3 million; net income increased 7%. Higher mortgage banking and loan-related derivative income more than offset lower net interest income and wealth management revenue.
- Nine-month total revenue increased 4% to $151.9 million and net income rose 4%. Diluted EPS was $3.07. FTE net interest income increased 3% to $102.4 million.
- Net interest margin contracted as funding costs rose. Q3 FTE margin declined 27 basis points year over year; the nine-month margin fell 21 basis points.
- Noninterest income rose 21% in Q3 and 7% year to date. Mortgage banking revenue increased 84% in Q3 and 32% year to date; loan-related derivative income also increased. Wealth management revenue declined 3% in Q3 and 5% year to date.
- Noninterest expense increased 3% in both periods. Q3 included approximately $900,000 of FDIC assessment credits, reducing reported deposit insurance expense.
Financial position, cash flow and credit
- At September 30, total assets were $5.20 billion, up 4% from December 31, 2018. Loans were $3.78 billion, up 3%; deposits were $3.59 billion, up 2%; FHLB advances were $956.8 million, up 1%.
- Cash and due from banks was $141.8 million. Nine-month operating cash flow was $37.4 million, investing cash outflow $27.3 million, and financing cash inflow $42.6 million. Cash and cash equivalents increased $52.6 million to $146.1 million.
- Shareholders’ equity was $497.8 million, up $49.6 million from year-end. The company and Bank exceeded regulatory “well capitalized” thresholds; the company’s total risk-based capital ratio was 12.94%. The quarterly dividend declared was $0.51 per share, versus $0.43 a year earlier.
- Nonperforming assets rose to $19.0 million, or 0.37% of assets, from $13.8 million at year-end. Nonaccrual loans were $14.9 million, mainly residential and consumer, and included $12.5 million of residential real estate loans. Foreclosed property increased by $2.0 million.
- The allowance for loan losses was $27.0 million, or 0.71% of loans, versus 0.74% at year-end. Nine-month net charge-offs were $1.7 million, compared with $729,000 a year earlier. Management stated the allowance was adequate.
- Available-for-sale securities were $887.0 million. Their net unrealized position improved to a $4.2 million gain from a $22.0 million loss at year-end, primarily reflecting interest-rate movements.
Changes, outlook and risks
- Management attributed Q3 NII weakness to higher funding costs, partly offset by loan growth. Year-to-date NII gains reflected growth in loans and securities and higher yields on variable-rate loans, partly offset by rising deposit and borrowing costs.
- Wealth management assets under administration fell 5% year over year to $6.1 billion. Management cited client outflows, including departures of client-facing personnel and two senior counselors.
- No specific earnings or revenue guidance is provided in the filing. Management said liquidity remained within internal targets and expected available funding sources to meet anticipated needs. Unused funding capacity was approximately $1.07 billion, plus a $40 million unused FHLB line.
- Interest-rate simulations estimated that a 100-basis-point rate decrease would reduce NII 3.67% over months 1–12 and 5.57% over months 13–24; a 100-basis-point increase was estimated to raise NII 2.72% and 0.77%, respectively. The filing cautions that simulations rely on assumptions and a largely static balance sheet.
- The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2020. It expected a one-time increase to the allowance with an adjustment to retained earnings, but did not provide a clear estimate of the amount. Management planned to use the permitted three-year regulatory capital transition relief.
- In October 2019, $78.8 million of FHLB advances were modified: the weighted average rate fell from 3.52% to 2.76%, with maturities extended from 2021–2023 to 2024–2026.
- Key risks include credit deterioration, interest-rate and funding-cost changes, deposit runoff, wealth-management asset outflows, market and housing conditions, operational and cybersecurity risks, and regulatory or accounting changes. Management reported no material change in previously disclosed risk factors; ordinary-course legal matters were not expected to materially affect results.
Important facts for investors to verify
- Whether margin pressure and higher deposit costs continue, and how they affect earnings as rates change.
- Trends in nonaccrual residential loans, foreclosed properties, charge-offs, and potential problem commercial loans.
- Whether wealth-management client flows stabilize and mortgage banking and derivative-related income remain at recent levels.
- The eventual CECL day-one allowance and retained-earnings impact, and the related capital effects.
- Funding mix, reliance on FHLB advances and brokered deposits, and continued access to reported contingent liquidity.