Washington Trust Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and period: Regional bank holding company serving Rhode Island, eastern Massachusetts, and Connecticut through commercial, residential, and consumer banking and wealth-management businesses. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $48.7 million | $47.3 million | $145.4 million | $137.2 million |
| Net interest income | $33.4 million | $30.1 million | $98.4 million | $88.6 million |
| Net income | $17.5 million | $13.0 million | $51.4 million | $37.9 million |
| Diluted EPS | $1.01 | $0.75 | $2.95 | $2.19 |
| FTE net interest margin | 2.99% | 2.93% | 3.03% | 2.92% |
| Provision for loan losses | $0.35 million | $1.30 million | $0.75 million | $2.40 million |
- Net income rose 35% in both the quarter and year-to-date comparison. Management attributed the improvement primarily to net interest income growth and lower income taxes following the federal corporate tax-rate reduction enacted in 2017.
- For the first nine months, operating cash flow was $58.4 million; investing cash flow was negative $250.4 million, principally reflecting loan growth and securities purchases; financing cash flow was positive $184.9 million, mainly from deposit growth and FHLB funding. Cash and cash equivalents ended at $75.9 million, down from $82.9 million at the start of the year.
Financial position and material changes
- Total assets were $4.77 billion, up 5% from year-end 2017. Loans increased 5% to $3.56 billion; deposits increased 5% to $3.41 billion. Residential real estate loans grew $122.1 million, while commercial loans grew $74.4 million.
- FHLB advances rose $37.0 million to $828.4 million. The company reported $601.0 million in remaining FHLB borrowing capacity and a separate unused $40 million FHLB line of credit.
- Shareholders’ equity was $427.9 million, up $14.6 million. The nine-month $15.6 million after-tax other comprehensive loss, primarily from lower available-for-sale securities values, partially offset earnings. Available-for-sale securities had a net unrealized loss position of $33.7 million, versus $9.7 million at year-end.
- Asset quality improved in several measures: nonperforming assets were $13.8 million (0.29% of assets), down from $15.3 million (0.34%); nonaccrual loans fell to $10.8 million from $15.2 million. The allowance was $26.5 million, or 0.75% of loans, compared with 0.79% at year-end. Potential problem loans increased to $11.8 million from $9.7 million.
- The quarterly dividend declared was $0.43 per share, versus $0.39 a year earlier. The company and bank were reported as “well capitalized”; the corporation’s total risk-based capital ratio was 12.77%.
Outlook, commentary, and risks
- The filing gives no specific earnings or revenue guidance. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. It planned to open a full-service branch in North Providence in early 2019.
- Management said loan growth and higher yields supported net interest income, while deposit and borrowing costs rose. Wealth-management assets under administration were $6.46 billion, down 4% from year-end; net client outflows totaled $586.0 million over nine months, about 90% associated with the departure of certain client-facing personnel.
- Interest-rate simulations showed modeled net-interest-income sensitivity over the next 12 months of negative 3.69% for a 100-basis-point rate decrease and positive 1.90% for a 100-basis-point increase. Management cautioned that simulations rely on assumptions, including deposit behavior and a largely static balance sheet.
- Key risks identified include economic and market weakness, interest-rate and funding-cost changes, loan demand and credit losses, securities valuation, wealth-management asset outflows, competition, regulation, cybersecurity, and natural disasters. Management noted that further deterioration in issuer credit, economic conditions, or real-estate values could lead to securities write-downs; it did not consider the reported unrealized losses other-than-temporary at quarter-end.
- Unusual or notable items included a $300,000 third-party vendor credit reducing Q3 outsourced-services expense; $796,000 in nine-month software implementation costs; and one-time employee compensation enhancements in Q1. Adoption of revenue-recognition guidance had no material impact. The company expected lease accounting adoption in 2019 to increase reported assets and liabilities, without a material change in expense timing. The expected impact of the forthcoming credit-loss standard remained undetermined.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan and deposit growth can continue without materially higher funding costs or deterioration in credit quality; review the rise in potential problem loans and residential delinquencies.
- How wealth-management client outflows and staff departures affect assets under administration, fee income, and retention.
- Whether securities unrealized losses, especially as interest rates change, affect capital or require future impairment charges.
- The sustainability of earnings growth after the lower tax rate and the impact of the one-time vendor credit and employee compensation items.
- Funding mix, FHLB advance maturities, liquidity capacity, and the company’s reported interest-rate sensitivity assumptions.